Leading humanity to
healthy, vibrant lives
2018
MAGELLAN HEALTH
ANNUAL REPORT
To Our Shareholders,
Customers and Members:
For decades, Magellan Health was the leader in the carve-out specialty
and behavioral health space. While these capabilities remain valuable and
relevant today, the reality is that the market has changed to a much more
integrated model.
We recognized this, proactively took steps to transform our
business and have made solid progress in shifting our revenue
stream into growth markets over the last five years. We created
and expanded Magellan Complete Care, which now represents
over 50 percent of our healthcare revenue and transformed
our pharmacy business into a full-service pharmacy benefit
manager (PBM).
These were the right choices to strengthen our Company
and enable us to continue serving the interests of all our
stakeholders by delivering access to quality care and
positive results over the long-term. Had we not made
this pivot, both our top line and bottom line would have
been a fraction of what they are today, with little prospect
for growth. Instead, we have two major growth platforms,
well-positioned for the future.
For the full year 2018, we reported a 25 percent increase
in net revenue to $7.3 billion, net income of $24.2 million
and EPS of $0.97 per share. Our adjusted net income was
$61.7 million, or $2.46 per share.
While 2018 was challenging, we are only mid-way through
our work to create a stronger, more sustainable foundation for
the Company. We gained more disciplined and operational
knowledge, and added key resources with specific expertise
to help us better leverage our new platforms and capabilities.
Looking ahead, we are focused on
our multi-year margin improvement
plan, which has a long-term goal of
over two percent adjusted net income
margin. The initiatives that are part of
this plan include:
1
2
3
In Healthcare, reducing our cost
of care while improving quality,
with attention to Magellan
Complete Care and, in particular,
our Virginia plan.
In Magellan Rx, continuing to grow
our PBM while retaining specialty
carve-out contracts and lowering
our cost of goods sold.
Driving operational improvements
across the organization to
enhance efficiency.
Magellan is needed in today’s marketplace. Our decades of work in
behavioral health, substance use disorder, and specialty pharmacy
management have created a wealth of unique expertise.
1 Magellan Health
Magellan is needed in today’s marketplace. Our
decades of work in behavioral health, substance
use disorder, and specialty pharmacy management
have created a wealth of unique expertise that can
positively affect some of the most costly health
programs in the nation.
In both healthcare and pharmacy management,
the awareness of the impact that behavioral
I would like to acknowledge Magellan’s 10,000
plus associates who are on the front lines every
day. They truly are “leading humanity to healthy,
vibrant lives.” With their support, and the more
diversified healthcare platform we have built, I
remain confident in our mission, our team and
health plays in an individual’s health and decision
our ability to deliver sustainable growth and
making helps us design valuable healthcare
value creation over the long term.
solutions for health plans, government, employers
and our members. Integrating this knowledge with
advanced technology and dedicated staff is our
recipe for success.
Barry M. Smith
CHAIRMAN AND CEO, MAGELLAN HEALTH
2018 Annual Report 2
To watch
Dennis’ story,
visit the About page on
MagellanHealth.com
A Journey to Recovery
DENNIS PERRY
“I probably wouldn’t
be here right now…
I do want to thank
Magellan for that.”
MCC OF VA MEMBER
Dennis’ Story
Despite this striking statement, Dennis Perry is never
Magellan Complete Care of Virginia (MCC of VA)
stepped in and recommended an inpatient
substance abuse treatment program to Dennis.
The Difference is Coordinated Caring
MCC of VA is a full-service health plan serving members
of the Commonwealth Coordinated Care Plus (CCC
Plus) program. CCC Plus is the program for Medicaid
members with multiple comorbid conditions who need
long-term services and supports. Working hand-in-hand
with our members, providers and families, our MCC of
VA associates help each person live a healthy, vibrant
life and achieve his or her fullest potential.
one to be melodramatic. In fact, he says his “personal
As a CCC Plus member, Dennis has support from
attitude toward life is that if you can’t laugh about it,
the MCC of VA team, which has a long history of
it’s not worth living.” In 2018, Dennis was facing so
serving the complex needs of special populations,
many serious challenges, they caused him to question
and broad expertise in managing physical health,
even this motto. Following a suicide attempt, Dennis
behavioral health, pharmacy benefits and other
was admitted to a psychiatric hospital.
services. Magellan Complete Care’s (MCC’s)
dedication to offering choices to the individuals
Dennis has long been diagnosed with schizoaffective
they serve sets Magellan apart.
disorder with depression and has struggled with
multiple chronic health conditions, all while still
Gigi Edwards, RN, who is now a maternal child
trying to cope with the aftermath and trauma of
health manager for MCC, was Dennis’ original care
a terrible accident in which he lost his left leg.
coordinator. She was the first to get a call from the
discharge planner at the psychiatric hospital about
“It changed my whole life in one second,” is how
Dennis. But she was far from alone in caring for him.
Dennis describes the 2017 accident in which he was
struck and pinned by a car to a gas station wall. “It’s
With more than 25 years of experience as a registered
very, very hard to lose a limb, and I see that accident
nurse, Gigi knew that Dennis’ mental health condition
every day.” He could understandably be embittered.
was urgent and only part of his complex needs. Gigi says,
Instead, Dennis says, “I forgive the person who did it.
“I called my colleague and friend Amy Stephan and
They were young, and it was an accident. But it is hard
said, ‘I need your help, and I’m concerned about Dennis’
to take – really, really hard to take.”
safety going home, where Dennis felt threatened and
was at greater risk of continuing to abuse drugs and
Dennis was at a crisis point—his physical health
alcohol.’ Amy took action right away.”
issues were compounded by his mental health issues
and drug and alcohol addictions. After a week’s stay,
Amy Stephan is an Addiction Recovery and Treatment
Dennis was scheduled to be discharged from the
Services (ARTS) Care Coordinator with MCC. She
psychiatric facility – without a set plan in place,
has more than 25 years of mental healthcare and
stable housing, or any support for substance abuse.
substance abuse care experience. Based on Dennis’
records, Amy recommended monitored detox and
residential service.
2018 Annual Report 4
Amy says: “We have to make sure the program
matches the person. In this case, we needed to
ensure that Dennis was monitored during detox for
Starting Over with Continued
Care and Support
It was a team effort to support Dennis on his
the safety of his health. We also needed to ensure
journey to successful recovery and continued
that the treatment facility had space available and
sobriety. His current MCC Coordinator Greta
was able to accommodate Dennis’ wheelchair. Plus,
McCray, RN, says: “We don’t give up on any one of
we had to gauge Dennis’ motivation to recover.”
our members. Dennis had a care coordinator like
Gigi says: “It’s a very fragile time, and I needed
Community Services Board, and others
him to see the importance of going into inpatient
assisting him – he wasn’t alone.”
me at Magellan, a case manager with the
stay. He wanted a better life, and I wanted that for
him. So he agreed to go. And that made me happy,
because I knew we were on our way.”
And he’s still not alone. Greta
continues to help Dennis with
scheduling and transportation to his
Gigi worked with local community services to
healthcare appointments and Alcoholics
ensure that his housing was secured during his
Anonymous meetings. She is also helping him
absence. She also obtained enough supplies of
obtain a prosthetic leg.
his medications for the duration of his stay. When
Dennis’ wheelchair was damaged, potentially
Dennis also participates in MCC of VA’s Medication
jeopardizing the residential placement, Gigi worked
Therapy Management (MTM) program, which
to get him a new one prior to admission. She also
helps patients get the most benefit from their
worked with MCC’s transportation vendor to take
medications. MCC’s pharmacists review all
Dennis to the facility.
GIGI EDWARDS
“Dennis was not a
subscriber ID number.
Dennis was my
brother. I just wanted
to help him as I would
if I were helping my
family member—what
I would want someone
to do for me.”
MATERNAL CHILD HEALTH
MANAGER, MCC
5 Magellan Health
medications from prescribers and any over-
the-counter medications to ensure there is no
duplication, unnecessary medications or untreated
conditions. They offer him advice and help ensure
Dennis uses his medications properly. In fact, MCC
of VA’s MTM has helped with Dennis’ adherence
to his medications and alerts healthcare providers
when there is a concern with his nonadherence.
Dennis says, “I do want to thank Magellan. It means
a lot to me. Magellan helped me out so much with
going to rehab. I believe we are here for a purpose,
and I am glad I have a chance to tell my story
because a lot of people don’t.
“If you need help, ask for it. That’s what people
are there for. Life is so fun and enjoyable and,
therefore, I chose to live another day!”
Pictured from left:
Greta McCray, RN, Care Coordinator, MCC
Amy Stephan, Addiction Recovery and Treatment
Services (ARTS) Care Coordinator, MCC
Gigi Edwards, RN, Maternal Child Health Manager, MCC
MCC of VA is a part
of Magellan Health,
which has served the
Commonwealth of
Virginia since 1972.
In addition to serving CCC Plus and Medallion 4.0
members through MCC of VA, Magellan’s other
divisions operate as the Medicaid Pharmacy Benefits
Administrator and the Behavioral Health Services
Administrator to the Virginia Department of Medical
Assistance Services (DMAS).
2018 Annual Report 6
Financial Highlights1
Dollars in thousands, except per share data and number of associates
Operations
2018
2017
Net revenue
$7,314,151
$5,838,583
Net income
$24,181
$110,207
Segment profit2
$227,961
$310,891
Adjusted net income2
$61,661
$144,825
Diluted earnings per
common share (EPS)
$.97
$4.51
Adjusted EPS2
$2.46
$5.92
Operating cash flow
$164,844
$162,273
Capital expenditures
$68,275
$57,232
Number of associates
10,500
10,700
Financial Position
at Year End
Unrestricted cash
and investments
$130,390
$261,186
Total assets
$2,979,056
$2,957,234
Total debt and capital
lease obligations
$752,882
$853,737
Total stockholders’ equity
$1,285,303
$1,276,494
7 Magellan Health
$7.3B
In Net Revenue
$228M
In Segment
Profit
Net Revenue
(Dollars in millions)
14
$3,760
15
$4,597
16
$4,837
17
$5,839
18
$7,314
Segment Profit2
(Dollars in millions)
14
$267
15
$276
16
$302
17
$311
18
$228
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, 2018, attached herein.
2
In the adjacent financial table and elsewhere in
the Annual Report, we refer to segment profit,
adjusted net income and adjusted earnings per
common share, which are non-GAAP measures.
Segment profit is equal to net revenues less the
sum of cost of care, cost of goods sold, direct
service costs and other operating expenses,
and includes income from unconsolidated
subsidiaries, but excludes segment profit or loss
from non-controlling interests held by other
parties, stock compensation expense, special
charges or benefits, as well as changes in the
fair value of contingent consideration recorded
in relation to acquisitions. Adjusted net income
and adjusted earnings per common share reflect
certain adjustments made for acquisitions
completed after January 1, 2013 to exclude non-
cash stock compensation expense resulting from
restricted stock purchases by sellers, changes
in the fair value of contingent consideration,
amortization of identified acquisition intangibles,
as well as impairment of identified acquisition
intangibles. For a reconciliation of these non-
GAAP measures to the corresponding GAAP
measures, please refer to Magellan’s Annual
Report on Form 10-K for the year ended
December 31, 2018, attached herein.
Leadership
Barry M. Smith
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER,
MAGELLAN HEALTH
Mostafa M. Kamal
CHIEF EXECUTIVE OFFICER,
MAGELLAN RX MANAGEMENT
Gus Giraldo
PRESIDENT, BEHAVIORAL
AND SPECIALTY HEALTH,
MAGELLAN HEALTHCARE
Daniel N. Gregoire
GENERAL COUNSEL
AND SECRETARY,
MAGELLAN HEALTH
Jonathan N. Rubin
CHIEF FINANCIAL OFFICER,
MAGELLAN HEALTH
Chrissie Cooper
PRESIDENT, MAGELLAN
COMPLETE CARE,
MAGELLAN HEALTHCARE
Ashok Sudarshan
CHIEF OPERATING OFFICER,
MAGELLAN HEALTHCARE
Caskie Lewis-Clapper
CHIEF HUMAN RESOURCES OFFICER,
MAGELLAN HEALTH
Srini Koushik
CHIEF TECHNOLOGY OFFICER,
MAGELLAN HEALTH
John Littel
CHIEF EXTERNAL AFFAIRS OFFICER,
MAGELLAN HEALTH
Officers
Board of Directors
Barry M. Smith
Chairman and
Chief Executive Officer
Jonathan N. Rubin
Chief Financial Officer
Mostafa M. Kamal
Chief Executive Officer
Magellan Rx Management
Daniel N. Gregoire
General Counsel
and Secretary
Caskie Lewis-Clapper
Chief Human
Resources Officer
Barry M. Smith
Chairman and Chief
Executive Officer
Magellan Health, Inc.
Swati Abbott
President and Chief
Executive Officer
Health Intelligence
Company LLC
John Agwunobi, M.D.
Chief Health and Nutrition
Officer and Co-President
Herbalife Ltd.
Eran Broshy
Operating Executive
Tailwind Capital LLC
Michael S. Diament
Retired Portfolio Manager
Q Investments
9 Magellan Health
Peter Feld
Managing Member
and Head of Research
Starboard Value LP
Perry G. Fine, M.D.
Professor of
Anesthesiology
University of Utah
Scott MacKenzie
Chief Executive Officer
RevSpring, Inc.
William J. McBride
Retired President and
Chief Operating Officer
Value Health, Inc.
Leslie Norwalk
Strategic Counsel
Epstein Becker Green, P.C.,
EBG Advisors, Inc. and
National Health Advisors
Guy Sansone
Managing Director
Alvarez & Marsal
Steven Shulman
Managing Partner
Shulman Family
Ventures, Inc.
Matthew J. Simas
Director
Truveris, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4800 Scottsdale Rd, Suite 4400
Scottsdale, Arizona
(Address of principal executive offices)
58 - 1076937
(I.R.S. Employer
Identification No.)
85251
(Zip Code)
Registrant’s telephone number, including area code: (602) 572 - 6050
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Each Exchange on which Registered
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 No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non - accelerated filer, a smaller reporting
company, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule 12b - 2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Exchange Act). Yes No
The aggregate market value of the Common Stock (“common stock”) held by non - affiliates of the registrant based on the closing price on
June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $2.4 billion.
The number of shares of Magellan Health, Inc.’s common stock outstanding as of February 22, 2019 was 23,925,342.
Portions of the definitive proxy statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this
DOCUMENTS INCORPORATED BY REFERENCE
Form 10 - K.
MAGELLAN HEALTH, INC.
REPORT ON FORM 10 - K
For the Fiscal Year Ended December 31, 2018
Table of Contents
Page
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits, Financial Statement Schedule and Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
15
29
29
29
30
31
32
33
52
52
52
53
55
56
56
56
56
56
57
61
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, Inc. (“Magellan”) is a leader in managing the fastest growing, most complex areas of
healthcare, including special populations, complete pharmacy benefits and other specialty areas of healthcare. The
Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to
drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the
customers Magellan serves. The Company provides services to health plans and other managed care organizations
(“MCOs”), employers, labor unions, various military and governmental agencies and third party administrators
(“TPAs”). Magellan operates three segments: Healthcare, Pharmacy Management and Corporate. In this report,
references to “we”, “us”, “our” and the “Company” include Magellan and its subsidiaries. Magellan was incorporated in
1969 under the laws of the State of Delaware.
Healthcare
The Healthcare segment (“Healthcare”) is broken down into two reporting units – (i) Behavioral & Specialty
Health and (ii) Magellan Complete Care (“MCC”).
The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care
organizations, employers, state Medicaid agencies, the United States military and various federal government agencies
for whom Magellan provides carve-out management services for behavioral health, employee assistance plans (“EAPs”)
and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical
medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations,
or on a more targeted basis for health plan customers.
The MCC reporting unit contracts with state Medicaid agencies and the Centers for Medicare and Medicaid
Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a
wide range of services from total medical cost to carve out long-term support services. MCC largely focuses on
1
managing care for special populations including individuals with serious mental illness (“SMI”), dual eligibles, the aged,
blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.
Magellan’s coordination and management of these healthcare and long-term support services are provided
through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing
facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with
clinical and quality improvement programs to improve access to care and enhance the healthcare experience for
individuals in need of care, while at the same time making the cost of these services more affordable for customers. 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 provides its Healthcare 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, or (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 full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in
some instances, a gain share.
Pharmacy Management
The Pharmacy Management segment (“Pharmacy Management”) is comprised of products and solutions that
provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit.
Pharmacy Management’s services include: (i) pharmacy benefit management (“PBM”) services, including
pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other
government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy
management programs; and (v) programs for the integrated management of specialty drugs across both the medical and
pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit
reimbursement.
These services are available individually, in combination, or on a fully integrated manner. The Company
markets its pharmacy management services to health plans, employers, third party administrators, state governments,
Medicare Part D beneficiaries, government agencies, exchanges, brokers and consultants. In addition, the Company will
continue to upsell its suite of pharmacy services to existing customers and market these pharmacy solutions to the
Healthcare customer base.
Pharmacy Management contracts with its customers for services using risk - based, gain share or ASO
arrangements. In addition, the Pharmacy Management segment provides services to the MCC reporting unit within the
Healthcare segment.
Corporate
This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy
Management segments that are largely associated with costs related to being a publicly traded company.
See Note 10—“Business Segment Information” to the consolidated financial statements for certain segment
financial data relating to our business set forth elsewhere herein.
Recent Acquisitions
Healthcare Acquisitions
In recent years, the Company has expanded its Healthcare segment with various acquisitions. The acquisitions
of AlphaCare Holdings, Inc. (“AlphaCare Holdings”) in 2013, The Management Group, LLC (“TMG”) in 2016 and
SWH Holdings, Inc. (“SWH”) in 2017 expanded the Company’s MCC reporting unit. Magellan also increased its
presence within the federal marketplace through the acquisition of Armed Forces Services Corporation (“AFSC”) in
2016 which falls under the Behavioral & Specialty Health reporting unit.
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Pharmacy Management Acquisitions
In recent years, the Company has expanded its Pharmacy Management segment with various acquisitions. The
acquisitions of Partners Rx Management, LLC (“Partners Rx”) in 2013, 4D Pharmacy Management Systems, Inc. (“4D”)
in 2015 and Veridicus Holdings, LLC (“Veridicus”) in 2016 expanded the Company’s presence in the PBM market. The
Company expanded its formulary management programs with the acquisition of CDMI, LLC (“CDMI”) in 2014.
Industry
According to the Centers for Medicare and Medicaid Services (“CMS”), national health expenditure growth is
expected to average 5.5 percent annually over 2017-2026. Growth in national health spending is projected to be faster
than projected growth in Gross Domestic Product (“GDP”) by 1.0 percentage point over 2017-2026. As a result, the
report projects the health share of GDP to rise from 17.9 percent in 2016 to 19.7 percent by 2026.
With the dynamic economic environment, rising healthcare costs, increased fiscal pressures on federal and state
governments and the uncertainty around the future of healthcare reform, healthcare spending will continue to be one of
the greatest pressing issues for the American public and 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.
Business Strategy
The Company is a leader in managing the fastest growing, most complex areas of health, including special
populations, complete pharmacy benefits and other specialty areas of healthcare. Magellan is focused on measured
growth while executing against a multi-year margin improvement plan for the current portfolio of customers to bring
earnings in line with industry competitive levels. The Company’s strategy is organized around four main focus areas:
1. Retain customers and drive new sales
2.
Improve margins by reducing cost of care, lowering pharmacy cost of goods sold and driving
operational improvements across the Company
3. Maximize and expand the Company’s key value drivers
4. Engage Magellan’s workforce
Retain customers and drive new sales: To drive revenue and profit growth long term, the Company has targeted
plans to retain existing customers and add new customers across both segments. In Pharmacy Management and
Healthcare, the Company is targeting growth through new business wins, increased retention and upselling existing and
newly developed services to existing customers. MCC will seek growth within current contracts deploying a local market
strategy to increase retention and add new members. MCC will also seek to expand its footprint within existing states
and selectively target new geographies as new managed Medicaid opportunities emerge for complex populations.
Improve margins by reducing cost of care, lowering Pharmacy costs of goods sold and driving operational
improvements across the organization: Within Pharmacy Management, the Company will continue to grow PBM while
retaining specialty carve-out contracts and lowering our cost of goods sold. Within Healthcare, the Company will
execute against targeted medical action plans and will have market competitive loss ratios for each customer. Further,
teams will drive operational improvements across the company to enhance efficiency.
Maximize and expand Magellan’s key value drivers:
Pharmacy Management - continued focus on specialty drug management: With advances in specialty drugs
driving the majority of pharmaceutical cost increases, Magellan’s foundation as an industry leader in specialty
drug management uniquely positions us to deliver programs across all aspects of drug spend – traditional drugs,
as well as specialty drugs paid under both the medical and pharmacy benefits. Our value based strategies are
designed to support the 2-3 percent of patients driving the majority of spend through advanced analytics, high-
touch clinical programs and comprehensive specialty drug solutions centered around complex conditions.
Healthcare: The Company will leverage significant Medicaid, behavioral health, specialty healthcare and
pharmacy management experience to enhance current and develop new innovative clinical programs for
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complex populations or niche areas of specialty healthcare, utilizing the Company’s unique expertise to
improve quality and outcomes for members served while lowering costs for our customers.
Engage the Company’s workforce: The Company will focus on talent acquisition, development and retention, as
well as streamlining the Company’s organizational structure. Employee engagement, communication and
training for employees will help ensure the workforce can meet Magellan’s evolving needs moving into the
future.
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 30 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 “Item 1A. Risk Factors—Risk - Based
Products” and “Item 1A. Risk Factors—Reliance on Customer Contracts.”
The Company provides integrated healthcare services to Medicaid enrollees in the state of Florida pursuant to a
contract with the State of Florida (the “Florida Contract”). The Florida Contract generated net revenues that exceeded, in
aggregate, ten percent of net revenues for the consolidated Company for the year ended December 31, 2017, however not
for the year ended December 31, 2018.
The Company also has significant concentrations of business with various counties in the State of Pennsylvania
(the “Pennsylvania Counties”) which are part of the Pennsylvania Medicaid Program, with members under its contract
with CMS, and with various agencies and departments of the United States federal government. See further discussion
related to these significant customers in “Item 1A. Risk Factors—Reliance on Customer Contracts.” In addition, see
“Item 1A. Risk Factors—Dependence on Government Spending” for discussion of risks to the Company related to
government contracts.
Provider Network
The Company’s managed healthcare services are primarily provided by a contracted network of third - party
providers. 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 220,000 healthcare providers 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 typically execute standard contracts with the Company under which they are
generally paid on a fee - for - service basis.
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 also provides capability to support client-specific networks. Many of the Company’s clients have
their own contracted networks. The Company establishes and administers these private networks segregating and
reporting to the clients. In addition, the Company can lease networks on behalf of specific entities in order to enhance
coverage.
4
The Company also has a national network of contracted retail pharmacies which is offered to its pharmacy
benefit management customers. We contract with and manage these pharmacies to optimize drug cost and member
access to fill covered prescriptions. Pharmacies can work with us both electronically and telephonically at the point of
service for member eligibility, claim adjudication and member cost share, if applicable.
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”), TPAs, independent practitioner associations (“IPAs”), multi - disciplinary medical groups,
PBMs, healthcare information technology companies 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 across 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 members, rather than subcontracting 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, 2018 to June 17, 2019. 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 dispensing operations. The specialty pharmaceutical dispensing operations
insurance policy has a one - year term for the period June 17, 2018 to June 17, 2019. 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 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 “Item 1A. 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 operations are subject to extensive and evolving state and federal laws and regulation in the
jurisdictions in which we do business. This includes applicable federal and state laws and regulations in connection with
its role in providing pharmacy benefit management; behavioral health benefit management; radiology benefit
management; utilization review; customer employee benefit plan services; pharmacy; healthcare services; Medicaid;
Medicare; health insurance, and laws and regulations impacting its federal government contracts. Regulation of the
healthcare industry as well as government contracting 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
5
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. In addition, existing laws and regulations may be repealed or modified. Such
changes 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 effect on the Company.
State Licensure and Regulation
The Company is subject to certain state laws and regulations governing the licensing of insurance companies,
HMOs, PPOs, TPAs, PBMs, pharmacies and companies engaged in utilization review. In addition, the Company is
subject to state laws and regulations concerning the licensing of healthcare professionals, including restrictions on
business corporations from providing, controlling or exercising excessive influence over healthcare 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.
Further, 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, 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.
The Company has sought and obtained licenses as a utilization review agent, single service HMO, TPA, PBM,
Pharmacy, PPO, HMO and Health Insurance Company in one or more jurisdictions. Numerous states in which the
Company does business have adopted regulations governing entities engaging in utilization review. 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. Many states also license TPA activities.
These 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.
Other states regulate PBMs through a PBM specific license. The Company has obtained these licenses as
required to support the PBM business. Certain insurance licenses are required for the Company to pursue Medicare
Advantage and Medicare Part D business. In some cases, single purpose HMO licenses are required for the Company to
take risk on business in that state. Some states require PPO or other network licenses to offer a network of providers in
the state. Almost all states require licensure for pharmacies dispensing or shipping medications into the state. The
Company has obtained all of these necessary licenses.
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. Being licensed as an insurance company, HMO or similar entity could also subject the Company to
regulations governing reporting and disclosure, coverage, mandated benefits, rate setting, grievances and appeals, prompt
pay laws and other traditional insurance regulatory requirements.
Regulators in a few states 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.
The National Association of Insurance Commissioners (“NAIC”) has developed a “health organizations
risk - based capital” formula, designed specifically for managed care organizations, that establishes a minimum amount of
6
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, Florida 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.
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 cosign 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 or requiring additional restricted cash or other security.
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 an event of default or otherwise could have a material adverse effect on the Company. Licensure requirements
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 licensure regulations has not had a material adverse effect on the Company, there can be no
assurance that specific laws or regulations adopted in the future would not have such a result.
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. 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 medicine,
psychiatry, psychology, social work and related behavioral healthcare professions, radiology, pharmacy, privacy,
accreditation, government healthcare program participation requirements, reimbursements for patient services, Medicare,
Medicaid, federal and state laws governing fraud, waste and abuse and, in certain cases, the common law or statutory
duty to warn others of danger or to prevent patient self - injury or the statutory duties to report matters of abuse or neglect
of individuals. However, there can be no assurance that changes in such 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. In
California, the Company’s employee assistance programs are regulated by the California Department of Managed Health
Care. This subjects the Company to regulations governing reporting and disclosure, coverage, mandated benefits,
grievances and appeals and other traditional insurance regulatory requirements.
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. 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
7
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.
Employee Retirement Income Security Act (“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.
Numerous states require the licensing or certification of entities performing TPA activities; however, certain
federal courts have held that such licensing requirements are preempted by 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 PBM or TPA activities. In some states, the Company has licensed its self - funded pharmacy
related business as a TPA or PBM 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.
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. 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.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and Other Privacy Regulation
HIPAA contains 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.
The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), passed as part of
the American Recovery and Reinvestment Act of 2009, represented a significant expansion of the HIPAA privacy and
security laws.
HIPAA generally does not preempt state law. Therefore, because many states have privacy laws that provide
more stringent privacy protections than those imposed by HIPAA, the Company must address privacy issues under those
state laws as well.
In addition to HIPAA and the HITECH Act, the Company is also subject to federal laws and regulations
governing patient records involving substance abuse treatment, as well as other federal privacy laws and regulations.
The European Union (“EU”) General Data Protection Regulation (“GDPR”) became effective May 25, 2018.
The Company believes its exposure to the GDPR is at present limited to EAP services to US-based companies that
decide to offer EAP to their EU-based employees, which is a very small subset of the Company’s EAP line of business.
The Company does not market its EAP services within the EU or to persons in the EU, or monitor the behavior of
persons in the EU, and its EAP contracts with its customers are entered into in the United States with companies
8
established in the US. When a US customer chooses to make EAP services available to EU-based employees, the EAP
services are managed through an EU-based subcontractor and EAP personal data subject to the GDPR processed by that
subcontractor does not leave the EU. The Company has received contractual assurances from its subcontractor of its
subcontractor’s compliance with the GDPR. Thus, the Company does not believe the GDPR at present poses material
compliance risks for the Company. However, there can be no assurances that the GDPR could not be interpreted by EU
supervisory authorities or courts in a manner that would require the Company to restructure its EAP services in the EU,
or the GDPR could be changed or interpreted in a manner causing material adverse impact on the Company.
Fraud, Waste and Abuse Laws
The Company is subject to federal and state laws and regulations protecting against fraud, waste and abuse.
Fraud, waste and abuse prohibitions cover a wide range of activities, including kickbacks and other inducements for
referral of members or the coverage of products, billing for unnecessary services by a healthcare provider and improper
marketing. Companies involved in public healthcare programs such as Medicare and Medicaid are required to maintain
compliance programs to detect and deter fraud, waste and abuse, and are often subject to audits. The regulations and
contractual requirements applicable to the Company in relation to these programs are complex and subject to change.
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”), the Department of Health and Human Services (“DHHS”) and other administrative bodies.
It also is a crime under the Public Contracts Anti - Kickback Act, for any person to knowingly and willfully offer
or provide any remuneration to a prime contractor to the United States, 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 over the last several years in connection with alleged kickback schemes.
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 healthcare program, such as Medicare or Medicaid,
in order to influence the beneficiary’s choice of a provider. 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.
The Federal Civil False Claims Act imposes civil penalties for knowingly making or causing to be made false
claims with respect to government contracts and 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 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 Patient Protection and Affordable Care Act (“ACA”), a violation of the Anti - Kickback
Statute is also a per se violation of the Federal Civil 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 discrepancies. 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
9
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 Company is also subject to
The Dodd - Frank Wall Street Reform and Consumer Protection Act (“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.
Many states have laws and/or regulations similar to the federal fraud, waste and abuse laws described above.
Sanctions for violating these laws may include injunction, imprisonment, criminal and civil fines and exclusion from
participation in the state Medicaid programs. The Company has a corporate compliance and ethics program, policies and
procedures and internal controls in place designed to ensure that the Company conducts business appropriately.
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.
Mental Health Parity
The Paul Wellstone and Pete Domenici Mental Health Parity Act of 2008 (“MHPAEA”) establishes 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 Health Insurance Exchange) are required to provide mental health and substance abuse 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 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 Rules”). The Final Rules include 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 Company believes it is in
compliance with these requirements. In March 2016, CMS promulgated a final rule on the application of parity to
Medicaid Managed Care Plans, CHIP and alternative benefit plans. The Company has been working with our state
Medicaid customers on compliance with these rules. On December 7, 2016, the Congress adopted the Twenty-First
Century Cures Act, which codified some concepts in the Final Rules. The Company’s risk contracts 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.
Health Care Reform
The ACA is a broad and sweeping piece of legislation creating numerous changes in the healthcare regulatory
environment. Some of the regulations interpreting the ACA, most notably the Medical Loss Ratio regulations, the
Internal Claims and Appeals and External Review Processes Regulations and Health Insurance Exchanges 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 has had some impact on the Company’s Medicaid business. The Company has 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 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. Our state public sector customers have made 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
10
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 are uncertain. There can be no assurances that public sector customers may make
rate adjustments to cover the direct costs of these fees in the future, so 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.
Federal and State Medicaid Laws and Regulations
The Company directly contracts with various states to provide Medicaid services to states. In addition, 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. In addition to state regulation, certain Medicaid contracts require the Company to maintain
Medicare Advantage special needs plan status, which is regulated by CMS.
The Company also is a sub - contractor to health plans that 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, the 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.
On May 6, 2016, CMS published final regulations that significantly modified the existing federal Medicaid
Managed Care and the SCHIP regulations. On June 30, 2017, CMS issued an Informational Bulletin regarding the
applicable effective/compliance dates for the new Medicaid Managed Care and the SCHIP regulations. Magellan is
working respectively with state Medicaid agencies and Medicaid Managed Care Plans (our Medicaid customers) to
ensure ongoing compliance with those sections of the regulations that are specified as effective based on the
determination made by the applicable state Medicaid agency. Nonetheless, CMS issued proposed regulations on
November 14, 2018, that would modify certain parts of the 2016 regulation.
In connection with its PBM business, the Company negotiates rebates with and provides services for drug
manufacturers. The manufacturers are subject to Medicaid “best price” regulations requiring 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 contracted with CMS as a Medicare Advantage Organization (“MAO”) and Prescription Drug
Plan (“PDP”) to provide health services and prescription drug benefits to Medicare beneficiaries. The regulations and
contractual requirements applicable to the Company and other participants in Medicare programs are complex and
subject to change. CMS regularly audits the performance of contracted health plans to determine compliance with
contracts and CMS regulations, and to assess the quality of services provided to Medicare beneficiaries. CMS penalties
for noncompliance include premium refunds, civil monetary penalties, prohibiting a company from continuing to market
and/or enroll members in the company’s Medicare products, exclusion from participation in federally funded healthcare
programs and other sanctions. In July 2017 CMS issued a civil monetary penalty against one of the Company’s
subsidiaries for non-compliance with a contractual standard outlined in its Part D contract. In February 2018 CMS issued
civil monetary penalties against the same subsidiary for deficiencies cited as a result of CMS audits conducted in the 2nd
and 3rd quarters of 2017. These penalties have not had a material impact on the Company or its Part D business.
The Company is also a subcontractor to health plans that are MAOs and PDPs. In the Company’s capacity as a
subcontractor with these health plans, the Company administers benefits to Medicare beneficiaries and is indirectly
subject to certain federal laws and regulations, as well as contractual requirements pertaining to the operation of this
business. If CMS 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
11
subcontracts, the Company can give no assurances that CMS or a health plan will not terminate the Company’s business
relationships with respect to these services.
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 Plans.
The CMS regulations also suggests that Part D Plans should contractually require their first tier, downstream and related
entities (subcontractors) 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.
The Company expects CMS and the U.S. Congress to continue to closely scrutinize each component of the
Medicare program, modify the terms and requirements of the program and possibly seek to modify private insurers’ role.
Therefore, it is not possible to predict the outcome of any Congressional or regulatory activity, either of which could
have a material adverse effect on the Company.
Federal and State Requirements related to Quality and Service Metrics Under Medicare and Medicaid Contracts
The Company’s Medicare and Medicaid business is subject to various quality and performance measures.
Failure to maintain satisfactory quality and performance measures may negatively affect the Company’s premium rates,
subject it to penalties, limit or reduce membership, impede the Company’s ability to compete for new business in
existing or new markets or result in the termination of its contracts, which could have a material adverse effect on our
business, rate of growth and results of operations, financial condition and cash flows.
Quality scores are used by certain regulatory agencies to establish premium rates and/or calculate performance
incentives. In the case of CMS, for example, quality-based metrics are used to pay quality bonuses to Medicare
Advantage plans that enable high scoring plans to offer enhanced health benefits for their MA beneficiaries.
Medicare Advantage plans and Medicare Prescription Drug Plans (together, “MA Plans”) with Star Ratings of
four (4.0) stars or higher are eligible for year-round open enrollment; conversely, plans with lower Star Ratings have
more restricted times for enrollment of beneficiaries. MA Plans with Star Ratings of less than three (3.0) stars in three
consecutive years are denoted as "low performing" plans on the CMS website and in the CMS "Medicare and You"
handbook. In addition, CMS recently had its authority to terminate MA Plan contracts for plans rated below three (3.0)
stars in three consecutive years reinstated. CMS may begin terminations of low rated MA Plans beginning with plan year
2023. As a result, MA Plans that achieve higher Star Ratings may have a competitive advantage over plans with lower
Star Ratings. As a result, lower quality scores/Star ratings compared to our competitors could have a material adverse
effect on our business, rate of growth, results of operation, financial condition, or cash flows.
For certain state Medicaid programs, plans that do not meet applicable quality and service measures may be
subject to a range of penalties including being placed on a corrective action plan, denial of quality performance
incentives, financial sanctions, reduction in capitation, enrollment limitations or termination of contract. We are unable
to predict with any certainty what actions a state may take, if any, when assessing our contractual performance.
Failure to maintain satisfactory quality and service measures could also adversely affect our ability to establish
new health plans or expand the business of our existing health plans. In addition, lower quality scores or Star ratings,
when compared to our competitors, may adversely affect our ability to attract members and obtain regulatory approval
for acquisitions or expansions, including expansion of Medicare Advantage health plans, or succeed in competitive
bidding situations.
Other Federal and State Laws and Regulations
Federal Laws and Regulations affecting Procurement. In addition to the laws and regulations cited in the
section entitled Fraud, Waste and Abuse laws above, the Company is subject to other federal laws and regulations in
connection with its contracts with the federal government. These laws and regulations affect how the Company conducts
12
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 conducts business with federal agency customers and federal contractors to such
agencies.
The Company is investigating, with the assistance of outside counsel, matters relating to compliance by AFSC
with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors
and has reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA
regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was
disclosed to Magellan prior to its acquisition of AFSC. The Company is voluntarily responding to government requests
for further information regarding the Company’s investigation. Contingencies, if any, arising from the results of this
investigation and self-reporting could require us to record balance sheet liabilities or accrue expenses, the amount of
which we are not able to currently estimate. While the Company believes that it has responded appropriately by self-
reporting findings regarding matters that incepted prior to its acquisition of AFSC in order to mitigate the risk of adverse
consequences, should the SBA, Department of Defense and/or other federal agencies seek to hold the Company or AFSC
responsible for the reported conduct, we may be required to pay damages and/or penalties and AFSC could be suspended
or debarred from government contracting. For 2017 and 2018 AFSC’s total revenue comprised approximately 3% and
2%, respectively, of the total revenues of the Company.
The Company also provides services to various state Medicaid programs. Services procurement related to
Medicaid programs 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.
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 provides certain
consulting and related services to drug manufacturers, and there can be no assurance that the FDA will not attempt to
assert jurisdiction over certain aspects of the Company’s activities. The impact of future FDA regulation could materially
adversely affect the Company’s 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 services offered by the Company’s PBM business. Legislation in this area is varied
and encompasses licensing, audit provisions, network access, recoupment of funds, submission of claims data to state all
payor claims databases, potential fiduciary duties, pass through of cost savings and disclosure obligations, including the
disclosure of information regarding the company’s maximum allowable cost pricing with pharmacies. In some
circumstances, claims or inquiries against PBMs have been asserted under state consumer protection laws, which exist in
most states. The Company has obtained licenses as necessary to support current business and future opportunities. The
various state laws do not appear to have 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.
Prompt Pay Laws. Under Medicare Part D and some state laws, the Company or customer may be required to
pay network pharmacies within certain time periods and/or by electronic transfer instead of by check. The shorter time
periods may negatively impact our cash flow. We cannot predict whether additional states will enact some form of
prompt pay legislation.
13
Legislation and Regulation Affecting Drug Price and Rebates. 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.
Additionally, most of the Company’s pharmacy benefit management and 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 effect 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, on a monthly basis CMS publishes the National Average Drug
Acquisition Cost (“NADAC”), a data set that purports to provide the average acquisition cost of retail drugs based on a
nationwide voluntary survey of retail pharmacies. At this time, the Company does not anticipate that NADAC will
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.
On February 6, 2019, the Department of Health and Human Services Office of Inspector General published a
proposed rule which would remove the anti-kickback regulatory safe harbor protection for prescription drug rebates paid
by manufacturers to plan sponsors under Medicare Part D and Medicaid managed care. It also would create a new safe
harbor protection for price discounts between manufacturers and PBMs if given at the point-of-sale (“POS”). Comments
on the proposed rule are due April 8, 2019. This proposed rule would apply only to Medicare Part D and Medicaid
managed care, and not commercial rebates. While we do not believe the proposed rule would have a material adverse
impact on our business, President Trump in his State of the Union speech on February 6, 2019 also proposed that
Congress adopt laws to control drug prices and other related measures, which could materially and adversely affect our
commercial pharmacy benefits management rebate business.
Regulations Affecting the Company’s Pharmacies. The Company owns three pharmacies that provide services
primarily to members of 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 nonresident 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 Utah, and are duly licensed to conduct business in those states. Almost all 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 nonresident pharmacy licenses where required. The Company also maintains Medicare
and Medicaid provider licenses where required for the pharmacies to provide services to these plans. In some states, the
Company is not able to obtain Medicaid licenses to dispense because those states require that the pharmacy have a
physical location in the state to participate in the Medicaid network.
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 and in some states drug database reporting requirements.
Employees of the Registrant
At December 31, 2018, the Company had approximately 10,500 full - time and part - time employees.
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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 SEC’s website, which contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov,
and 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.
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 approximately
43.9 percent, 40.3 percent and 51.7 percent of the Company’s net revenue in the years ended December 31, 2016, 2017
and 2018, 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. See Note 2—“Summary of Significant Accounting Policies—Significant
Customers” to the consolidated financial statements set forth elsewhere herein for a discussion of the Company’s
significant customers.
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.
A portion of the Company’s Healthcare 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. 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.
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.
A portion of the Company’s Healthcare 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
15
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 49.1 percent,
49.6 percent and 59.3 percent of the Company’s net revenue in the years ended December 31, 2016, 2017 and 2018,
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 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;
16
•
•
•
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 continue its expansion 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 the Company expands into new markets, 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, as the Company expands into new markets, 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.
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
17
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, 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);
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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, enrollment changes and contract terminations;
pricing adjustments upon contract renewals;
the timing of acquisitions;
changes in estimates regarding medical costs and IBNR claims;
the timing of recognition of pharmacy revenues, including rebates and Medicare Part D; and
changes in estimates of contingent consideration.
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.
A portion of the Company’s net revenues 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 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. 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 September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal
amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of
September 22, 2017 (the “Base Indenture”), between the Company, as issuer and U.S. Bank National Association, as
trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental
Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National
Association, as trustee.
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The Indenture contains certain covenants which restrict the Company’s ability to, among other things, create
liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation, merger
or sale of assets.
On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a
$400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the
Company, as the borrower (the “2017 Credit Agreement”). On August 13, 2018, the Company entered into an
amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the
Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio
covenant, and which was necessary in order for us to remain in compliance with the terms of the 2017 Credit Agreement.
The 2017 Credit Agreement is scheduled to mature on September 22, 2023.
The 2017 Credit Agreement 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:
•
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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;
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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.
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 2017 Credit Agreement also requires the
Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the
2017 Credit Agreement, pursuant to its terms, or amended, would result in an event of default.
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.
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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, radiology benefits management 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 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. Our state public sector customers have made 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 are uncertain. There can be no assurances that public sector customers may make
rate adjustments to cover the direct costs of these fees in the future, so 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 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
21
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 Rules”). 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
Rules however it is still reviewing and assessing the Final Rules 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.
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.
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:
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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.
22
Proposed changes to current Federal law and regulations could have a material and adverse impact on our PBM
business.
On February 6, 2019, the Department of Health and Human Services Office of Inspector General published a
proposed rule which would remove the anti-kickback regulatory safe harbor protection for prescription drug rebates paid
by manufacturers to plan sponsors under Medicare Part D and Medicaid managed care. It also would create a new safe
harbor protection for price discounts between manufacturers and PBMs if given at the point-of-sale. Comments on the
proposed rule are due April 8, 2019 by 5:00 p.m. Eastern. This proposed rule would apply only to Medicare Part D and
Medicaid managed care, and not commercial rebates. While we do not believe the proposed rule would have a material
adverse impact on our business, additional legislative action could materially and adversely affect other parts of our
pharmacy benefits management rebate business.
Noncompliance with Regulations—Noncompliance with regulations may have a material adverse effect on the
Company’s business, financial condition and results of operations, including from monetary or criminal liabilities
and penalties, investigations or regulatory actions, additional compliance requirements, heightened governmental
scrutiny, or exclusion from participating in government programs.
Extensive laws and regulation are applicable to all of our business operations. In addition to laws and
regulations generally applicable to our business, the Company is subject to other 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. Noncompliance by the Company
with these laws and regulations may have a material adverse effect on the Company’s business, financial condition and
results of operations.
Government investigations and allegations have become more frequent concerning possible violations of
statutes and regulations by healthcare organizations. The Company also conducts its own investigations into these
matters and may choose to self-report its findings to governmental agencies. Violations by the Company with certain
laws and regulations may result in it being 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. 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. In addition, alleged violations 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 any 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.
The Company also 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.
Reference is made to information set forth under “Regulation—Other Federal and State Laws and Regulations”
under Item 1 of this Report.
Medicare Part D—The Company’s participation in Medicare Part D is subject to government regulation and failure
to comply with regulatory requirements could adversely impact the Company’s profitability.
There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D
program, and we can give no assurance these risks will not materially adversely impact the Company’s results. Certain of
the Company’s subsidiaries have been approved by CMS to offer Medicare Part D prescription drug plans to individual
beneficiaries and employer groups. Such subsidiaries are required to comply with Medicare Part D laws and regulations
and, because CMS requires that Medicare Part D sponsors be licensed as risk - bearing entities, also with applicable state
laws and regulations regarding the business of insurance. The Company also provides services in support of our clients’
23
Medicare Part D plans and must be able to deliver such services in a manner that complies with applicable regulatory
requirements. We have made substantial investments in both human resources and the technology required to administer
Medicare Part D benefits. The adoption of new or more complex regulatory requirements or changes in the interpretation
of existing regulatory requirements associated with Medicare Part D may require us to incur significant costs or
otherwise impact our ability to earn a profit on such business. In addition, the Company’s receipt of federal funds made
available through the Medicare Part D program is subject to compliance with the laws and regulations governing the
federal government’s payment for healthcare goods and services, including the federal anti - kickback law and false
claims acts. If we fail to comply materially with applicable regulatory or contractual requirements, whether identified
through CMS or other government audits, client audits, or otherwise, we may be subject to certain sanctions, penalties,
or other remedies, including, but not limited to, suspension of marketing or enrollment activities, restrictions on
expanding our service area, civil monetary penalties or other monetary amounts, termination of our contract(s) with CMS
or Part D clients, and exclusion from federal healthcare programs.
Medicare and Medicaid: Quality and Performance Measures - Failure to maintain satisfactory quality and
performance measures may negatively affect our premium rates, subject us to penalties, limit or reduce our
membership, or impede our ability to compete for new business in existing or new markets or result in the termination
of our contracts, affect our ability to establish new health plans or expand current health plans, which could have a
material adverse effect on our business, rate of growth and results of operations, financial condition and cash flows.
Quality scores are used by certain regulatory agencies to establish premium rates and/or calculate performance
incentives. In the case of CMS, for example, quality based metrics are used to pay quality bonuses to Medicare
Advantage plans that enable high scoring plans to offer enhanced health benefits for their MA beneficiaries.
MA Plans with Star Ratings of four (4.0) stars or higher are eligible for year-round open enrollment;
conversely, plans with lower Star Ratings have more restricted times for enrollment of beneficiaries. MA Plans with Star
Ratings of less than three (3.0) stars in three consecutive years are denoted as "low performing" plans on the CMS
website and in the CMS "Medicare and You" handbook. In addition, in 2018 CMS had its authority reinstated to
terminate MA Plan contracts for plans rated below three (3.0) stars in three consecutive years. CMS may begin
terminations of low rated plans of MA Plans beginning with plan year 2023. As a result, MA Plans that achieve higher
Star Ratings may have a competitive advantage over plans with lower Star Ratings. As a result, lower quality scores/Star
ratings compared to our competitors could have a material adverse effect on our business, rate of growth, results of
operation, financial condition, or cash flows.
For certain state Medicaid programs, plans that do not meet applicable quality and service measures may be
subject to a range of penalties including being placed on a corrective action plan, denial of quality performance
incentives, financial sanctions, reduction in capitation, enrollment limitations or termination of contract. We are unable
to predict with any certainty what actions a state may take, if any, when assessing our contractual performance.
Failure to maintain satisfactory quality and service measures could also adversely affect our ability to establish
new health plans or expand the business of our existing health plans. In addition, lower quality scores or Star ratings,
when compared to our competitors, may adversely affect our ability to attract members and obtain regulatory approval
for acquisitions or expansions, including expansion of Medicare Advantage health plans, or succeed in competitive
bidding situations.
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 is subject 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 (including, but not limited to, GDPR) 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.
24
Cyber - Security—The Company faces risks related to a breach or failure in our operational security systems or
infrastructure, or those of third parties with which we do business.
Our business requires us to securely store, process and transmit confidential, proprietary and other information
in our operations. Security breaches may arise from computer hackers penetrating our systems and approaching our
employees to obtain personal information for financial gain, attempting to cause harm to our operations, or intending to
obtain competitive information. Our data assets and systems are also subject to attack by viruses, worms, phishing
attempts and other malicious software programs. We maintain a comprehensive system of preventive and detective
controls through our security programs; however, our prevention and detection controls may not prevent or identify all
such attacks. The costs to update our security protocols to mitigate a security breach could be significant. A breach or
failure in our operational security systems may result in loss of data or an unauthorized disclosure of sensitive or
confidential member or employee information and could result in significant penalties or fines, litigation, loss of
customers, significant damage to our reputation and business, and other losses, which could adversely impact the
Company’s financial condition and results of operations.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with third party vendors and service providers who provide services to us and our subsidiaries or to
whom we delegate selected functions. Some of these third-parties also have direct access to our systems. Our
arrangements with third party vendors and service providers may make our operations vulnerable if those third parties
fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of
our information and data or the information and data relating to our members or customers. We are also at risk of a data
security incident involving a vendor or third party, which could result in a breakdown of such third party’s data
protection processes or cyber-attackers gaining access to our infrastructure through the third party.
To the extent that a vendor or third party suffers a data security incident that compromises its operations, we
could incur significant costs and possible service interruption, which could have an adverse effect on our business and
operations. In addition, we may have disagreements with third party vendors and service providers regarding relative
responsibilities for any such failures or incidents under applicable business associate agreements or other applicable
outsourcing agreements.
Any contractual remedies and/or indemnification obligations we may have for vendor or service provider
failures or incidents may not be adequate to fully compensate us for any losses suffered as a result of any vendor’s
failure to satisfy its obligations to us or under applicable law. Further, we may not be adequately indemnified against all
possible losses through the terms and conditions of our contracts with third party vendors and service providers. Our
outsourcing arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or
financial condition or other matters outside of our control.
If we fail to adequately monitor and regulate the performance of our third party vendors and service providers,
we could be subject to additional risk, including significant cybersecurity risk. Violations of, or noncompliance with,
laws and/or regulations governing our business (including, but not limited to, GDPR) or noncompliance with contract
terms by third party vendors and service providers could increase our exposure to liability to our members, providers, or
other third parties, or sanctions and/or fines from the regulators that oversee our business. In turn, this could increase the
costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover,
if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative
partners in a timely manner or on acceptable financial terms, and may incur significant costs and/or disruption to our
operations in connection with any such vendor or service provider transition. As a result, we may not be able to meet the
full demands of our members or customers and, in turn, our business, financial condition, or results of operations may be
harmed. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects
or other relationships we enter into with third party vendors and service providers, as a result of regulatory restrictions on
outsourcing, unanticipated delays in transitioning our operations to the third party, vendor or service provider
noncompliance with contract terms or violations of laws and/or regulations, or otherwise. This could result in substantial
costs or other operational or financial problems that could have a material adverse effect on our business, financial
condition, cash flows, or results of operations.
25
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 transparency requirements on
PBMs. 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, 2018 reflect goodwill of approximately $1.0 billion, representing
approximately 34.1 percent of total assets. The Company completed its annual impairment analysis of goodwill as of
October 1, 2018, noting that no impairment was identified.
At December 31, 2018, identifiable intangible assets (customer lists, contracts, provider networks and trade
names) totaled approximately $231.9 million. Intangible assets are generally 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 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.
The 2018 annual goodwill impairment testing as of October 1, 2018, determined that the fair value of the MCC
reporting unit had declined, largely due to continued economic challenges in certain markets, and was in excess of its
carrying value by a margin of approximately 5%. We considered our observed fourth quarter performance in
our October 1, 2018 test. At December 31, 2018, we evaluated whether our forecast for 2019 and beyond would have
changed from what was used in our October 1, 2018 test. Based on this evaluation, we continue to believe that the fair
value of the MCC reporting unit exceeds its carrying value by a margin of approximately 5%. While the reporting unit
was not determined to be impaired at this time, the MCC reporting unit goodwill is at risk of future impairment in the
event of significant unfavorable changes in the Company’s forecasted future results and cash flows. In addition, market
factors utilized in the impairment analysis, including long-term growth rates or discount rates, could negatively impact
the fair value of our reporting units. For testing purposes, management's best estimates of the expected future results are
the primary driver in determining the fair value. Fair value determinations require considerable judgment and are
sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and
assumptions made for purposes of the annual goodwill test will prove to be an accurate prediction of the future.
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key
assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a
decrease in expected future cash flows, specifically, a decrease in membership or rates or customer attrition and increase
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in costs that could significantly impact our immediate and long-range results, unfavorable working capital changes and
an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an
economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession); and (iii)
volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average
cost of capital.
Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as
related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These
facts and circumstances are subject to change and may impact future analyses.
While historical performance and current expectations have resulted in fair values of our reporting units and
indefinite-lived intangible assets in excess of carrying values, if our assumptions are not realized, it is possible that an
impairment charge may need to be recorded in the future.
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, 2018, the Company had approximately
$80.1 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 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
27
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, including but not limited to, claims by network providers. 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.
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 $385.7 million and represented 12.9 percent of the Company’s
total assets at December 31, 2018.
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—Adverse changes in national economic conditions could adversely affect the
Company’s business and results of operations.
Changes in national economic conditions could adversely affect the Company’s reimbursement from state
Medicaid programs in its Healthcare segment. Adverse economic conditions could also adversely affect the Company’s
customers in the Healthcare and Pharmacy Management segments resulting in increased pressures on the Company’s
operating margins. In addition, economic conditions may result in decreased membership in the Healthcare and
Pharmacy Management segments, thereby adversely affecting the revenues to the Company from such customers as well
as the Company’s operating profitability.
28
Adverse economic conditions in the debt markets could affect the Company’s ability to refinance the
Company’s existing Credit Agreement upon its maturity on acceptable terms, or at all.
If we are unable to successfully execute our margin improvement initiatives and plans, or if we fail to realize the
anticipated benefits of those initiatives and plans, our business, cash flows, financial position, or results of operations
could be materially and adversely affected.
In December 2018, we announced the implementation of a margin and profitability improvement plan. The
margin improvement plan includes flattening our organizational structure, standardizing our healthcare administrative
functions and automating certain core operating processes.
Our restructuring plan and profit improvement initiatives may create uncertainties, including the effect of the
initiatives and plan on our business, operations, revenues, and profitability, potential disruptions to our business as a
result of management’s attention to the initiatives and plan, uncertainty regarding the potential amount and timing of
future cost savings associated with the initiatives and plan, and the potential negative impact of the initiatives and plan
on employee morale. The success of the initiatives and plan will depend, in part, on factors that are beyond our control.
Accordingly, we can provide no assurance that the goals of the initiatives and plan will be fully achieved. Failure in this
regard could have a material and adverse impact on our business, cash flows, financial position, or results of operations.
Tax matters, including the changes in corporate tax rates, disagreements with taxing authorities and imposition of
new taxes could impact our results of operations and financial condition.
We are subject to income and other taxes in the U.S. and our operations, plans and results of operations are
affected by tax and other initiatives. As a result of the passage of the Tax Cuts and Jobs Act (the “Tax Act”), corporate
tax rates in the United States decreased in 2018, which resulted in changes to our valuation of our deferred tax asset and
liabilities. These changes in valuation were material to our income tax expense and deferred tax balances.
We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other
taxing authorities with respect to our taxes. Although we believe our tax estimates are reasonable, if a taxing authority
disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. There
can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a
material impact on our results of operations and financial position.
Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in
the mix of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and
liabilities, changes in the application or interpretation of the Tax Act, or other changes in tax laws.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company currently leases approximately 1.1 million square feet of office space comprising 68 offices in 25
states and the District of Columbia with terms expiring between February 28, 2019 and November 30, 2025. The
Company’s principal executive offices are located in Scottsdale, Arizona, which lease expires in October 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 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.
29
The Company is also subject to or party to certain class actions and other litigation and claims relating to its
operations or business practices. The Company has recorded reserves that, in the opinion of management, 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.
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Shares of the Company’s Common Stock, $0.01 par value per share (“common stock”) trade 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.
As of December 31, 2018, there were approximately 227 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.
Comparison of Cumulative Total Return
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, 2013, and comparing relative values on
December 31, 2014, 2015, 2016, 2017 and 2018. 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.
Magellan Health, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100 $100.20 $102.92 $125.61 $161.16 $ 94.96
157.22 150.33
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Managed Health Care Index(1) . . . . . . . . . . . . .
280.36 310.62
100 113.69 115.26 129.05
100 133.61 162.83 194.60
2013
2014
December 31,
2016
2015
2017
2018
(1) The S&P 500 Managed Health Care Index consists of Anthem, Inc., Centene Corporation, Humana, Inc.,
UnitedHealth Group, Inc. and WellCare Health Plans, Inc.
31
The information set forth above under the “Comparison of Cumulative Total Return” 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.
On October 26, 2015, 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 22, 2017 (the “2015
Repurchase Program”). On July 26, 2017, the Company’s board of directors approved an extension of the 2015
Repurchase Program through October 22, 2018. On May 24, 2018, the Company’s board of directors approved an
increase of $200 million to the current $200 million stock repurchase plan which now authorizes the Company to
purchase up to $400 million of its outstanding common stock under the 2015 Repurchase Program. The board also
extended the program from October 22, 2018 to October 22, 2020. Pursuant to the 2015 Repurchase Program, the
Company made purchases during the three months ended December 31, 2018 as follows (aggregate cost excludes broker
commissions and is reflected in millions):
Total number Average
Total Number of Shares
Approximate Dollar Value of
Period
October 1 - 31, 2018 . . . . . . . . . . .
November 1 - 30, 2018 . . . . . . . . .
December 1 - 31, 2018 . . . . . . . . .
Price Paid Purchased as Part of Publicly
of Shares
Purchased per Share(1) Announced Plans or Programs Purchased Under the Plans(1)(2)
165,039
165,039
101,927
101,927
63,237
63,237
330,203
330,203
$67.87
60.87
56.72
$199.8
193.6
190.0
Shares that May Yet Be
(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
The Company made additional open market purchases of 60,901 shares of the Company’s common stock at an
aggregate cost of $3.7 million (excluding broker commissions) during the period from January 1, 2019 through
February 22, 2019.
Dividends
The Company does not expect to pay a dividend in 2019. Should the Company pay any dividends in the future,
there can be no assurance that the Company will continue to pay such dividends.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2018, the Company had no sales of unregistered securities.
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, 2014, 2015, 2016, 2017 and 2018.
Selected consolidated financial information for the years ended December 31, 2016, 2017 and 2018 and as of
December 31, 2017 and 2018 presented below, have been derived from, and should be read in conjunction with, the
32
audited consolidated financial statements and the notes thereto included elsewhere herein. Selected consolidated
financial information for the years ended December 31, 2014 and 2015 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.
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
2014
Year Ended December 31,
2016
2017
2015
2018
Statement of Operations Data:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,760,118 $ 4,597,400 $ 4,836,884 $ 5,838,583 $ 7,314,151
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,762,412
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . .
2,283,022
Direct service costs and other operating
1,882,614
1,818,720
2,274,755
1,321,877
2,088,595
732,949
2,413,770
2,211,910
expenses(1)(2)(3) . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net loss attributable to non-controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Magellan . . . . . . . . $
Net income per common share
attributable to Magellan:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
723,498
91,070
7,387
(1,301)
117,920
43,689
74,231
822,392
102,844
6,581
(2,165)
71,116
42,409
28,707
876,612
106,046
10,193
(2,818)
145,517
69,728
75,789
941,883
115,706
25,977
(5,887)
135,224
25,083
110,141
1,071,535
132,660
35,396
(14,068)
43,194
19,013
24,181
(5,173)
79,404 $
(2,706)
31,413 $
(2,090)
77,879 $ 110,207 $
(66)
—
24,181
2.98 $
2.90 $
1.26 $
1.21 $
3.36 $
3.22 $
4.72 $
4.51 $
0.99
0.97
2014
2015
December 31,
2016
2017
2018
Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,140,323 $ 1,097,682 $ 1,319,267 $ 1,483,353 $ 1,547,167
898,893
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . .
150,748
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,979,056
Total debt, capital lease and deferred
585,840
171,916
2,068,943
1,092,850
172,524
2,443,687
724,235
174,745
2,069,060
892,303
158,638
2,957,234
financing obligations . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . .
269,841
1,133,558
257,309
1,066,183
618,379
1,099,719
853,737
1,276,494
752,882
1,285,303
(1) Includes stock compensation expense of $40,584, $50,384, $37,422, $39,116 and $29,472 for the years ended
December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
(2) Includes changes in fair value of contingent consideration of $6,172, $44,257, $(104), $696 and $1,307 for the years
ended December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
(3) Includes impairment of intangible assets of $4,800 for the year ended December 31, 2016.
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
33
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
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 and other MCOs, employers, labor unions, various military and governmental
agencies, TPAs, consultants and brokers. The Company’s business is divided into three segments, based on the services
it provides and/or the customers that it serves. See Item 1—“Business” for more information on the Company’s business
segments.
Summarized Results
Summarized below are the key financial highlights for the year ended December 31, 2018 (“2018”). For
additional Information see the “Results of Operations” section, which discusses both consolidated and segment results in
more detail:
• Net revenue for 2018 increased to $7.3 billion from the year ended December 31, 2017 (“2017”).
•
Income before income taxes for 2018 decreased to $43.2 million from 2017.
• Net income attributable to Magellan for 2018 decreased to $24.2 million from 2017.
• Segment profit(1) for 2018 decreased to $228.0 million from 2017.
• Adjusted net income(1) for 2018 decreased to $61.7 million from 2017.
(1) See Non-GAAP Measures section for a discussion of these non-GAAP financial measures and a
reconciliation to the most comparable GAAP item.
Key Developments and Accomplishments
• On March 12, 2018, the Company entered into a contract with the State of Arizona as one of seven
integrated managed care organizations that will coordinate physical and behavioral health services for
approximately one million Medicaid eligible members in the central geographic service area effective
October 1, 2018.
• On April 16, 2018, the Company entered into a contract with the Commonwealth of Virginia to participate
statewide in the Medallion 4 program. The Company was selected through a competitive procurement and
is one of six health plans to contract with Virginia for this program. The Medallion program will
collectively serve over 700,000 TANF Medicaid enrollees commencing on August 1, 2018.
•
In May, the Company announced that it had been named to the annual Fortune 500 list of America’s largest
corporations by revenue for the first time in the Company’s history.
34
Results of Operations
The following table summarizes, for the periods indicated, consolidated operating results (in thousands):
Consolidated Results
Statement of Operations Data:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,836,884 $ 5,838,583 $ 7,314,151
3,762,412
Cost of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . .
2,283,022
Direct service costs and other operating
1,882,614
1,818,720
2,413,770
2,211,910
2018
2016
20.7%
28.2%
21.6%
25.3%
55.9%
3.2%
December 31,
2017
Change
'16 vs '17
Change
'17 vs '18
expenses (1)(2)(3) . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net income (loss) attributable to non-
876,612
106,046
10,193
(2,818)
145,517
69,728
75,789
941,883
115,706
25,977
(5,887)
135,224
25,083
110,141
1,071,535
132,660
35,396
(14,068)
43,194
19,013
24,181
7.4%
9.1%
154.9%
108.9%
(7.1%)
(64.0%)
45.3%
13.8%
14.7%
36.3%
139.0%
(68.1%)
(24.2%)
(78.0%)
controlling interest . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Magellan . . . . . . . . . . $
(2,090)
77,879 $ 110,207 $
(66)
—
24,181
41.5%
(78.1%)
(1) Includes stock compensation expense of $37,422, $39,116 and $29,472 for the years ended December 31, 2016,
2017 and 2018, respectively.
(2) Includes changes in fair value of contingent consideration of $(104), $696 and $1,307 for the years ended
December 31, 2016, 2017 and 2018, respectively.
(3) Includes impairment of intangible assets of $4,800 for the year ended December 31, 2016.
2018 compared to 2017
Net revenue, Cost of care, Cost of goods sold, and Direct service costs and other operating expenses
Net revenue, cost of care, cost of goods sold, and direct service costs and other operating expense variances are
addressed within the segment results that follow.
Depreciation and amortization
Depreciation and amortization expense increased by 14.7 percent or $17.0 million from 2017 to 2018, primarily
due to asset additions after 2017 and acquisition activity.
Interest Expense
Interest expense increased by $9.4 million from 2017 to 2018 mainly due to an increase in interest rates and the
amount of outstanding debt.
Interest and other income
Interest and other income increased by $8.2 million from 2017 to 2018 primarily due to higher yields and
invested balances.
Income taxes
The Company’s effective income tax rate was 18.6 percent in 2017 and 44.0 percent in 2018. These rates differ
from the applicable federal statutory income tax rate for each year primarily due to state income taxes, remeasurement of
deferred tax balances in 2017 due to the Tax Act, permanent differences between book and tax income, and changes to
the valuation allowances. The Company also accrues interest and penalties related to uncertain tax positions in its
provision for income taxes. Although the federal statutory rate was reduced under the Tax Act from 35% in 2017 to 21%
35
in 2018, the effective income tax rate for 2018 was higher than 2017, primarily due to (i) suspension of the non-
deductible Patient Protection and Affordable Care Act health insurer fee (“HIF”) fees in 2017, (ii) a significant reversal
of valuation allowances in 2017 for the AlphaCare net operating loss carryforwards (“NOLs”), (iii) remeasurement of
deferred tax balances in 2017 as a result of the Tax Act, (iv) a significant increase in the amount of non-deductible
executive compensation in 2018 as a result of the Tax Act, and (v) an increased relative impact in 2018 of the permanent
differences for non-deductible HIF fees and non-deductible executive compensation as a result of reduced earnings.
The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2014
expired during 2018. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2017 were
reversed in 2018, of which $2.4 million was reflected as a reduction to income tax expense and $0.6 million as a
decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2018 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 most state and local income taxes for 2013
expired during 2017. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2016 were
reversed in 2017, of which $2.0 million was reflected as a reduction to income tax expense and $1.0 million as a
decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2017 and reflected as a
reduction to income tax expense due to the closing of statutes of limitations on tax assessments.
2017 compared to 2016
Net revenue, Cost of care, Cost of goods sold, and Direct service costs and other operating expenses
Net revenue, cost of care, cost of goods sold, and direct service costs and other operating expense variances are
addressed within the segment results that follow.
Depreciation and amortization
Depreciation and amortization expense increased by 9.1 percent or $9.7 million from 2016 to 2017, primarily
due to asset additions after 2016 and acquisition activity.
Interest expense
Interest expense increased by $15.8 million from 2016 to 2017 mainly due to an increase in interest rates, an
increase in the amount of outstanding debt and higher amortization cost related to debt financing.
Interest and other income
Interest and other income increased by $3.1 million from 2016 to 2017 primarily due to higher yields and
invested balances.
Income taxes
The Company’s effective income tax rate was 47.9 percent in 2016 and 18.6 percent in 2017. These rates differ
from the 2017 federal statutory income tax rate primarily due to state income taxes, remeasurement of deferred tax
balances due to the Tax Act, permanent differences between book and tax income, and changes to the valuation
allowances. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income
taxes. The effective income tax rate for 2017 was lower than 2016 mainly due to suspension for 2017 of the non-
deductible HIF fees, reversal of valuation allowances in 2017 of AlphaCare NOLs as a result of a change in judgment
about their realizability due to internal restructuring as a result of the acquisition of SWH, remeasurement of deferred tax
balances as a result of the Tax Act, and more significant excess tax deductions from equity compensation in 2017.
The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2013
expired during 2017. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2016 were
reversed in 2017, of which $2.0 million was reflected as a reduction to income tax expense and $1.0 million as a
decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2017 and reflected as a
reduction to income tax expense due to the closing of statutes of limitations on tax assessments.
36
The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2012
expired during 2016. As a result, $2.2 million of tax contingency reserves recorded as of December 31, 2015 were
reversed in 2016, of which $1.5 million was reflected as a reduction to income tax expense and $0.7 million as a
decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2016 and reflected as a
reduction to income tax expense due to the closing of statutes of limitations on tax assessments.
Segment Results
The Company manages and measures operational performance through three segments: Healthcare, Pharmacy
Management and Corporate. The Company evaluates performance of its segments based on 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. Stock compensation expense and changes in fair value of contingent consideration recorded in
relation to acquisitions are included in direct service costs and other operating expenses; however, these amounts are
excluded from the computation of Segment Profit. The non-controlling portion of AlphaCare’s Segment Profit (Loss) is
also excluded from the computation of Segment Profit in 2016 and 2017.
Healthcare
The Healthcare segment includes the Company’s: (i) management of behavioral healthcare services and EAP
services, (ii) management of other specialty areas including diagnostic imaging and musculoskeletal management, and
(iii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered
through Magellan Complete Care. The Healthcare segment’s Behavioral & Specialty Health division provides
management services to health plans, accountable care organizations, employers, state Medicaid agencies, the United
States military and various federal government agencies for whom Magellan provides carve-out management services for
behavioral health, employee assistance plans, and other areas of specialty healthcare including diagnostic imaging,
musculoskeletal management, cardiac, and physical medicine. The MCC division contracts with state Medicaid agencies
and CMS to manage care for beneficiaries under various Medicaid and Medicare programs.
37
The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in
thousands):
Healthcare Segment Results
Behavioral & Specialty Health revenue
December 31,
Change Change
2016
2017
2018
'16 vs '17 '17 vs '18
Risk-based, non-EAP . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,390,846 $ 1,461,159 $ 1,511,532
EAP risk-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
349,751
247,953
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
295,391
244,141
382,047
257,310
5.1%
29.3%
5.4%
3.4%
(8.5%)
(3.6%)
Magellan Complete Care revenue
Risk-based, non-EAP . . . . . . . . . . . . . . . . . . . . . . . . .
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Managed care and other revenue . . . . . . . . . . . . . . . . . .
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent
687,536
41,771
2,659,685
1,882,614
777,071
573,706
203,365
4,440
1,053,916
51,845
3,206,277
2,413,770
792,507
601,201
191,306
10,689
2,473,570
55,816
4,638,622
3,762,412
876,210
735,366
140,844
53.3% 134.7%
7.7%
24.1%
44.7%
20.6%
55.9%
28.2%
10.6%
2.0%
22.3%
4.8%
(26.4%)
(5.9%)
(34.7%)
6,982 140.7%
consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of intangible assets . . . . . . . . . . . . . . . . . . .
Less: non-controlling interest segment loss . . . . . . . . .
Segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(231)
4,800
(567)
212,941 $
696
—
(56)
202,747 $
1,307
—
—
149,133
(4.8%)
(26.4%)
Direct service cost as % of revenue . . . . . . . . . . . . . . . .
MLR Behavioral & Specialty Health risk . . . . . . . . . . .
MLR Behavioral & Specialty Health EAP risk . . . . . . .
MLR Magellan Complete Care risk . . . . . . . . . . . . . . . .
21.6%
83.3%
61.2%
79.1%
18.8%
88.5%
68.6%
81.5%
15.9%
87.0%
68.4%
89.3%
Membership
Behavioral & Specialty Health
Risk (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EAP risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Magellan Complete Care
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,109
14,586
27,159
61
20
13,030
14,471
27,825
120
20
12,321
15,189
26,655
139
23
(1) May include some duplicate count of membership for customers that contract with Magellan for both behavioral and
other specialty management services.
2018 compared to 2017
Managed Care and Other Revenue
Net revenue related to Healthcare increased by 44.7 percent or $1,432.3 million from 2017 to 2018. The
increase in revenue is primarily due to revenue for Senior Whole Health acquired on October 31, 2017 of $1,011.6
million, new contracts implemented during (or after) 2017 of $376.9 million, higher membership partially offset by
unfavorable rate changes of $180.6 million, net revenue recorded for HIF fees in 2018 of $31.1 million, customer
settlements in 2018 of $22.3 million, a performance penalty in 2017 of $4.6 million, the revenue impact of net favorable
prior period medical claims recorded in 2017 of $4.1 million and the revenue impact of favorable prior period medical
claims recorded in 2018 of $1.6 million. These increases were partially offset by terminated contracts of $111.4 million,
net retroactive program changes recorded in 2017 of $23.3 million, program changes of $21.8 million, unfavorable
retroactive membership and rate adjustments in 2018 of $18.3 million, retroactive profit share in 2017 of $2.6 million,
favorable customer settlements in 2017 of $2.0 million, retroactive rate adjustments in 2017 of $1.5 million and other net
unfavorable variances of $19.6 million.
38
Cost of Care
Cost of care increased by 55.9 percent or $1,348.6 million from 2017 to 2018. The increase in cost of care is
primarily due to care cost for Senior Whole Health acquired on October 31, 2017 of $889.5 million, new contracts
implemented after (or during) 2017 of $346.8 million, increased membership and higher care from existing customers
partially offset by unfavorable rate changes of $160.6 million, favorable customers settlements in 2017 of $11.1 million,
net favorable prior period medical claims development recorded in 2017 of $7.5 million and care trends and other net
unfavorable variances of $87.9 million. These increases were partially offset by terminated contracts of $93.6 million,
program changes of $27.3 million, net retroactive program changes recorded in 2017 of $21.2 million, net favorable care
development recorded in 2018 of $9.7 million and litigation settlements in 2017 of $3.0 million. For our behavioral and
specialty health contracts, cost of care as a percentage of risk revenue (excluding EAP business) decreased from 88.5
percent in 2017 to 87.0 percent in 2018, mainly due to revenue growth from new business and favorable rate changes,
partially offset by terminated contracts. For our MCC contracts, cost of care increased as a percentage of risk revenue
(excluding EAP business) from 81.5 percent in 2017 to 89.3 percent in 2018, mainly due to care trends and business mix.
Direct Service Costs
Direct service costs increased by 22.3 percent or $134.2 million from 2017 to 2018 primarily due to costs
related to Senior Whole Health, new business and contract implementation costs, and HIF fees in 2018. Direct service
costs decreased as a percentage of revenue from 18.8 percent in 2017 to 15.8 percent in 2018, mainly due to increased
revenue from business growth and acquisition activity partially offset by terminated contracts.
2017 compared to 2016
Managed Care and Other Revenue
Net revenue related to Healthcare increased by 20.6 percent or $546.6 million from 2016 to 2017. The increase
in revenue is mainly due to higher membership and net favorable rate changes of $220.5 million, new contracts
implemented after (or during) 2016 of $210.8 million, revenue for Senior Whole Health acquired on October 31, 2017 of
$186.6 million, revenue for AFSC acquired on July 1, 2016 of $92.3 million, net retroactive program changes recorded
in 2017 of $23.3 million, revenue for TMG acquired February 29, 2016 of $8.5 million, retroactive profit share in 2017
of $2.6 million, favorable customer settlements in 2017 of $2.0 million and retroactive rate adjustments in 2017 of $1.5
million. These increases were partially offset by terminated contracts of $139.9 million, net revenue recorded for HIF in
2016 of $44.0 million, program changes of $5.5 million, performance penalty in 2017 of $4.6 million, the revenue
impact of net favorable prior period medical claims development recorded in 2017 of $4.1 million, favorable retroactive
rate adjustments recorded in 2016 of $3.3 million and other net decreases of $0.1 million.
Cost of Care
Cost of care increased by 28.2 percent or $531.2 million from 2016 to 2017. The increase in cost of care is
primarily due to new contracts implemented after (or during) 2016 of $197.2 million, increased membership and higher
care associated with net favorable rate changes of $187.6 million, care cost for Senior Whole Health acquired on
October 31, 2017 of $158.9 million, care cost for AFSC acquired on July 1, 2016 of $77.5 million, net retroactive
program changes recorded in 2017 of $21.2 million, net favorable prior period medical claims development recorded in
2016 of $10.3 million, litigation settlements in 2017 of $3.0 million and care trends and other net unfavorable variances
of $15.3 million. These increases were partially offset by terminated contracts of $109.1 million, favorable customer
settlements in 2017 of $11.1 million, net favorable prior period medical claims development recorded in 2017 of
$7.5 million, program changes of $6.4 million and favorable 2016 medical claims development recorded after 2016 of
$5.7 million. For our behavioral & specialty health contracts, cost of care as a percentage of risk revenue (excluding EAP
business) increased from 83.3 percent in 2016 to 88.5 percent in 2017, mainly due to unfavorable care trends. For our
MCC contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 79.1 percent in
2016 to 81.5 percent in 2017, mainly due to business mix and higher revenue in 2016 due to HIF fees.
Direct Service Costs
Direct service costs increased by 4.8 percent or $27.5 million from 2016 to 2017 primarily due to costs related
to TMG, AFSC, and Senior Whole Health, new business and contract implementation costs, which increases were
39
partially offset by terminated contracts, an impairment of intangible assets in 2016 and HIF fees in 2016. Direct service
costs decreased as a percentage of revenue from 21.6 percent in 2016 to 18.8 percent in 2017, mainly due to an increase
in revenue from business growth and acquisition activity, partially offset by terminated contracts and additional costs due
to the acquisitions of TMG, AFSC and SWH.
Pharmacy Management
The Pharmacy Management segment comprises products and solutions that provide clinical and financial
management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management’s services
include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical
dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs;
and (vi) programs for the integrated management of specialty drugs. Pharmacy Management’s services are provided
under contracts with health plans, employers, state Medicaid programs, Medicare Part D and other government agencies.
The following table summarizes, for the periods indicated, operating results for the Pharmacy Management
segment (in thousands, except state count):
December 31,
Change Change
Pharmacy Segment Results
Formulary management . . . . . . . . . . . . . . . . . . . . . . . . . $
PBA and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Managed care and other revenue . . . . . . . . . . . . . . . . . .
PBM, including dispensing . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PBM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . .
2016
85,400 $
158,161
243,561
1,780,388
272,800
2,053,188
2,296,749
1,933,086
363,663
261,570
102,093
20,509
127
2017
91,900 $
181,589
273,489
1,980,044
511,000
2,491,044
2,764,533
2,341,979
422,554
302,525
120,029
19,881
—
2018
70,900
169,527
240,427
2,183,151
442,266
2,625,417
2,865,844
2,468,170
397,674
298,713
98,961
5,458
'16 vs '17 '17 vs '18
7.6% (22.9%)
14.8%
(6.6%)
12.3% (12.1%)
11.2% 10.3%
87.3% (13.5%)
5.4%
21.3%
3.7%
20.4%
5.4%
21.2%
(5.9%)
16.2%
15.7%
(1.3%)
17.6% (17.6%)
(3.1%) (72.5%)
Stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration . . . .
Segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,729 $ 139,910 $ 104,419
— (100.0%)
14.0% (25.4%)
Direct service cost as % of revenue . . . . . . . . . . . . . . . .
COGS as % of PBM revenue . . . . . . . . . . . . . . . . . . . . .
11.4%
94.2%
10.9%
94.0%
10.4%
94.0%
Pharmacy Operational Statistics
Adjusted commercial network claims . . . . . . . . . . . . . .
Adjusted PBA claims . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjusted claims . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Generic dispensing rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial PBM covered lives . . . . . . . . . . . . . . . . . . .
Medical pharmacy covered lives . . . . . . . . . . . . . . . . . .
Total states and DC that participate in PBA . . . . . . . . .
24,000
72,600
96,600
84.9%
1,700
12,500
26
29,100
80,700
109,800
31,321
70,429
101,750
87.3%
1,900
13,100
27
87.4%
1,986
13,910
27
2018 compared to 2017
Managed Care and Other Revenue
Managed care and other revenue related to Pharmacy Management decreased by 12.1 percent or $33.1 million
from 2017 to 2018. This decrease is primarily due to decreased formulary management revenue of $20.5 million, lower
revenue in government pharmacy of $5.6 million, decreased medical pharmacy revenue of $3.3 million, terminated
contracts of $1.2 million and other net unfavorable variances of $5.0 million. These decreases were partially offset by
new contracts implemented after (or during) 2017 of $2.5 million.
40
PBM and Dispensing Revenue
PBM and dispensing revenue related to Pharmacy Management increased by 5.4 percent or $134.4 million from
2017 to 2018. This increase is primarily due to new contracts implemented after (or during) 2017 of $154.4 million and
other net favorable variances of $0.3 million. These increases were partially offset by terminated contracts of $17.0
million and customer guarantee penalties in 2018 of $3.3 million.
Cost of Goods Sold
Cost of goods sold increased by 5.4% percent or $126.2 million from 2017 to 2018. This increase is primarily
due to new contracts implemented after (or during) 2017 of $147.2 million, partially offset by terminated contracts of
$16.3 million and decreased membership and utilization of $4.7 million. As a percentage of the portion of net revenue
that relates to PBM, cost of goods sold is consistent with 2017 at 94.0 percent.
Direct Service Costs
Direct service costs decreased by 1.3 percent or $3.8 million from 2017 to 2018. The decrease is primarily due
to a decrease in stock compensation due to acquisition related awards which became fully vested in the prior year,
partially offset by higher costs to support new business.
2017 compared to 2016
Managed Care and Other Revenue
Managed care and other revenue related to Pharmacy Management increased by 12.3 percent or $29.9 million
from 2016 to 2017. This increase is primarily due to Medical pharmacy revenue of $11.7 million, new contracts
implemented after (or during) 2016 of $8.3 million, increased formulary management revenue of $6.2 million, revenue
for Veridicus acquired on December 13, 2016 of $4.8 million and other net favorable variances of $2.1 million. These
increases were partially offset by terminated contracts of $3.2 million.
PBM and Dispensing Revenue
PBM and dispensing revenue related to Pharmacy Management increased by 21.3 percent or $437.9 million
from 2016 to 2017. This increase is primarily due to increased membership and utilization of $294.4 million, new
contracts implemented after (or during) 2016 of $210.2 million, revenue for Veridicus acquired on December 13, 2016 of
$173.9 million, government pharmacy revenue of $11.1 million and other net favorable variances of $1.2 million. These
increases were partially offset by terminated contracts of $252.9 million.
Cost of Goods Sold
Cost of goods sold increased by 21.2 percent or $408.9 million from 2016 to 2017. This increase is primarily
due to an increased membership and utilization of $274.1 million, new contracts implemented after (or during) 2016 of
$207.5 million, Veridicus acquired on December 13, 2016 of $159.8 million, government pharmacy of $10.9 million and
other net unfavorable variances of $3.9 million. These increases were partially offset by terminated contracts of $247.3
million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold
decreased from 94.2 percent in 2016 to 94.0 percent in 2017, mainly due to increases in formulary management and
medical pharmacy revenue and changes in business mix.
Direct Service Costs
Direct service costs increased by 15.7 percent or $41.0 million from 2016 to 2017. This increase is mainly due
to the acquisition of Veridicus, contract implementation costs and ongoing costs to support new business. As a
percentage of revenue, direct service costs decreased from 11.4 percent in 2016 to 10.9 percent in 2017, mainly due to an
increase in revenue from business growth and acquisitions and a decrease in stock compensation expense.
41
Corporate Segment
The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and
Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.
The following table summarizes, for the periods indicated, operating results for the Corporate segment (in
thousands):
December 31,
Change
Change
Corporate Segment & Eliminations
Managed care and other revenue . . . . . . . . . . . . . . . . . . . . $
PBM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . . . .
2016
2017
(304) $
(584) $
(119,246)
114,366
(5,184)
41,336
(46,520)
12,473
(170)
(131,643)
130,069
(2,158)
38,157
(40,315)
8,546
(3)
2018
(607) 92.1%
(189,708) 10.4%
185,148 13.7%
'16 vs '17 '17 vs '18
3.9%
44.1%
42.3%
(5,167) (58.4%) 139.4%
(1.8%)
37,456
(7.7%)
5.7%
(42,623) (13.3%)
99.3%
17,032 (31.5%)
— (98.2%) (100.0%)
(19.4%)
(6.2%)
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . .
Less: non-controlling interest segment loss . . . . . . . . . . . .
Segment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (33,877) $ (31,766) $ (25,591)
2018 compared to 2017
Net expenses related to Corporate, which includes eliminations, decreased 19.4 percent or $6.2 million,
primarily due to lower discretionary benefits in 2018, higher corporate development costs in 2017 related to the SWH
acquisition and a litigation settlement recorded in 2017 partially offset by higher stock compensation expense in 2018.
As a percentage of revenue, corporate and elimination decreased from 0.5 percent in 2017 to 0.3 percent in 2018, mainly
due to increased revenue from business growth, higher corporate development costs in 2017 and lower discretionary
benefits.
2017 compared to 2016
Net expenses related to Corporate, which includes eliminations, decreased by 6.2 percent or $2.1 million,
primarily due to lower stock compensation expense and discretionary benefits in 2017, partially offset by a litigation
settlement in 2017. As a percentage of revenue, corporate and elimination decreased from 0.7 percent in 2016 to 0.5
percent in 2017, mainly due to higher revenue due to acquisitions and new business, lower discretionary benefits and
stock compensation expenses.
Inter segment revenues and expenses
Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for
certain of Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the
Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and
other related to these arrangements are eliminated within the Corporate segment.
Non - GAAP Measures
The Company reports its financial results in accordance with GAAP, however the Company’s management also
assesses business performance and makes business decisions regarding the Company’s operations using certain
non - GAAP measures.
In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to
Magellan (“Adjusted Net Income”) and adjusted net income per common share attributable to Magellan on a diluted
basis (“Adjusted EPS”). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions
completed after January 1, 2013 to exclude non - cash stock compensation expense resulting from restricted stock
purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition
intangibles, as well as impairment of identified acquisition intangibles. The Company believes these non - GAAP
measures provide a more useful comparison of the Company’s underlying business performance from period to period
42
and are more representative of the earnings capacity of the Company. Non - GAAP financial measures disclosed, such as
Segment Profit, Adjusted Net Income and Adjusted EPS, should not be considered a substitute for, or superior to,
financial measures determined or calculated in accordance with GAAP.
The following table reconciles income before income taxes to segment profits for the years ended December 31,
2017, 2017 and 2018 (in thousands):
2016
2017
2018
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,517 $135,224 $ 43,194
29,472
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,307
Impairment of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Non-controlling interest segment (profit) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
132,660
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,396
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,068)
Segment Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $301,793 $310,891 $227,961
39,116
696
—
59
115,706
25,977
(5,887)
37,422
(104)
4,800
737
106,046
10,193
(2,818)
The following table reconciles net income attributable to Magellan to Adjusted Net Income for the years ended
December 31, 2016, 2017 and 2018:
Net income attributable to Magellan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,879 $ 110,207 $ 24,181
Adjusted for acquisitions starting in 2013
2016
2017
2018
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of intangible assets, net of non-controlling interest . . . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
530
1,307
49,078
—
(13,435)
Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $109,540 $ 144,825 $ 61,661
16,215
696
37,265
—
(19,558)
19,181
(104)
25,324
3,936
(16,676)
The following table reconciles net income per common share attributable to Magellan—diluted to Adjusted EPS
for the years ended December 31, 2016, 2017 and 2018:
Net income per common share attributable to Magellan—diluted . . . . . . . . . . . . . .
Adjusted for acquisitions starting in 2013
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of intangible assets, net of non-controlling interest . . . . . . . . . . . . . .
Tax impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
$ 3.22
2017
$ 4.51
2018
$ 0.97
0.79
—
1.05
0.16
(0.69)
$ 4.53
0.66
0.03
1.52
—
(0.80)
$ 5.92
0.02
0.05
1.96
—
(0.54)
$ 2.46
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); (vi) the timing of acquisitions;
(vii) changes in estimates regarding medical costs and IBNR; (viii) the timing of recognition of pharmacy revenues,
including rebates and Medicare Part D; and (ix) changes in the estimates of contingent consideration.
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 healthcare services and higher costs of such services. Many of these factors are
43
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.
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 2017 Credit Agreement. In
addition, interest rates on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based
on the amount of cash equivalents and investments and the borrowing levels under the 2017 Credit Agreement and the
principal amount of the Notes as of December 31, 2018, 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
2018 compared to 2017
Operating Activities. The Company reported net cash provided by operating activities of $162.3 million and
$164.8 million for 2017 and 2018, respectively. The $2.5 million increase in operating cash flows from 2017 to 2018 is
mainly attributable to favorable working capital changes and decreased tax payments between years, mainly offset by a
decrease in Segment Profit, increased interest payments between years and ACA activity.
The net favorable impact of working capital changes between periods totaled $66.3 million. For 2017, operating
cash flows were impacted by net unfavorable working capital changes of $89.2 million, which were largely attributable
to timing related to receivables and payables. For 2018, operating cash flows were impacted by net unfavorable working
capital changes of $22.9 million, which were largely attributable to an increase in accounts receivable, partially offset by
an increase in payables.
Segment Profit for 2018 decreased $82.9 million from 2017. Tax payments for 2018 decreased $19.3 million
from 2017.
Investing Activities. The Company utilized $57.2 million and $68.3 million during 2017 and 2018, respectively,
for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized
software for 2017 were $16.0 million and $41.2 million, respectively, as compared to additions for 2018 related to hard
assets and capitalized software of $26.3 million and $42.0 million, respectively.
During 2017 and 2018 the Company used net cash of $26.8 million and $59.2 million for the net purchase of
"available-for-sale" securities. During 2017, the Company used net cash of $232.4 million related to investments in
businesses and the acquisition of Veridicus and SWH. During 2018, the Company used net cash of $1.0 million related
to investments in businesses.
Financing Activities. During 2017, the Company paid $798.1 million on debt obligations, $21.8 million for the
repurchase of treasury stock under the Company's share repurchase program, $9.9 million in debt issuance fees, $5.3
million on capital lease obligations and had other net unfavorable items of $2.7 million. In addition, the Company
received $1,041.7 million from the issuance of debt and $44.4 million from the exercise of stock options.
During 2018, the Company paid $110.0 million on debt obligations, $62.6 million for the repurchase of treasury
stock under the Company's share repurchase program, $12.2 million on capital lease obligations and had other net
unfavorable items of $1.0 million. In addition, the Company received $23.1 million from the exercise of stock options.
2017 compared to 2016
Operating Activities. The Company reported net cash provided by operating activities of $66.7 million and
$162.3 million for 2016 and 2017, respectively. The $95.6 million increase in operating cash flows from 2016 to 2017 is
mainly attributable to favorable working capital changes and an increase in Segment Profit partially offset by increased
tax payments between years.
The net favorable impact of working capital changes between periods totaled $91.5 million. For 2016, operating
cash flows were impacted by net unfavorable working capital changes of $180.7 million, which were largely attributable
44
to contingent consideration payments of $91.7 million, of which $51.1 million is reflected as operating activities,
working capital changes of approximately $113.8 million related to our Medicare Part D business, primarily receivables,
and other net unfavorable working capital changes due to timing related to receivables and payables. For 2017, operating
cash flows were impacted by net unfavorable working capital changes of $89.2 million, which were largely attributable
to timing related to receivables and payables.
Segment Profit for 2017 increased $9.1 million from 2016. Tax payments for 2017 increased $5.0 million from
2016.
Investing Activities. The Company utilized $60.9 million and $57.2 million during 2016 and 2017, respectively,
for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized
software for 2016 were $15.2 million and $45.7 million, respectively, as compared to additions for 2017 related to hard
assets and capitalized software of $16.0 million and $41.2 million, respectively.
During 2016 the Company received net cash of $15.8 million from the net maturity of "available-for-sale"
securities, with the Company using $26.8 million during 2017 for the net purchase of "available-for-sale" securities.
During 2016, the Company used net cash of $16.0 million, $110.9 million and $72.8 million for the acquisitions of
TMG, AFSC and Veridicus, respectively, partially offset by a working capital adjustment of $0.5 million related to the
acquisition of 4D Pharmacy Management Systems, Inc. During 2017, the Company used net cash of $232.4 million
related to investments in businesses and the acquisition of Veridicus and SWH.
Financing Activities. During 2016, the Company paid $106.8 million for the repurchase of treasury stock under
the Company’s share repurchase program, $15.6 million on debt obligations and $5.3 million on capital lease
obligations. The Company made a contingent consideration payment totaling $91.7 million, of which $40.6 million was
related to financing activities. In addition, the Company received $375.0 million from the issuance of debt, $25.2 million
from exercise of stock options, and had other net favorable items of $1.2 million.
During 2017, the Company paid $798.1 million on debt obligations, $21.8 million for the repurchase of treasury
stock under the Company's share repurchase program, $9.9 million in debt issuance fees, $5.3 million on capital lease
obligations and had other net unfavorable items of $2.7 million. In addition, the Company received $1,041.7 million
from the issuance of debt and $44.4 million from the exercise of stock options.
Outlook—Liquidity and Capital Resources
Liquidity. The Company may draw on the 2017 Credit Agreement as required to meet working capital needs
associated with the timing of receivables and payables, fund share repurchases or support acquisition activities. The
Company 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 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 the Company will not experience any such losses in the future.
45
Contractual Obligations and Commitments
The following table sets forth the future financial commitments of the Company as of December 31, 2018 (in
thousands):
Less than
1 year
Payments due by period
1-3
years
3-5
years
More than
5 years
Total
Contractual Obligations
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,000 $
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease and deferred financing obligations(3) . . . . .
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase commitments(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax contingencies(5) . . . . . . . . . . . . . . . . . . . . . . . .
328,125
82,230
66,096
34,573
8,000
1,171
15,683
— $ 400,000
—
10,376
—
3,855
—
—
—
$ 935,878 $ 56,475 $ 79,812 $ 303,581 $ 414,231
275,625
20,502
—
7,454
—
—
—
35,000
30,464
—
14,348
—
—
—
17,500
20,888
—
8,916
8,000
1,171
—
— $
— $
(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 and deferred financing obligations include imputed interest of $3.3 million and are net of leasehold
improvement allowances.
(4) Purchase commitments include open purchase orders as of December 31, 2018 relating to ongoing capital
expenditure and operational activities.
(5) 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 these contingencies. However, settlement of 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.
The Company also 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. See Note 6—“Stockholders’
Equity” to the consolidated financial statements for more information on the Company’s share repurchase program.
Off - Balance Sheet Arrangements
As of December 31, 2018, the Company has no material off - balance sheet arrangements.
Senior Notes
On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal
amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of
September 22, 2017 (the “Base Indenture”), between the Company, as issuer and U.S. Bank National Association, as
trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental
46
Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National
Association, as trustee.
For more information on the Company’s Senior Notes see Note 5—“Long - Term Debt, Capital Lease and
Deferred Financing Obligations” to the consolidated financial statements set forth elsewhere herein.
Credit Agreements
On September 22, 2017, the Company entered into the 2017 Credit Agreement with various lenders that
provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan
facility to the Company, as the borrower. On August 13, 2018, the Company entered into an amendment to the 2017
Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a
second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was
necessary in order for us to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit
Agreement is scheduled to mature on September 22, 2023.
For more information on the Company’s Credit Agreements see Note 5—“Long - Term Debt, Capital Lease and
Deferred Financing Obligations” to the consolidated financial statements set forth elsewhere herein.
Restrictive Covenants in Debt Agreements
The 2017 Credit Agreement 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.
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 2017 Credit Agreement also requires the Company to comply with specified financial ratios and tests.
Failure to do so, unless waived by the lenders under the 2017 Credit Agreement, pursuant to its terms, or amended,
would result in an event of default under the 2017 Credit Agreement. As of December 31, 2018, the Company was in
compliance with all covenants, including financial covenants, under the 2017 Credit Agreement.
47
Critical Accounting Policies and 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. Actual results could differ from those estimates. The
Company considers the following to be its critical accounting policies and estimates:
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. Cost of care for the
Company’s EAP contracts, which are mainly with the United States federal government, pertain to the costs to employ
licensed behavioral health counselors to deliver non-medical counseling for these contracts.
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.” For new contracts, the
Company estimates IBNR based on underwriting data until it has sufficient data to utilize these methodologies.
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
48
should have been accrued. The following table presents the components of the change in medical claims payable for the
years ended December 31, 2016, 2017 and 2018 (in thousands):
Claims payable and IBNR, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 253,299 $ 188,618 $ 326,642
Cost of care:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,892,914
(10,300)
1,882,614
2,421,270
(7,500)
2,413,770
3,772,112
(9,700)
3,762,412
Claim payments and transfers to other medical liabilities(1):
2016
2017
2018
3,402,010
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
292,904
Total claim payments and transfers to other medical liabilities . . . . . . . . .
3,694,914
—
Acquisition of SWH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
394,140
Claims payable and IBNR, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withhold (receivables) payable, end of period(2) . . . . . . . . . . . . . . . . . . . . . . . .
(593)
Medical claims payable, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,136 $ 327,625 $ 393,547
2,210,346
161,798
2,372,144
96,398
326,642
983
1,733,310
213,985
1,947,295
—
188,618
(4,482)
(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) Favorable development in 2016, 2017 and 2018 was $10.3 million, $7.5 million and $9.7 million, respectively, and
was mainly related to lower medical trends and faster claims completion than originally assumed.
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. Any prior period favorable cost of care development related to a
lack of moderately adverse conditions is excluded from “Cost of Care—Prior Years” adjustments, as a similar provision
for moderately adverse conditions is established for current year cost of care liabilities and therefore does not generally
impact net income.
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, 2018 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
−4 %
−3 %
−2 %
−1 %
1 %
2 %
3 %
4 %
(in thousands)
$(22,500)
(16,500)
(11,000)
(5,500)
5,500
11,000
16,500
22,500
−2 %
−1.5 %
−1 %
−0.5 %
0.5 %
1 %
1.5 %
2 %
(in thousands)
$(56,500)
(42,500)
(28,500)
(14,500)
14,500
29,000
44,000
59,000
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).
49
(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, 2018; however, actual claims payments may differ from established estimates.
Other medical liabilities consist primarily of amounts payable to pharmacies for claims that have been
adjudicated by the Company but not yet paid, “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. In addition, certain contracts include provisions to provide
the Company additional funding if the cost of care is above the specified levels.
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 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. The Company’s reporting units with
goodwill as of December 31, 2017 were comprised of Commercial, Government and Pharmacy Management. During the
third quarter of 2018, the Company re-evaluated how it was managing the Healthcare business segment and decided a
reorganization was necessary to effectively manage the business going forward. As a result of this business
reorganization, the Company concluded that changes to Healthcare’s reporting units were warranted. Healthcare now
consists of two reporting units – Behavioral & Specialty Health and Magellan Complete Care (“MCC”). Effective
August 1, 2018, the Company evaluated the impact of the reorganization on its previously identified reporting units. The
Company allocated goodwill to the new reporting units using a relative fair value approach. In addition, the Company
completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and
immediately after the reallocation and determined that no impairment existed.
The fair value of Behavioral & Specialty Health (a component of the Healthcare segment), MCC (a component
of the Healthcare segment) and Pharmacy Management 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 2018 annual goodwill impairment testing as of October 1, 2018, determined that the fair value of the MCC
reporting unit had declined, largely due to continued economic challenges in certain markets, and was in excess of its
carrying value by a margin of approximately 5%. We considered our observed fourth quarter performance in
our October 1, 2018 test. At December 31, 2018, we evaluated whether our forecast for 2019 and beyond would have
changed from what was used in our October 1 test. Based on this evaluation, we continue to believe that the fair value of
the MCC reporting unit exceeds its carrying value by a margin of approximately 5%. While the reporting unit was not
determined to be impaired at this time, the MCC reporting unit goodwill is at risk of future impairment in the event of
significant unfavorable changes in the Company’s forecasted future results and cash flows. In addition, market factors
50
utilized in the impairment analysis, including long-term growth rates or discount rates, could negatively impact the fair
value of our reporting units. For testing purposes, management's best estimates of the expected future results are the
primary driver in determining the fair value. Fair value determinations require considerable judgment and are sensitive to
changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions
made for purposes of the annual goodwill test will prove to be an accurate prediction of the future.
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key
assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a
decrease in expected future cash flows, specifically, a decrease in membership or rates or customer attrition and increase
in costs that could significantly impact our immediate and long-range results, unfavorable working capital changes and
an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an
economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession); and (iii)
volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average
cost of capital.
Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as
related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These
facts and circumstances are subject to change and may impact future analyses.
While historical performance and current expectations have resulted in fair values of our reporting units and
indefinite-lived intangible assets in excess of carrying values, if our assumptions are not realized, it is possible that an
impairment charge may need to be recorded in the future.
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2017 was as follows (in
thousands):
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 242,255
368,612
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
395,421
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,006,288
2017
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2018 was as follows (in
thousands):
Behavioral & Specialty Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 410,869
211,735
Magellan Complete Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
395,552
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,018,156
2018
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2018 are reflected
in the table below (in thousands):
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742,054 $ 1,006,288
—
Acquisition of Veridicus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of SWH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other acquisitions and measurement period adjustments . . . . . . . . .
11,868
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,006,288 $ 1,018,156
1,647
260,139
2,448
2017
2018
Income Taxes
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
51
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.
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.
In addition to reducing the federal statutory tax rate from 35% in 2017 to 21% in 2018, the Tax Act that was
enacted on December 22, 2017 included a number of other changes to existing U.S. tax laws that impacted the Company,
including acceleration of depreciation on certain assets and additional limitations on the deduction of executive
compensation. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address
the application of U.S. GAAP in situations when a registrant did not have the necessary information available in
reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 allowed registrants
to determine a reasonable estimate to be included as provisional amounts and provided a measurement period by which
the accounting must be completed.
Because the Company had not yet completed its accounting for the effects of the Tax Act at the time,
provisional amounts were recorded in 2017 for the enactment-date effects by applying the guidance in SAB 118. The
Company has now completed its accounting for all of the enactment-date income tax effects of the Tax Act. As a result,
an adjustment of $0.3 million to the provisional amounts is included as a component of income tax expense for 2018.
The tax benefit from an uncertain tax position is recognized when it is more likely than not that, based on the
technical merits, the position will be sustained by the taxing authorities upon examination, including resolution of related
appeals or litigation processes. Significant judgment is required in determining the Company’s uncertain tax positions.
Accruals for uncertain tax positions are established using the Company’s best judgment and adjustments are made, as
warranted, due to changing facts and circumstances. 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.
Item 7A. Quantitative and Qualitative Disclosures about Market 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 2017 Credit Agreement. In addition, interest rates
on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash
equivalents and investments and the borrowing levels under the 2017 Credit Agreement and the principal amount of the
Notes as of December 31, 2018, 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.
52
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, 2018. Based on their evaluation, management has concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2018.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the year ended December 31, 2017, management completed its initial assessment of the effectiveness of
our internal control over financial reporting for our AFSC business, which was acquired on July 1, 2016. During the
fourth quarter of fiscal year 2017, we identified and disclosed a material weakness related to inadequate process level
controls at AFSC including contract accounting and information technology general controls. Specifically, AFSC did not
adequately identify, design and implement appropriate process level controls for its processes, including contract
accounting and information technology general controls.
The Company has taken several actions to remediate the material weakness related to our internal control over
financial reporting. During the year, we made improvements to the design of the related processes and information
technology general controls as well as implemented new controls for each significant process. We added resources to our
accounting and financial reporting functions to facilitate the timely execution of the process improvements and to
increase the review procedures in numerous areas. With respect to information technology general controls, we have
implemented an upgraded software solution to properly account for complex contract terms and designed additional
reconciling controls to ensure proper recognition of revenue. As it relates to this software solution, and the existing
applications, we developed enhanced procedures and controls related to user access management and changes in
information technology systems and implemented a testing plan to monitor information technology general controls with
a focus on systems supporting our financial reporting processes. Based on progress made to date as a result of the actions
outlined above, we have concluded that the material weakness has been remediated as of December 31, 2018.
In the fourth quarter ended December 31, 2018, 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, except those noted in the preceding paragraph.
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, 2018. 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 (2013).”
Based on this assessment, management has concluded that, as of December 31, 2018, 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 February 28, 2019 appears on page 54 of this Form 10 - K.
53
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Magellan Health, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Magellan Health, Inc. and subsidiaries’ internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Magellan Health,
Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on the COSO criteria.
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the accompanying consolidated balance sheets of Magellan Health, Inc. and subsidiaries as of
December 31, 2017 and 2018, the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related
notes (collectively referred to as the “financial statements”) and our report dated February 28, 2019, expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definitions and Limitation of Internal Control Over Financial Reporting
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.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
February 28, 2019
54
Item 9B. Other Information
The following information is included in this Item 9B in lieu of filing a Form 8-K:
Entry into a Material Definitive Agreement
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
On February 27, 2019, Magellan entered into Amendment No. 2 to Credit Agreement (the “Amendment”) with
The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“MUFG”), as administrative agent and the lenders party thereto, amending
that certain Credit Agreement (as amended by that certain Amendment No. 1 to Credit Agreement, dated as of
August 13, 2018, the “2017 Credit Agreement”) dated as of September 22, 2017, among the Magellan, the lenders party
thereto, and MUFG as administrative agent. The Amendment amends the 2017 Credit Agreement to modify the financial
covenant levels with respect to certain fiscal quarters, beginning with and including the fiscal quarter ended
December 31, 2018 and ending on and including the fiscal quarter ending on December 31, 2019, with corresponding
modifications to the “leverage covenant holiday” level applicable following “permitted acquisitions” (as such terms are
defined in the Amendment or in the 2017 Credit Agreement, as applicable). The foregoing does not constitute a complete
summary of the terms of the Amendment and is qualified in its entirety by the full text of the Amendment, a copy of
which is filed as Exhibit 4.6 to this Form 10-K and is incorporated by reference herein.
In the ordinary course of their respective businesses, one or more of the lenders, or their affiliates, have or may
have various relationships with the Company involving the provision of a variety of financial services, including cash
management, commercial banking, investment banking, advisory or other financial services, for which they received, or
will receive, customary fees and expenses.
55
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, 2018, except for the following information required by Item 10 and Item 12 of this Part III.
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, Inc., 55 Nod Road, Avon, Connecticut 06001. 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2018 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
Weighted average
outstanding options,
exercise price of
outstanding options,
warrants and rights 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
(a)
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,718,378 (1)
$68.10 (2)
3,282,964 (3)
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2,718,378 (1)
—
$68.10 (2)
—
3,282,964 (3)
(1) Consists of outstanding stock options and unvested restricted stock units and performance-based restricted stock
units as of December 31, 2018.
(2) Weighted average exercise price of outstanding stock options as of December 31, 2018.
(3) Consists of shares remaining available for issuance as of December 31, 2018 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.
56
Item 15. Exhibits, Financial Statement Schedule and Additional Information
PART IV
(a) Documents furnished as part of the Report:
1.
Financial Statements
Information with respect to this item is contained on Pages F - 1 to F - 44 of this Report on Form 10 - K.
2.
Financial Statement Schedules
Not applicable.
3.
Exhibit Index
Exhibit No.
1.1
Underwriting Agreement, dated September 15, 2017, among Magellan Health, Inc., as issuer, and J.P.
Morgan Securities LLC, MUFG Securities Americas Inc. and Wells Fargo Securities, LLC, as
representatives of the several underwriters named therein, which was filed as Exhibit 1.1 to the Company’s
current report on Form 8-K, which was filed on September 18, 2017.
Description of Exhibit
2.1 Agreement and Plan of Merger, dated July 13, 2017, among Magellan Healthcare, Inc., SWH Holdings,
Inc., certain of the stockholders of SWH Holdings, Inc., certain of the vested optionholders of SWH
Holdings, Inc., TA Associates Management, L.P. and Silver Merger Sub, Inc., which was filed as Exhibit
2.1 to the Company’s quarterly report on Form 10-Q, which was filed on July 28, 2017 and is incorporated
herein by reference.
Second Amended and Restated Certificate of Incorporation of the Company, as amended and restated on
May 25, 2017, which was filed as Exhibit 3.1 to the Company’s current report on Form 8-K, which was
filed on May 25, 2017 and is incorporated herein by reference.
Bylaws of the Company as amended and restated on May 24, 2017, which was filed as Exhibit 3.2 to the
Company’s current report on Form 8-K, which was filed on May 25, 2017 and is incorporated herein by
reference.
Base Indenture, dated as of September 22, 2017, between the Company, as issuer and U.S. Bank National
Association, as trustee, which was filed as Exhibit 4.1 to the Company’s current report on Form 8-K,
which was filed on September 25, 2017.
First Supplemental Indenture, dated September 22, 2017, between the Company, as issuer and U.S. Bank
National Association, as trustee, which was filed as Exhibit 4.2 to the Company’s current report on
Form 8-K, which was filed on September 25, 2017.
Form of Global Note for the 4.400% Senior Notes due 2024 (included as an exhibit to Exhibit 4.2), which
was filed as Exhibit 4.3 to the Company’s current report on Form 8-K, which was filed on September 25,
2017.
Credit Agreement dated as of September 22, 2017, among the Company, as borrower, BTMU, JPMorgan
Chase Bank, N.A., Compass Bank (d/b/a BBVA Compass), U.S. Bank National Association and Wells
Fargo Securities, LLC as co-syndication agents, BTMU as administrative agent and the lenders party
thereto from time to time, which was filed as Exhibit 4.4 to the Company’s current report on Form 8-K,
which was filed on September 25, 2017.
Amendment No.1 to Credit Agreement dated as of August 13, 2018, among the Company, as borrower,
The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent and the lenders party thereto, which was
filed as Exhibit 4.1 to the Company’s current report on Form 8-K, which was filed on August 13, 2018 and
is incorporated herein by reference.
Amendment No. 2 to Credit Agreement dated as of February 27, 2019, among the Company, as borrower,
The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent and the lenders party thereto.
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.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
#4.6
*10.1
57
Exhibit No.
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
Description of Exhibit
Magellan Health Services, Inc. 2008 Management Incentive Plan, effective as of May 20, 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.
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.
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.
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 27, 2009 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 10, 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 March 10, 2009 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 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 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.
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.
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.
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.
58
Exhibit No.
*10.19
*10.20
*10.21
*10.22
*10.23
*10.24
*10.25
*10.26
*10.27
*10.28
*10.29
*10.30
*10.31
*10.32
*10.33
*10.34
*10.35
Description of Exhibit
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.
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.
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, 2014 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, 2014 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, 2014 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, 2014 and is incorporated herein by reference.
Amendment to Employment Agreement, dated April 28, 2014, between the Company and Jonathan N.
Rubin, which was filed as Exhibit 10.1 to the Company’s current report on Form 8 - K, which was filed on
April 29, 2014 and is incorporated herein by reference.
Employment Agreement, dated September 18, 2013 between the Company and Sam K. Srivastava, Chief
Executive Officer of Magellan HealthCare, which was filed as Exhibit 10.85 to the Company’s annual
report on Form 10 - K, which was filed on February 26, 2015 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 March 9, 2015 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 9, 2015 and is incorporated herein by reference.
Form of Performance - Based Restricted Stock Unit Agreement, relating to performance - based 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 9, 2015 and is
incorporated herein by reference.
Form of Notice of Performance - Based Restricted Stock Unit Award, relating to performance - based
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 9, 2015 and is
incorporated herein by reference.
59
Exhibit No.
*10.36
*10.37
*10.38
*10.39
*10.40
*10.41
*10.42
10.43
10.44
*10.45
*10.46
*10.47
*10.48
*10.49
*10.50
Description of Exhibit
Amendment to Employment Agreement, dated April 28, 2015, between the Company and Jonathan N.
Rubin, which was filed as Exhibit 10.1 to the Company’s current report on Form 8 - K, which was filed on
April 29, 2015 and is incorporated herein by reference.
Amendment to Employment Agreement, dated October 26, 2015 between the Company and Jonathan N.
Rubin, which was filed as Exhibit 10.1 to the Company’s quarterly report on Form 10 - Q, which was filed
on October 27, 2015 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 March 7, 2016 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, 2016 and is incorporated herein by reference.
Form of Performance - Based Restricted Stock Unit Agreement, relating to performance - based 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, 2016 and is
incorporated herein by reference.
Form of Notice of Performance - Based Restricted Stock Unit Award, relating to performance - based
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, 2016 and is
incorporated herein by reference.
Magellan Health Services, Inc. 2016 Management Incentive Plan, effective as of May 18, 2016, which was
filed as Appendix A to the Company’s Definitive Proxy Statement, which was filed on April 8, 2016, and
is incorporated herein by reference.
Share Purchase Agreement dated as of May 15, 2016, among Magellan Health, Inc., Magellan
Healthcare, Inc., Armed Forces Services Corporation and the holders of the issued and outstanding
common stock of AFSC who are parties thereto, which was filed as Exhibit 10.1 to the Company’s
quarterly report on Form 10-Q, which was filed on July 29, 2016 and is incorporated herein by reference.
Purchase Agreement dated as of November 9, 2016, among Magellan Health, Inc., Magellan Pharmacy
Solutions, Inc., Veridicus Holdings, LLC and Veridicus Health, LLC, which was filed as Exhibit 10.44 to
the Company’s annual report on Form 10-K, which was filed on February 24, 2017 and is incorporated
herein by reference.
Form of Stock Option Agreement, relating to options granted under the Company’s 2016 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, 2017 and is incorporated herein by reference.
Form of Notice of Stock Option Grant, relating to options granted under the Company’s 2016
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, 2017 and is incorporated herein by reference.
Form of Performance-Based Restricted Stock Unit Agreement, relating to performance - based restricted
stock units granted under the Company’s 2016 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, 2017 and is
incorporated herein by reference.
Form of Notice of Performance-Based Restricted Stock Unit Award, relating to performance - based
restricted stock units granted under the Company’s 2016 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, 2017 and is
incorporated herein by reference.
Form of Stock Option Agreement, relating to options granted under the 2016 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 9, 2018 and is incorporated herein by reference.
Form of Notice of Stock Option Grant, relating to options granted under the 2016 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 9, 2018 and is incorporated herein by reference.
60
Exhibit No.
*10.51
*10.52
Description of Exhibit
Form of Performance-Based Restricted Stock Unit Agreement, relating to performance-based restricted
stock units granted under the 2016 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 9, 2018 and is incorporated herein by
reference.
Form of Notice of Performance-Based Restricted Stock Award, relating to performance-based restricted
stock units granted under the 2016 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 9, 2018 and is incorporated herein by
reference.
#21 List of subsidiaries of the Company.
#23 Consent of Independent Registered Public Accounting Firm.
#31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
#31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
†32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
†32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
#101
The following materials from the Company’s Annual Report on Form 10 - K for the fiscal year ended
December 31, 2018 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 Rule 12-09:
(1)
(2)
(3)
Not applicable.
Not applicable.
Not applicable.
Item 16. 10-K Summary
None.
61
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
Date: February 28, 2019
Date: February 28, 2019
MAGELLAN HEALTH, INC.
(Registrant)
/s/ JONATHAN N. RUBIN
Jonathan N. Rubin
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
/s/ BARRY SMITH
Barry Smith
Chief Executive Officer and Chairman of the Board of
Directors
(Principal Executive Officer)
Title
Date
/s/ SWATI ABBOTT
Swati Abbott
Director
/s/ DR. JOHN O. AGWUNOBI
Dr. John O. Agwunobi
Director
/s/ ERAN BROSHY
Eran Broshy
Director
/s/ MICHAEL DIAMENT
Michael Diament
Director
/s/ DR. PERRY FINE
Dr. Perry Fine
Director
/s/ G. SCOTT MACKENZIE
G. Scott MacKenzie
Director
/s/ WILLIAM J. MCBRIDE
William J. McBride
Director
/s/ MATTHEW J. SIMAS
Matthew J. Simas
Director
/s/ JONATHAN N. RUBIN Chief Financial Officer
Jonathan N. Rubin
(Principal Financial Officer)
/s/ JEFFREY N. WEST
Jeffrey N. West
Senior Vice President and Controller
(Principal Accounting Officer)
62
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
MAGELLAN HEALTH, 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:
Page(s)
Magellan Health, Inc.
Audited Consolidated Financial Statements
Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated balance sheets as of December 31, 2017 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of income for the years ended December 31, 2016, 2017 and 2018 . . . . . . . . . . . . .
Consolidated statements of comprehensive income for the years ended December 31, 2016,
F - 2
F - 3
F - 4
2017 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F - 5
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2016,
2017 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of cash flows for the years ended December 31, 2016, 2017 and 2018 . . . . . . . . . . .
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F - 6
F - 7
F - 8
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
To the Shareholders and Board of Directors of Magellan Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Magellan Health, Inc. and subsidiaries as of
December 31, 2017 and 2018, the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated February 28, 2019 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
February 28, 2019
F-2
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
(In thousands, except per share amounts)
Current Assets:
Cash and cash equivalents ($229,013 and $160,967 restricted at December 31, 2017 and
ASSETS
2017
2018
December 31, 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments ($219,111 and $363,840 restricted at December 31, 2017 and
December 31, 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets ($41,121 and $43,401 restricted at December 31, 2017 and December 31, 2018,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments ($17,287 and $2,854 restricted at December 31, 2017 and
398,732
660,775
$ 272,308
756,059
310,578
40,945
382,582
40,818
72,323
1,483,353
158,638
95,400
1,547,167
150,748
December 31, 2018, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,287
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
813
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,567
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,006,288
268,288
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,957,234
3,161
3,411
24,530
1,018,156
231,883
$ 2,979,056
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other medical liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current debt, capital lease and deferred financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, capital lease and deferred financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2017 and December 31, 2018-Issued and
74,300
193,635
6,892
327,625
177,002
112,849
892,303
740,888
12,298
14,226
1,925
19,100
1,680,740
72,077
$
231,356
8,000
393,547
169,639
24,274
898,893
728,608
11,167
16,478
2,124
36,483
1,693,753
outstanding- none . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2017 and December 31, 2018-Issued and
outstanding-52,973 and 24,202 shares at December 31, 2017, respectively, and 53,536 and 23,935
shares at December 31, 2018, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Stockholders’ Equity:
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 28,771 and 29,601 shares at December 31, 2017 and December 31, 2018,
530
535
1,274,811
1,399,495
(380)
1,326,645
1,419,449
(324)
(1,397,962)
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,276,494
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,957,234
(1,461,002)
1,285,303
$ 2,979,056
See accompanying notes to consolidated financial statements.
F-3
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts)
Net revenue:
2016
2017
2018
Managed care and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,902,942 $ 3,479,182 $4,878,442
2,435,709
PBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,314,151
Costs and expenses:
1,933,942
4,836,884
2,359,401
5,838,583
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating expenses (1)(2)(3) . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net income (loss) attributable to non-controlling interest . . . . . . . . . . . .
Net income attributable to Magellan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to Magellan per common share:
Basic (See Note B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted (See Note B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,882,614
1,818,720
876,612
106,046
10,193
(2,818)
4,691,367
145,517
69,728
75,789
(2,090)
77,879 $ 110,207 $
2,413,770
2,211,910
941,883
115,706
25,977
(5,887)
5,703,359
135,224
25,083
110,141
(66)
3,762,412
2,283,022
1,071,535
132,660
35,396
(14,068)
7,270,957
43,194
19,013
24,181
—
24,181
3.36 $
3.22 $
4.72 $
4.51 $
0.99
0.97
(1) Includes stock compensation expense of $37,422, $39,116 and $29,472 for the years ended December 31, 2016,
2017 and 2018, respectively.
(2) Includes changes in fair value of contingent consideration of $(104), $696 and $1,307 for the years ended
December 31, 2016, 2017 and 2018, respectively.
(3) Includes impairment of intangible assets of $4,800 for the year ended December 31, 2016.
See accompanying notes to consolidated financial statements.
F-4
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,789 $110,141 $ 24,181
Other comprehensive income:
2016
2017
2018
Unrealized gain (loss) on available-for-sale securities (1) . . . . . . . . . . . . . . . . . . . . . .
56
24,237
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: comprehensive income (loss) attributable to non-controlling interest . . . . . . . . . . .
—
Comprehensive income attributable to Magellan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77,966 $110,002 $ 24,237
(205)
109,936
(66)
87
75,876
(2,090)
(1) Net of income tax expense (benefit) of $51, $(8) and $18 for the years ended December 31, 2016, 2017 and 2018,
respectively.
See accompanying notes to consolidated financial statements.
F-5
MAGELLAN HEALTH, 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
Retained
Earnings
Balance at December 31, 2015 . . . . . . . . . . . . . . 51,340
—
Stock compensation expense . . . . . . . . . . . . . . . .
494
Exercise of stock options . . . . . . . . . . . . . . . . . .
—
Adjustment due to adoption of ASU 2016-09 . . . .
159
Issuance of equity . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of stock . . . . . . . . . . . . . . . . . . . . . .
—
—
Adjustment to non-controlling interest . . . . . . . . .
—
Net income attributable to Magellan . . . . . . . . . . .
Other comprehensive income—other . . . . . . . . . .
—
Balance at December 31, 2016 . . . . . . . . . . . . . . 51,993
—
Stock compensation expense . . . . . . . . . . . . . . . .
831
Exercise of stock options . . . . . . . . . . . . . . . . . .
149
Issuance of equity . . . . . . . . . . . . . . . . . . . . . . .
—
Repurchase of stock . . . . . . . . . . . . . . . . . . . . . .
—
Adjustment to non-controlling interest . . . . . . . . .
—
Net income attributable to Magellan . . . . . . . . . . .
Other comprehensive loss—other . . . . . . . . . . . .
—
Balance at December 31, 2017 . . . . . . . . . . . . . . 52,973
—
Stock compensation expense . . . . . . . . . . . . . . . .
409
Exercise of stock options . . . . . . . . . . . . . . . . . .
Issuance of equity . . . . . . . . . . . . . . . . . . . . . . .
154
—
Repurchase of stock . . . . . . . . . . . . . . . . . . . . . .
—
Net income attributable to Magellan . . . . . . . . . . .
—
Other comprehensive income—other . . . . . . . . . .
Adoption of ASC 606. . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31, 2018 . . . . . . . . . . . . . . 53,536
$ 513
—
6
—
1
—
—
—
—
520
—
8
2
—
—
—
—
530
—
4
1
—
—
—
—
$ 535
—
—
—
—
(1,828)
—
—
—
(28,476)
—
—
—
(295)
—
—
—
(28,771)
—
—
—
(830)
—
—
—
(26,648) $ (1,269,391) $ 1,124,013 $ 1,211,310
—
—
99
—
—
—
77,879
—
1,289,288
—
—
—
—
—
110,207
—
1,399,495
—
—
—
—
24,181
—
(4,227)
(29,601) $ (1,461,002) $ 1,326,645 $ 1,419,449
—
—
—
—
(106,806)
—
—
—
(1,376,197)
—
—
—
(21,765)
—
—
—
(1,397,962)
—
—
—
(63,040)
—
—
—
37,422
24,542
—
1,229
—
(923)
—
—
1,186,283
39,116
44,347
361
—
4,704
—
—
1,274,811
29,472
23,060
(698)
—
—
—
—
Accumulated
Other
Total
Comprehensive Stockholders’
Income (Loss)
$ (262)
—
—
—
—
—
—
—
87
(175)
—
—
—
—
—
—
(205)
(380)
—
—
—
—
—
56
—
$ (324)
Equity
$ 1,066,183
37,422
24,548
99
1,230
(106,806)
(923)
77,879
87
1,099,719
39,116
44,355
363
(21,765)
4,704
110,207
(205)
1,276,494
29,472
23,064
(697)
(63,040)
24,181
56
(4,227)
$ 1,285,303
See accompanying notes to consolidated financial statements.
F-6
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
2016
2017
2018
106,046
4,800
565
37,422
4,710
5,238
132,660
—
1,221
29,472
(1,725)
1,344
115,706
—
4,757
39,116
(30,981)
3,924
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,789 $ 110,141 $ 24,181
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash impairment of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash amortization on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims payable and other medical liabilities . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and investments in businesses, net of cash acquired . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities and sales of investments . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
—
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to acquire treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62,640)
23,064
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt, capital lease and deferred financing obligations . . . . . . . . . . .
(122,239)
Payments on contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,020)
(162,835)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(126,424)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
398,732
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 304,508 $ 398,732 $ 272,308
(40,910)
17,605
(4,565)
(84,445)
26,235
696
1,681
3,218
95
162,273
(99,295)
127
(25,774)
9,139
72,347
1,307
1,803
18,020
17
164,844
(134,089)
(8,246)
(13,900)
52,470
(8,042)
(51,205)
673
(5,584)
52
66,699
1,041,736
(21,765)
44,355
(803,393)
(3,032)
(9,560)
248,341
94,224
304,508
375,000
(106,806)
25,145
(20,891)
(40,559)
1,230
233,119
55,479
249,029
(57,232)
(232,403)
(449,873)
423,118
(316,390)
(68,275)
(958)
(557,232)
498,032
(128,433)
(60,881)
(199,237)
(478,477)
494,256
(244,339)
See accompanying notes to consolidated financial statements.
F-7
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
1. General
Basis of Presentation
The consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include
Magellan and its subsidiaries (together with Magellan, the “Company”). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Business Overview
The Company is a leader within the healthcare management business, and is focused on delivering innovative
specialty solutions for the fastest growing, most complex areas of health, including special populations, complete
pharmacy benefits, and other specialty carve-out areas of healthcare. The Company develops innovative solutions that
combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact
members’ health outcomes and optimize the cost of care for the customers we serve. The Company provides services to
health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and
governmental agencies and third party administrators (“TPAs”). Magellan operates three segments: Healthcare,
Pharmacy Management and Corporate.
Healthcare
During the third quarter of 2018, the Company re-evaluated how it was managing the Healthcare business
segment and decided a reorganization was necessary to effectively manage the business going forward. As a result of this
business reorganization, the Company concluded that changes to Healthcare’s reporting units were warranted. Healthcare
now consists of two reporting units – Behavioral & Specialty Health and Magellan Complete Care (“MCC”). Effective
August 1, 2018, the Company evaluated the impact of the reorganization on its previously identified reporting units. The
Company allocated goodwill to the new reporting units using a relative fair value approach. In addition, the Company
completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and
immediately after the reallocation and determined that no impairment existed.
The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care
organizations (“ACOs”), employers, the United States military and various federal government agencies for whom
Magellan provides carve-out management services for behavioral health, employee assistance plans (“EAP”), and other
areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac, and physical medicine.
These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a
more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health unit also includes
Magellan’s carve-out behavioral health contracts with various state Medicaid agencies.
The MCC reporting unit contracts with state Medicaid agencies and the Centers for Medicare and Medicaid
Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a
wide range of services from total medical cost to carve out long term support services. MCC largely focuses on
managing care for special populations including individuals with serious mental illness (“SMI”), dual eligibles, aged,
blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.
Magellan’s coordination and management of these healthcare and long term support services are provided
through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing
facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with
clinical and quality improvement programs to improve access to care and enhance the healthcare experience for
individuals in need of care, while at the same time making the cost of these services more affordable for our customers.
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.
F-8
The Company provides its Healthcare 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, or (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 full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in
some instances, a gain share.
Pharmacy Management
The Pharmacy Management segment (“Pharmacy Management”) is comprised of products and solutions that
provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit.
Pharmacy Management’s services include: (i) pharmacy benefit management (“PBM”) services, including
pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other
government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy
management programs; and (v) programs for the integrated management of specialty drugs across both the medical and
pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit
reimbursement.
These services are available individually, in combination, or in a fully integrated manner. The Company
markets its pharmacy management services to health plans, employers, third party administrators, managed care
organizations, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants.
In addition, the Company will continue to upsell its pharmacy products to its existing customers and market its pharmacy
solutions to the Healthcare customer base.
Pharmacy Management contracts with its customers for services using risk - based, gain share or ASO
arrangements. In addition, Pharmacy Management provides services to the Healthcare segment for its MCC business.
Corporate
This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy
Management segments that are largely associated with costs related to being a publicly traded company.
2. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The FASB also issued
various ASUs which subsequently amended ASU 2014-09. These amendments and ASU 2014-09, collectively known as
Accounting Standard Codification 606 (“ASC 606”), were adopted on a modified retrospective basis in the quarter ended
March 31, 2018. The Company applied the standard to contracts not completed at the date of initial application. The
Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the
opening balance of retained earnings. The comparative information has not been restated and continues to be reported
under the accounting standards in effect for those periods. For contracts that were modified before January 1, 2018 the
Company has not retrospectively restated the contracts for those modifications in accordance with the contract
modification guidance, instead the Company reflected the aggregate effect of those modifications when identifying the
satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to
the satisfied and unsatisfied performance obligation. Given the nature of our arrangements, the Company does not
believe the use of this practical expedient had a significant impact on the results of our adoption.
A majority of our managed care revenue continues to be recognized over the applicable coverage period on a
per member basis for covered members. In addition, a majority of the PBM revenue continues to be recognized as the
claims are adjudicated or when the drugs are dispensed. The main impacts of ASC 606 to the Company’s business relate
to the timing of revenue recognition in relation to upfront fees in certain PBA contracts, as well as performance
incentive, performance guarantee and risk share arrangements. Some of the Company’s PBA contracts contain upfront
fees, which under ASC 605 were amortized over the life of the contract. Under ASC 606, these upfront fees constitute a
material right and are amortized over the anticipated life of the customer. Certain contracts include performance
F-9
incentive, performance guarantee and risk share arrangements, which under ASC 605 were recorded based on
calculations using the current period’s data. Under ASC 606, the revenues are recognized on a probability weighted
approach based on anticipated outcomes for the performance period. In addition, under ASC 606 the accounting for
material rights in relation to some of the Company’s government contracts will impact the consolidated balance sheets
for interim reporting periods.
The cumulative effect of changes made to our consolidated January 1, 2018 balance sheet for the adoption of
ASU 2014-09 were as follows (in thousands):
Balance at
December 31,
2017
Adjustments
Due to ASC
606
Balance at
January 1,
2018
Assets
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,323 $
1,483,353
813
22,567
2,957,234
Liabilities and Stockholders' Equity
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Stockholders' Equity . . . . . . . . . . .
193,635
892,303
19,100
1,680,740
1,399,495
1,276,494
2,957,234
(667) $
(667)
1,335
(1,333)
(665)
71,656
1,482,686
2,148
21,234
2,956,569
(2,182)
(2,182)
5,744
3,562
(4,227)
(4,227)
(665)
191,453
890,121
24,844
1,684,302
1,395,268
1,272,267
2,956,569
The impact of the adoption of ASC 606 on our consolidated balance sheet as of December 31, 2018 was as
follows (in thousands):
As Reported Adjustments
Balance
Without ASC
606 Adoption
Assets
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 756,059
95,400
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,547,167
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,411
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . .
24,530
2,979,056
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(6,210)
2,218
(3,992)
(1,335)
666
(4,661)
$ 749,849
97,618
1,543,175
2,076
25,196
2,974,395
Liabilities and Stockholders' Equity
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other medical liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits and other long-term liabilities . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Stockholders' Equity . . . . . . . . . . .
231,356
169,639
898,893
36,483
1,693,753
1,419,449
1,285,303
2,979,056
3,390
(165)
3,225
(8,030)
(4,805)
144
144
(4,661)
234,746
169,474
902,118
28,453
1,688,948
1,419,593
1,285,447
2,974,395
F-10
The impact of the adoption of ASC 606 on our consolidated income statement for the year ended December 31,
2018 was as follows (in thousands):
As Reported Adjustments
Managed care and other . . . . . . . . . . . . . . . . . . . . . . . . . $4,878,442 $(5,634)
(5,634)
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,634)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
(1,551)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . .
(4,083)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,083)
Net income attributable to Magellan . . . . . . . . . . . . . . .
7,314,151
43,194
19,013
24,181
24,181
Balance
Without ASC
606 Adoption
$4,872,808
7,308,517
37,560
17,462
20,098
20,098
In February 2016, the FASB issued ASU No. 2016 - 02, “Leases” (“ASU 2016 - 02”). This ASU amends the
existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance
sheets. The FASB also issued various ASUs which subsequently amended ASU 2016-02. These amendments and ASU
2016-02, collectively known as Accounting Standard Codification 842 (“ASC 842”), are effective for annual and interim
reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company
adopted the new standard on a modified retrospective basis and apply the transition method which did not require
adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company
implemented new leasing software capable of producing the data to prepare the required accounting and disclosures
prescribed by ASC 842. The Company is still assessing the impact of this ASU, but anticipates the adoption of this ASU
will result in the recognition of right-of-use assets and lease liabilities of approximately $45 million to $65 million. The
Company does not anticipate the adoption of this ASU will have a material impact on the Company’s consolidated
results of operations.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This ASU amends the accounting on
reporting credit losses for assets held at amortized cost basis and available for sale debt securities. This guidance is
effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption
permitted for fiscal years beginning after December 31, 2018. The Company is currently assessing the potential impact
this ASU will have on the Company’s consolidated results of operation, financial position and cash flows.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this ASU eliminate the
requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is
effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption
permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated
results of operations, financial position and cash flows.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract” (“ASU 2018-15”). This ASU aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software. This guidance is effective for annual and interim periods of public
entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the
potential impact this ASU will have on the Company’s consolidated results of operations, financial position and 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 can include, among
other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock
compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in
F-11
relation to revenue recognition under ASC 606 which are explained in more detail in “Revenue Recognition” below.
Actual results could differ from those estimates.
Revenue Recognition
Virtually all of the Company’s revenues are derived from business in North America. The following tables
disaggregate our revenue for the year ended December 31, 2018 by major service line, type of customer and timing of
revenue recognition (in thousands):
Year Ended December 31, 2018
Pharmacy
Healthcare
Management Elimination
Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,511,532 $
EAP risk-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
349,751
247,953
— $
—
34,130
(263) $ 1,511,269
349,751
281,739
—
(344)
Magellan Complete Care
Risk-based, non-EAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,473,570
ASO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,816
PBM, including dispensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,993,443
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
442,266
PBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,112
Formulary management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,900
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,285
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,638,622 $ 2,865,844 $ (190,315) $ 7,314,151
2,473,570
55,816
—
—
—
—
—
—
—
2,183,151
442,266
132,112
70,900
3,285
—
—
(189,708)
—
—
—
—
Type of Customer
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,432,901 $ 946,606 $
— $ 4,379,507
Non-government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,934,644
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,638,622 $ 2,865,844 $ (190,315) $ 7,314,151
1,205,721
1,919,238
(190,315)
Timing of Revenue Recognition
— $ 2,625,417 $ (189,708) $ 2,435,709
Transferred at a point in time . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Transferred over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,878,442
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,638,622 $ 2,865,844 $ (190,315) $ 7,314,151
4,638,622
240,427
(607)
Per Member Per Month (“PMPM”) Revenue. Almost all of the Healthcare revenue and a small portion of the
Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s
risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of
behavioral healthcare, specialty healthcare, pharmacy management, or fully integrated healthcare services. PMPM
contracts generally have a term of one year or longer, with the exception of government contracts where the customer
can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single
performance obligation that constitutes a series for the provision of managed healthcare services for a population of
enrolled members for the duration of the contract. The transaction price for PMPM contracts is entirely variable as it
primarily includes per member per month fees associated with unspecified membership that fluctuates throughout the
contract. In certain contracts, PMPM fees also include variable consideration for things such as performance incentives,
performance guarantees, risk pool measures and risk shares. The Company generally estimates the transaction price
using an expected value methodology and amounts are only included in the net transaction price to the extent that it is
probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority
of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for a distinct
increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to
service. The remaining transaction price is recognized over the contract period (or portion of the series to which it
specifically relates) based upon estimated membership as a measure of progress.
Under certain government contracts, our rates are subject to subsequent retroactive adjustment for things such
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as risk pool measures. In determining the adjustment necessary for various items, certain measures are compared with
the relevant state and market pool. The adjustments are determined annually or semi-annually on a retrospective
basis. Generally, if we are below the average, we are required to make a payment into the pool, and if we are above the
average, we will receive a payment from the pool from these adjustments. These adjustments can have a positive or
negative retroactive impact to rates. The adjustments to our rates are considered variable consideration and are estimated
on a quarterly basis using an expected value method. Amounts of variable consideration are recognized as revenue only
to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty associated with the variable consideration is subsequently resolved.
Pharmacy Benefit Management Revenue. The Company’s customers for PBM business, including
pharmaceutical dispensing operations, are generally comprised of MCOs, employer groups and health plans. PBM
relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed
by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a
member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The
acceptance of each individual claim creates enforceable rights and obligations for each party and represents a separate
contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the
claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in
each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a
negotiated prescription price (ingredient cost plus dispensing fee), co - payments and any associated administrative fees,
when claims are adjudicated or the drugs are shipped. 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, controls the underlying
service, 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. For
dispensing, 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.
Medicare Part D. The Company is contracted with CMS as a Prescription Drug Plan (“PDP”) to provide
prescription drug benefits to Medicare beneficiaries. The accounting for Medicare Part D revenue is primarily the same
as that for PBM, as previously discussed. However, there is certain variable consideration present only in Medicare Part
D arrangements. The Company estimates the annual amount of variable consideration using a most likely amount
methodology, which is allocated to each reporting period based upon actual utilization as a percentage of estimated
utilization for the year. Amounts estimated throughout the year for interim reporting are substantially resolved and fixed
as of December 31st, the end of the plan year.
Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and
other government sponsored programs. PBA contracts are generally multi-year arrangements but include language
regarding early termination for convenience without material penalty provisions that results in enforceable rights and
obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to
provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts
without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for
the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the
claims processing activities, and has concluded that a time based measure is appropriate for recognizing PBA revenue.
For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated
to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of
benefit of the material right, which generally ranges from 2 to 10 years.
Formulary Management Revenue. The Company administers formulary management programs 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. Formulary management contracts generally have a term of
one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for
the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of
the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract
with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of
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rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each quarter,
therefore the transaction price itself is variable. The Company uses the expected value methodology to estimate the total
rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during
the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate
revenue any rebates that are passed through to its clients.
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 is recorded as a reduction of cost of goods sold.
Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the
provision of various managed care services, which are classified as EAP risk-based business. These contracts are
generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a cost
reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required
for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with
the value to the customer of the Company’s performance completed to date, therefore the Company is utilizing the “right
to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.
The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or
services purchased by the customer, such as the operation of a counseling services group or call center. The performance
obligation represents a series for the duration of the arrangement. The reimbursement rate is fixed per the contract,
however the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of
the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a distinct
increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it
relates has been provided (i.e. as the Company provides hours, counselors or units of service).
In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining
performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the
Company’s PBM and Part D business, these reporting requirements are not applicable. The majority of the Company’s
remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including
(i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to
invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is
allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance
obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or
to a specific outcome from transferring the distinct service. For the Company’s contracts that pertain to these
exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services
to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the
remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily
includes net per member per month fees associated with unspecified membership that fluctuates throughout the contract.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except
percentages):
January 1, December 31,
Accounts receivable . . . . . . . . . . . . . . . . . . . $ 679,269
8,564
Contract assets . . . . . . . . . . . . . . . . . . . . . . . .
Contract liabilities - current . . . . . . . . . . . . .
14,299
Contract liabilities - long-term . . . . . . . . . . .
12,303
2018
2018
$786,395
4,647
16,853
13,441
$ Change
$107,126
(3,917)
2,554
1,138
% Change
15.8%
(45.7%)
17.9%
9.2%
Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets
on the consolidated balance sheets, increased by $107.1 million, mainly due to timing. Contract assets, which are
included in other current assets on the consolidated balance sheets, decreased by $3.9 million, mainly due to the timing
F-14
of accrual of certain performance incentives. Contract liabilities – current, which are included in accrued liabilities on the
consolidated balance sheets, increased by $2.6 million, mainly due to the timing of receipts related to January 2019
revenues. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the
consolidated balance sheets, increased by $1.1 million, mainly due to receipts for which recognition will be long-term.
During the year ended December 31, 2018, the Company recognized revenue of $14.1 million that was included
in current contract liabilities at January 1, 2018. The estimated timing of recognition of amounts included in contract
liabilities at December 31, 2018 are as follows: 2019—$16.9 million; 2020—$3.4 million; 2021—$2.9 million; 2022 and
beyond—$7.1 million. During the year ended December 31, 2018, the Company recognized revenue of $14.4 million for
one customer that was related to performance obligations that were satisfied, or partially satisfied, in previous periods.
During the year, all other revenue that the Company recognized related to performance obligations that were satisfied, or
partially satisfied, in previous periods was not material.
The Company’s accounts receivable consists of amounts due from customers throughout the United States.
Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service,
or within a few months thereafter. The timing of payments from customers from time to time generate contract assets or
contract liabilities, however these amounts are immaterial.
Significant Customers
Customers exceeding ten percent of the consolidated Company’s net revenues
The Company has a contract with the State of Florida to provide integrated healthcare services to Medicaid
enrollees in the state of Florida (the “Florida Contract”). The Florida Contract began on February 4, 2014 and extends
through December 31, 2018, unless sooner terminated by the parties. Under the Florida Contract, the Company serves all
of the members in the Florida Agency for Health Care Administration (“AHCA”) Regions 2, 4, 5, 6, 7, 9, 10, and 11.
The State of Florida has the right to terminate the Florida Contract with cause, as defined, upon 24 hour notice and upon
30 days notice for any reason or no reason at all. The Florida Contract generated net revenues of $548.7 million, $605.9
million and $618.2 million for the years ended December 31, 2016, 2017 and 2018, respectively.
On July 14, 2017, the State of Florida issued an Invitation to Negotiate for a new contract for its Medicaid
managed care program to replace the current contract with the Company and to be effective January 1, 2019. On
April 24, 2018 the Company was notified by AHCA that the Company was not selected to negotiate a new contract to
serve as a vendor for its Medicaid managed care program. The Company filed a protest with AHCA on May 7 2018. On
August 30, 2018, the Company entered into a settlement with AHCA in regards to the Company’s protest. Pursuant to
the terms of the settlement, Florida MHS, Inc. d/b/a Magellan Complete Care of Florida was awarded a contract
extending through September 30, 2023 to serve Medicaid members with SMI in AHCA Regions 4, 5, and 7 alongside
another vendor. The Company will no longer serve members in Regions 2, 6, 9, 10, and 11, which represents
approximately 60% of the total current membership the Company serves under the existing Florida Contract. On
September 4, 2018, the Company withdrew its protest under the terms of the settlement agreement.
F-15
Customers exceeding ten percent of segment net revenues
In addition to the Florida 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, 2016, 2017 and 2018 (in
thousands):
Segment
Healthcare
Term Date
2016
2017
2018
Customer A . . . . . . . . . . . . . .
Customer B . . . . . . . . . . . . . . December 31, 2019 to December 31, 2020 (2)
Customer C . . . . . . . . . . . . . .
December 31, 2022
(1)
$ 138,966 * $ 265,192 * $ 691,616
109,049 * 682,059
73,758 * 476,671
—
—
Pharmacy Management
Customer D . . . . . . . . . . . . . .
Customer E . . . . . . . . . . . . . .
March 31, 2020
December 31, 2016 (3)
152,218 * 346,405
264,152
4,764 *
344,479
2,864 *
* Revenue amount did not exceed 10 percent of net revenues for the respective segment for the year presented.
Amount is shown for comparative purposes only.
(1) The Company, along with other participating managed care plans in this state, continues to provide services while a
new contract is being finalized.
(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) A vast majority of this customer’s revenues were generated from drug acquisition costs related to PBM services
which terminated on September 1, 2016. The Company continues to provide specialty drug formulary management
services to the customer and is in negotiations with the customer to extend the contract.
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, with members under its contract
with CMS and with various agencies and departments of the United States federal government. Net revenues from the
Pennsylvania Counties in the aggregate totaled $461.6 million, $490.0 million and $544.6 million for the years ended
December 31, 2016, 2017 and 2018, respectively. Net revenues from members in relation to its contract with CMS in
aggregate totaled $272.8 million, $511.0 million and $442.3 million for the years ended December 31, 2016, 2017 and
2018, respectively. Net revenues from contracts with various agencies and departments of the United States federal
government in aggregate totaled $252.5 million, $341.5 million, and $308.7 million for the years ended December 31,
2016, 2017 and 2018, respectively.
The Company’s contracts with customers typically have stated 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 30 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 with its eighty-percent or more controlled
subsidiaries. The Company previously filed separate consolidated federal income tax returns for AlphaCare of New
York, Inc. (“AlphaCare”) and its parent, AlphaCare Holdings, Inc. (“AlphaCare Holdings”). During 2017, AlphaCare
F-16
and AlphaCare Holdings became members of the Magellan federal consolidated group. The Company and its
subsidiaries also 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. Reversals of both valuation allowances and unrecognized tax benefits are
recorded in the period they occur, typically as reductions to income tax expense.
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. 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.
Health Care Reform
The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposes a mandatory annual fee on health insurers
for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from
customers which the Company expects will cover the direct costs of these fees and the impact from non - deductibility of
such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew,
there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is
uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee,
the fee may have a material impact on the Company. The Consolidated Appropriations Act of 2016 imposed a one-year
moratorium on the Patient Protection and Affordable Care Act health insurer fee (“HIF”) fee, suspending its application
for 2017. The HIF fee went back into effect for 2018, however, on January 23, 2018 the United States Congress passed
the Continuing Resolution which imposed another one-year moratorium on the HIF fee, suspending its application for
2019. For 2016 and 2018, the HIF fees were $26.5 million and $29.9 million, respectively, which have been paid and
which are included in direct service costs and other operating expenses in the consolidated statements of income.
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, 2018, the Company’s
excess capital and undistributed earnings for the Company’s regulated subsidiaries of $63.3 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, 2017 and 2018 were as follows (in thousands):
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 229,013 $ 160,967
363,840
Restricted short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted deposits (included in other current assets) . . . . . . . . . . . . . . .
43,401
Restricted long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,854
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506,532 $ 571,062
219,111
41,121
17,287
2017
2018
F-17
The Company’s equity in restricted net assets of consolidated subsidiaries represented approximately 24.6% of
the Company’s consolidated stockholder’s equity as of December 31, 2018 and consisted of net assets of the Company
which were restricted as to transfer to Magellan in the form of cash dividends, loans or advances under regulatory
restrictions.
Fair Value Measurements
The Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis.
These 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 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, 2017 and
2018 (in thousands):
Level 1
Level 2
Level 3
Total
December 31, 2017
Assets
Cash and cash equivalents (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises (2) . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets held at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,231 $ 583,698 $
—
22,088
269,788
5,000
2,758
28,231
—
—
—
—
— $ 284,064 $
— $ 284,064
28,231
—
22,088
—
269,788
—
5,000
—
—
2,758
— $ 611,929
Liabilities
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities held at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $ 8,817 $
— $ 8,817 $
8,817
8,817
Level 1
December 31, 2018
Level 3
Level 2
Total
Assets
Cash and cash equivalents (3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of government-sponsored enterprises (2) . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets held at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,815 $ 581,390 $
—
5,229
292,049
20,650
67,815
—
—
—
— $ 263,462 $
— $ 263,462
67,815
—
5,229
—
292,049
—
—
20,650
— $ 649,205
Liabilities
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities held at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
— $ 10,124 $ 10,124
— $ 10,124 $ 10,124
F-18
(1) Excludes $114.7 million of cash held in bank accounts by the Company.
(2) Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal
National Mortgage Association.
(3) Excludes $8.8 million of cash held in bank accounts by the Company.
For the years ended December 31, 2017 and 2018, the Company did not transfer any assets between fair value
measurement levels.
The carrying values of financial instruments, including accounts receivable and accounts payable, approximate
their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of $370.1 million as of
December 31, 2018 was determined based on quoted market prices and would be classified within Level 1 of the fair
value hierarchy. The estimated fair value of the Company’s term loan of $328.1 million as of December 31, 2018 was
based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated
fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date
or that will be realized in the future.
All of the Company’s investments are classified as “available-for-sale” and are carried at fair value.
As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of
payment, projected payment dates, discount rates, projected operating income, member engagement and new contract
execution. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the
contingent consideration. As the fair value measurement for the contingent consideration is based on inputs not observed
in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement
guidance. The unobservable inputs used in the fair value measurement include the discount rate, probabilities of payment
and projected payment dates.
As of December 31, 2017 and 2018, the Company estimated undiscounted future contingent payments of $9.9
million and $10.6 million, respectively. As of December 31, 2018, the aggregate amounts and projected dates of future
potential contingent consideration payments were $8.0 million in 2019 and $2.6 million in 2020.
As of December 31, 2017, the fair value of the short-term and long-term contingent consideration was $6.9
million and $1.9 million, respectively, and is included in short-term contingent consideration and long-term contingent
consideration, respectively, in the consolidated balance sheets. As of December 31, 2018, the fair value of the short-term
and long-term contingent consideration was $8.0 million and $2.1 million, respectively, and is included in short-term
contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheets.
The change in the fair value of the contingent consideration was $(0.1) million, $0.7 million and $1.3 million
for the years ended December 31, 2016, 2017 and 2018, respectively, which were recorded as direct service costs and
other operating expenses in the consolidated statements of income. The increases during 2018 were mainly a result of
changes in present value and the estimated undiscounted liability.
The following table summarizes the Company’s liability for contingent consideration (in thousands):
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$11,153
696
(3,032)
$ 8,817
2018
$ 8,817
1,307
—
$10,124
December 31, December 31,
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 in active markets for identical assets or
liabilities while those which have been classified as Level 2 are measured using quoted prices for identical assets and
F-19
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
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 income. For impaired debt securities that the Company does not
intend to 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 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, 2017 and 2018, there were no material unrealized losses that the Company believed to be
other - than - temporary. No realized gains or losses were recorded for the years ended December 31, 2016, 2017, or 2018.
The following is a summary of short-term and long-term investments at December 31, 2017 and 2018 (in thousands):
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . $ 28,313
Obligations of government-sponsored enterprises (1) . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments at December 31, 2017 . . . . . . . . . . . . . . . . . . .
22,139
270,154
5,000
2,758
$ 328,364
Amortized Unrealized
Cost
Gains
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . $ 67,870 $17
Obligations of government-sponsored enterprises (1) . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments at December 31, 2018 . . . . . . . . . . . . . . . . . . .
5,257
292,392
20,650
$ 386,169
—
6
—
$23
Amortized Unrealized
Cost
Gains
Gross
December 31, 2017
Gross
Unrealized
Losses
$ (82)
(51)
(367)
—
—
$(500)
$—
—
1
—
—
$ 1
Gross
December 31, 2018
Gross
Unrealized
Losses
$ (72)
(28)
(349)
—
$(449)
Estimated
Fair Value
$ 28,231
22,088
269,788
5,000
2,758
$ 327,865
Estimated
Fair Value
$ 67,815
5,229
292,049
20,650
$ 385,743
(1) Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and
Federal Farm Credit Banks.
F-20
The maturity dates of the Company’s investments as of December 31, 2018 are summarized below (in
thousands):
Amortized Estimated
Fair Value
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,022 $ 382,582
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,161
Total investments at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . $ 386,169 $ 385,743
3,147
Cost
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 which 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 is 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 of an asset may
not be recoverable. We group and evaluate these long-lived assets for impairment at the lowest level at which individual
cash flows can be identified. 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.
In the evaluation of indefinite-lived intangible assets for impairment, the Company first assesses qualitative
factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less
than its carrying value. If the Company determines that it is not more likely than not for the indefinite-lived intangible
asset’s fair value to be less than its carrying value, a calculation of the fair value is not performed. If the Company
determines that it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying
value, a calculation is performed and compared to the carrying value of the asset. If the carrying amount of the
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that
excess. The Company measures the fair value of its indefinite-lived intangible assets using the “relief from royalty”
method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade
name evaluated.
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
F-21
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, 2017 and 2018 was $79.6 million and $71.7 million, respectively.
Depreciation expense was $75.3 million, $76.5 million and $80.9 million for the years ended December 31, 2016, 2017
and 2018, respectively. Included in depreciation expense for the years ended December 31, 2016, 2017 and 2018 was
$47.6 million, $49.5 million and $50.0 million, respectively, related to capitalized internal-use software.
Property and equipment, net, consisted of the following at December 31, 2017 and 2018 (in thousands):
Building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,974 $
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases - property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases - equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized internal-use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
18,954
201,343
26,945
24,932
527,129
799,303
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(648,555)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,638 $ 150,748
204,632
26,945
18,183
486,013
753,747
(595,109)
2017
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 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. The Company’s reporting units with
goodwill as of December 31, 2017 were comprised of Commercial, Government and Pharmacy Management. During the
third quarter of 2018, the Company re-evaluated how it was managing the Healthcare business segment and decided a
reorganization was necessary to effectively manage the business going forward. As a result of this business
reorganization, the Company concluded that changes to Healthcare’s reporting units were warranted. Healthcare now
consists of two reporting units – Behavioral & Specialty Health and MCC. Effective August 1, 2018, the Company
evaluated the impact of the reorganization on its previously identified reporting units. The Company allocated goodwill
to the new reporting units using a relative fair value approach. In addition, the Company completed an assessment of any
potential goodwill impairment for all reporting units immediately prior to and immediately after the reallocation and
determined that no impairment existed.
The fair values of the Behavioral & Specialty Health (a component of the Healthcare segment), MCC (a
component of the Healthcare segment) and Pharmacy Management 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 2018 annual goodwill impairment testing as of October 1,2018, determined that the fair value of the MCC
reporting unit had declined, largely due to continued economic challenges in certain markets, and was in excess of its
carrying value by a margin of approximately 5%. We considered our observed fourth quarter performance in
our October 1, 2018 test. At December 31, 2018, we evaluated whether our forecast for 2019 and beyond would have
changed from what was used in our October 1 test. Based on this evaluation, we continue to believe that the fair value of
the MCC reporting unit exceeds its carrying value by a margin of approximately 5%. While the reporting unit was not
determined to be impaired at this time, the MCC reporting unit goodwill is at risk of future impairment in the event of
F-22
significant unfavorable changes in the Company’s forecasted future results and cash flows. In addition, market factors
utilized in the impairment analysis, including long-term growth rates or discount rates, could negatively impact the fair
value of our reporting units. For testing purposes, management's best estimates of the expected future results are the
primary driver in determining the fair value. Fair value determinations require considerable judgment and are sensitive to
changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions
made for purposes of the annual goodwill test will prove to be an accurate prediction of the future.
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key
assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a
decrease in expected future cash flows, specifically, a decrease in membership or rates or customer attrition and increase
in costs that could significantly impact our immediate and long-range results, unfavorable working capital changes and
an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an
economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession); and (iii)
volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average
cost of capital.
Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as
related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These
facts and circumstances are subject to change and may impact future analyses.
While historical performance and current expectations have resulted in fair values of our reporting units and
indefinite-lived intangible assets in excess of carrying values, if our assumptions are not realized, it is possible that an
impairment charge may need to be recorded in the future.
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2017 was as follows (in
thousands):
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 242,255
368,612
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
395,421
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,006,288
2017
Goodwill for each of the Company’s reporting units with goodwill at December 31, 2018 was as follows (in
thousands):
Behavioral & Specialty Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 410,869
211,735
Magellan Complete Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmacy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
395,552
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,018,156
2018
F-23
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2018 are reflected
in the table below (in thousands):
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742,054 $ 1,006,288
—
Acquisition of Veridicus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Acquisition of SWH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquisitions and measurement period adjustments . . . . . . . . .
11,868
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,006,288 $ 1,018,156
1,647
260,139
2,448
2017
2018
Intangible Assets
The Company reviews other intangible assets for impairment when events or changes in circumstances occur
which may potentially impact the estimated useful life of the intangible assets. During the second quarter of 2016, the
Company recognized $4.8 million in impairment charges, which are reflected in direct service costs and other operating
expenses in the consolidated statements of income and reported within the Healthcare segment. The fair value of the
impairment was determined using the income method, which resulted in the full impairment of the customer agreement
intangible asset recorded in conjunction with the AlphaCare acquisition.
The following is a summary of intangible assets at December 31, 2017 and 2018, and the estimated useful lives
for such assets (in thousands, except useful lives):
Asset
Customer agreements and lists . . . . . . . . . . . . . . . 2.5 to18 years 5.3 years
Provider networks and other . . . . . . . . . . . . . . . . . 1 to16 years 3.0 years
Trade names and licenses . . . . . . . . . . . . . . . . . . .
indefinite
indefinite
December 31, 2017
Weighted Avg Gross
Original
Useful Life
Remaining
Useful Life
Carrying Accumulated
Amount
Amortization Amount
Net
Carrying
$ 441,346 $ (218,335) $ 223,011
10,977
34,300
$ 501,056 $ (232,768) $ 268,288
25,410
34,300
(14,433)
—
Asset
Customer agreements and lists . . . . . . . . . . . . . . . 2.5 to18 years 4.5 years
Provider networks and other . . . . . . . . . . . . . . . . . 1 to16 years 2.3 years
Trade names and licenses . . . . . . . . . . . . . . . . . . .
indefinite
indefinite
December 31, 2018
Weighted Avg Gross
Original
Useful Life
Remaining
Useful Life
Carrying Accumulated
Amount
Amortization Amount
Net
Carrying
$ 441,346 $ (262,729) $ 178,617
22,846
30,420
$ 516,401 $ (284,518) $ 231,883
44,635
30,420
(21,789)
—
Amortization expense was $30.7 million, $39.2 million and $51.8 million for the years ended December 31,
2016, 2017 and 2018, respectively. The Company estimates amortization expense will be $54.7 million, $53.2 million,
$46.9 million, $25.2 million and $17.2 million for the years ending December 31, 2019, 2020, 2021, 2022 and 2023,
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. Cost of care for the Company’s EAP contracts, which are mainly with the United States federal government,
pertain to the costs to employ licensed behavioral health counselors to deliver non-medical counseling for these
contracts.
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
F-24
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.” For new contracts, the
Company estimates IBNR based on underwriting data until it has sufficient data to utilize these methodologies.
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, 2016, 2017 and 2018 (in thousands):
Claims payable and IBNR, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . $ 253,299 $ 188,618 $ 326,642
Cost of care:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,892,914
(10,300)
1,882,614
2,421,270
(7,500)
2,413,770
3,772,112
(9,700)
3,762,412
Claim payments and transfers to other medical liabilities(1):
2016
2017
2018
3,402,010
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
292,904
Total claim payments and transfers to other medical liabilities . . . . . . . .
3,694,914
—
Acquisition of SWH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
394,140
Claims payable and IBNR, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withhold (receivables) payable, end of period(2) . . . . . . . . . . . . . . . . . . . . . . .
(593)
Medical claims payable, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,136 $ 327,625 $ 393,547
2,210,346
161,798
2,372,144
96,398
326,642
983
1,733,310
213,985
1,947,295
—
188,618
(4,482)
(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) Favorable development in 2016, 2017 and 2018 was $10.3 million, $7.5 million and $9.7 million, respectively, and
was mainly related to lower medical trends and faster claims completion than originally assumed.
Actuarial standards of practice require that 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. Any prior period favorable cost of care development related to a
lack of moderately adverse conditions is excluded from “Cost of Care – Prior Years” adjustments, as a similar provision
for moderately adverse conditions is established for current year cost of care liabilities and therefore does not generally
impact net income.
F-25
Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, principally in the
Government 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, 2018; however, actual claims payments may differ from established estimates.
Other medical liabilities consist primarily of amounts payable to pharmacies for claims that have been
adjudicated by the Company but not yet paid and “profit share” payables under certain risk-based contracts. 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. In addition, certain contracts include
provisions to provide the Company additional funding if the cost of care is above the specified levels. Other medical
liabilities also include “reinvestment” payables under certain managed healthcare contracts with Medicaid customers.
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.
Accrued Liabilities
As of December 31, 2017, the only individual current liability that exceeded five percent of total current
liabilities related to accrued employee compensation liabilities of $45.6 million. As of December 31, 2018, the only
individual current liability that exceeded five percent of total current liabilities related to accrued customer settlement
liabilities of $93.8 million.
Net Income per Common Share attributable to Magellan
Net income per common share attributable to Magellan 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”).
Stock Compensation
At December 31, 2017 and 2018, the Company had equity-based employee incentive plans, which are described
more fully in Note 6—“Stockholders’ Equity”. In addition, the Company issued restricted stock awards (“RSAs”)
associated with the Armed Forces Services Corporation (“AFSC”) acquisition, which are also described more fully in
Note 6—“Stockholders’ Equity”. 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 $37.4 million,
$39.1 million and $29.5 million for the years ended December 31, 2016, 2017 and 2018, respectively. As stock
compensation expense recognized in the consolidated statements of income for the years ended December 31, 2016,
2017 and 2018 is based on awards ultimately expected to vest, it has been reduced for annual estimated forfeitures of
zero to 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 (“RSUs”) that include performance conditions, stock
compensation is recognized using an accelerated method over the vesting period.
3. Acquisitions
Acquisition of SWH Holdings, Inc.
Pursuant to the July 13, 2017 Agreement and Plan of Merger (“the SWH Agreement”), on October 31, 2017 the
Company acquired (the “SWH Acquisition”) all of the outstanding equity interests of SWH Holdings, Inc. (“SWH”).
SWH is a healthcare company focused on serving complex, high-risk populations, providing Medicare and Medicaid
dual-eligible benefits to members in Massachusetts and New York.
F-26
As consideration for the Acquisition, the Company paid $400.4 million, including a net payment of $0.4 million
for working capital adjustments and a payment of $10.0 million based on SWH’s Medicare plan in Massachusetts
receiving a Centers for Medicare & Medicaid Services 2018 Star Rating of at least 4. The Company reports the results of
operations of SWH in its Healthcare segment.
Acquisition of Veridicus Holdings, LLC and Granite Alliance Insurance Company
Pursuant to the November 19, 2016 purchase agreements (the “Veridicus Agreements”) with Veridicus
Holdings, LLC and Granite Alliance Insurance Company (collectively “Veridicus”) and Veridicus Health, LLC, on
December 13, 2016 and February 7, 2017 the Company acquired all of the outstanding equity interests of Veridicus (the
“Veridicus Acquisition”). Veridicus is a PBM with a unique set of clinical services and capabilities.
As consideration for the Veridicus Acquisition, the Company paid $74.2 million, including net receipts of $0.3
million for working capital adjustments. The Company reports the results of operations of Veridicus within its Pharmacy
Management segment.
Acquisition of AFSC
Pursuant to the May 15, 2016 share purchase agreement (the “AFSC Agreement”) with AFSC, on July 1, 2016
the Company acquired all of the outstanding equity interests of AFSC (the “AFSC Acquisition”). AFSC has extensive
experience providing and managing behavioral health and specialty services to various agencies of the federal
government, including all five branches of the U.S. Armed Forces.
As consideration for the AFSC Acquisition, the Company paid $114.5 million, including net receipts of $3.0
million for working capital adjustments. In addition to the base purchase price, the AFSC Agreement provides for
potential contingent payments up to a maximum aggregate amount of $10.0 million. The potential contingent payments
are based on the retention of certain core business by AFSC. The Company reports the results of operations of AFSC
within its Healthcare segment.
Other Acquisition
Pursuant to the February 9, 2016 purchase agreement (the “TMG Agreement”) with The Management Group,
LLC (“TMG”), on February 29, 2016 the Company acquired all of the outstanding equity interests of TMG. TMG is a
company with 30 years of expertise in community-based long-term care services and supports. As consideration for the
transaction, the Company paid a base price of $14.8 million in cash, including net receipts of $0.2 million for working
capital adjustments. In addition to the base purchase price, the TMG agreement provides for potential contingent
payments up to a maximum aggregate of $15.0 million. The potential future payments are contingent upon the Company
being awarded additional managed long-term services and supports contracts. The Company reports the results of
operations of TMG within its Healthcare segment.
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 $11.1 million, $12.7 million and $14.9 million of expense for the years ended December 31, 2016, 2017 and
2018, respectively, for matching contributions to the 401(k) Plan.
5. Long - Term Debt, Capital Lease and Deferred Financing Obligations
Senior Notes
On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal
amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of
September 22, 2017 (the “Base Indenture”), between the Company, as issuer and U.S. Bank National Association, as
trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental
F-27
Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National
Association, as trustee.
The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year,
commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit
rating events. The Notes mature on September 22, 2024. The Indenture provides that the Notes are redeemable at the
Company’s option, in whole or in part, at any time on or after July 22, 2024, at a redemption price equal to 100% of the
principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption
date.
The Indenture also contains certain covenants which restrict the Company’s ability to, among other things,
create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation,
merger or sale of assets.
The net proceeds from the issuance and sale of the Notes were approximately $394.7 million after deducting the
underwriting discounts and commissions and offering expenses. The net proceeds from this offering were and will be
used for working capital and general corporate purposes, and the termination and repayment of the obligations under its
Previous Credit Agreements (as defined below) which were scheduled to expire on July 23, 2019 and December 29,
2017.
Terminated Credit Agreements
On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that
provided for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan) to borrow up to $250.0 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, and a term loan in an original aggregate principal amount of $250.0 million (the “2014 Credit Facility”). On
December 2, 2015, the Company entered into an amendment to the 2014 Credit Facility under which Magellan
Pharmacy Services, Inc. (a wholly owned subsidiary of Magellan) became a party to the $500.0 million Credit
Agreement as the borrower and assumed all of the obligations of Magellan Rx Management, Inc. Under the 2014 Credit
Facility, on September 30, 2014, the Company completed a draw-down of the $250.0 million term loan (the “2014 Term
Loan”). The 2014 Credit Facility was scheduled to mature on July 23, 2019. Upon consummation of the Refinancing (as
defined below) on September 22, 2017, the 2014 Credit Facility was terminated.
On June 27, 2016, the Company entered into a $200.0 million Credit Agreement with various lenders that
provided for a $200.0 million term loan (the “2016 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2016 Credit
Facility”). The 2016 Credit Facility was scheduled to mature on December 29, 2017. Upon consummation of the
Refinancing (as defined below) on September 22, 2017, the 2016 Credit Facility was terminated.
On January 10, 2017, the Company entered into a Credit Agreement with various lenders that provided for a
$200.0 million delayed draw term loan (the “2017 Term Loan”) to Magellan Pharmacy Services, Inc. (the “2017 Credit
Facility”). The 2017 Credit Facility was scheduled to mature on December 29, 2017. Upon consummation of the
Refinancing (as defined below) on September 22, 2017, the 2017 Credit Facility was terminated.
Active Credit Agreements
On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a
$400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the
Company, as the borrower (the “2017 Credit Agreement”). On August 13, 2018, the Company entered into an
amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the
Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio
covenant, and which was necessary in order for us to remain in compliance with the terms of the 2017 Credit Agreement.
The 2017 Credit Agreement is scheduled to mature on September 22, 2023.
The proceeds from the 2017 Credit Agreement were and will be used for (a) working capital and general
corporate purposes of the Company and its subsidiaries, including investments and the funding of acquisitions, (b) the
repayment of all outstanding loans and other obligations (and the termination of all commitments) under the 2014 Credit
Facility, 2016 Credit Facility and 2017 Credit Facility (collectively, the “Previous Credit Agreements”) (the termination
F-28
and repayment of the obligations under the Previous Credit Agreements, collectively, the “Refinancing”) and
(c) payment of fees and expenses incurred in connection with (i) the entering into the 2017 Credit Agreement and related
documents and the incurrence of loans and issuance of letters of credit thereunder and (ii) the consummation of the
Refinancing. Upon consummation of the Refinancing, the Previous Credit Agreements were terminated.
Under the 2017 Credit Agreement, the annual interest rate on the loan borrowing is equal to (i) in the case of
base rate loans, the sum of an initial borrowing margin of 0.500 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 1.000 percent, or (ii) in
the case of Eurodollar rate loans, the sum of an initial borrowing margin of 1.500 percent plus the Eurodollar rate for the
selected interest period. The borrowing margin is subject to adjustment based on the Company’s debt rating as provided
by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its
discretion. The commitment commission on the revolving credit facility under the 2017 Credit Agreement is 0.200
percent of the unused revolving credit commitment, which rate shall be subject to adjustment based on the Company’s
debt rating as provided by certain rating agencies. For the year ended December 31, 2018, the weighted average interest
rate was approximately 3.62 percent.
As of December 31, 2018, the contractual maturities of the term loan under the 2017 Credit Agreement were as
follows: 2019—$17.5 million; 2020—$17.5 million; 2021—$17.5 million; 2022—$17.5 million; and 2023—$258.1
million. At December 31, 2017, the Company had revolving loan borrowings of $92.5 million. At December 31, 2018,
the Company had no revolving loan borrowings, resulting in a borrowing capacity of $400.0 million under the 2017
Credit Agreement. Included in long-term debt and capital lease and deferred financing obligations as of
December 31, 2017 and December 31, 2018 are deferred loan issuance costs of $6.6 million and $5.9 million,
respectively.
The 2017 Credit Agreement 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.
Letter of Credit Agreement
On August 22, 2017, the Company entered into a Continuing Agreement for Standby Letters of Credit with The
Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as issuer (the “L/C Agreement”), under which BTMU, at its sole
discretion, may provide stand-by letter of credit to the Company. The Company had $26.5 million and $66.1 million of
letters of credit outstanding under the L/C Agreement at December 31, 2017 and 2018, respectively.
Capital Lease and Deferred Financing Obligations
There were $22.9 million and $31.2 million of capital lease and deferred financing obligations at
December 31, 2017 and December 31, 2018, respectively. The Company’s capital lease and deferred financing
F-29
obligations represent amounts due under leases for certain properties, computer software (acquired prior to the
prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. The recorded gross cost of capital leased
assets was $45.1 million and $51.9 million at December 31, 2017 and 2018, respectively.
6. Stockholders’ Equity
Stock Compensation
At December 31, 2017 and 2018, the Company had equity-based employee incentive plans. Prior to May 18,
2016, the Company utilized the 2011 Management Incentive Plan (the “2011 MIP”), 2008 Management Incentive Plan
(the “2008 MIP”) and 2006 Directors’ Equity Compensation Plan (collectively the “Preexisting Plans”) for grants of
stock options, RSAs, RSUs, and stock appreciation rights, to provide incentives to officers, employees and non-
employee directors.
On February 25, 2016, the board of directors of the Company approved the 2016 Management Incentive Plan
(“2016 MIP”), and the 2016 MIP was approved by the Company’s shareholders at the 2016 Annual Meeting of
Shareholders on May 18, 2016. The 2016 MIP provides for the delivery of up to a number of shares equal to
(i) 4,000,000 shares of common stock, plus (ii) the number of shares subject to outstanding awards under the 2011 MIP
and Preexisting Plans which become available after shareholder approval of the 2016 MIP as a result of forfeitures,
expirations, and in other permitted ways under the share recapture provisions of the 2016 MIP. Delivery of shares under
“full-value” awards (awards other than options or stock appreciation rights) will be counted for each share delivered as
1.60 shares against the total number of shares reserved under the 2016 MIP.
The 2016 MIP provides for awards of stock options, RSAs, RSUs, performance-based restricted stock units
(“PSUs”), stock appreciation rights, cash - denominated awards and any combination of the foregoing. A RSU 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, CDMI and AFSC, RSAs generally vest on the anniversary of the grant. In general, RSUs vest ratably on
each anniversary over the three years subsequent to grant. The PSUs vest over three years and are subject to market-
based conditions. At December 31, 2018, 3,282,964 shares of the Company’s common stock remain available for future
grant under the Company’s 2016 MIP.
On February 27, 2014 the board of directors of the Company approved the 2014 Employee Stock Purchase Plan
(“2014 ESPP”), and the 2014 ESPP was approved by the Company’s shareholders at the 2014 Annual Meeting of
Shareholders on May 21, 2014. The 2014 ESPP provides for up to 200,000 shares of the Company’s common stock, plus
the number of shares remaining under the 2011 Employee Stock Purchase Plan, to be issued. On May 24, 2018, the
Company’s shareholders approved an amendment to the 2014 ESPP to increase by 300,000 the number of shares
available for issuance under the plan. During the years ended December 31, 2017 and 2018, 56,426 and 63,471 shares of
the Company’s common stock were issued under the employee stock purchase plans, respectively. At December 31,
2018, 308,716 shares of the Company’s common stock remain available for future grant under the Company’s 2014
ESPP.
F-30
Stock Options
Summarized information related to the Company’s stock options for the years ended December 31, 2016, 2017
and 2018 is as follows:
2016
Weighted
Average
Exercise
2017
Weighted
Average
Exercise
Options
Price
Options
Price
Outstanding, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939,840 $ 55.13 2,843,177 $ 57.42
71.35
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61.39
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53.79
Outstanding, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61.50
501,960
(104,680)
(493,943)
2,843,177
525,596
(79,350)
(831,186)
2,458,237
64.10
57.23
50.60
57.42
2018
Weighted
Average
Weighted Remaining
Average Contractual
Exercise
Price
Term
Aggregate
Intrinsic
Value
Options
(in years) (in thousands)
Outstanding, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,458,237 $ 61.50
96.39
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.21
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56.36
Outstanding, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,352,609 $ 68.10
Vested and expected to vest at end of period . . . . . . . . . . . . . . . . . . . 2,342,100 $ 68.02
Exercisable, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,552,236 $ 60.40
477,956
(174,376)
(409,208)
5.78
5.77
4.31
$2,551
$2,551
$2,539
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 2018 of $56.89 and the exercise price)
for all in - the - money options as of December 31, 2018. This amount changes based on the fair market value of the
Company’s common stock.
The total pre - tax intrinsic value of options exercised during the years ended December 31, 2016, 2017 and 2018
was $9.3 million, $23.8 million, and $17.3 million, respectively.
The weighted average grant date fair value per share of substantially all stock options granted during the years
ended December 31, 2016, 2017 and 2018 was $15.05, $17.64 and $25.34, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.75 %
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.00 %
1.16 %
4 years
2016
2017
1.79 %
2018
2.54 %
4 years
4 years
27.75 %
0.00 %
28.20 %
0.00 %
For the years ended December 31, 2016, 2017 and 2018, expected volatility was based on the historical
volatility of the Company’s stock price.
As of December 31, 2018, there was $7.8 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
1.94 years. The total fair value of options vested during the year ended December 31, 2018 was $8.6 million.
F-31
In the year ended December 31, 2016, the net tax benefit from excess tax deductions was $0.8 million, which
consists of $1.0 million of excess tax benefits offset by $0.2 million of tax deficiencies. In the year ended December 31,
2017, the net tax benefit from excess tax deductions was $5.6 million, which consists of $5.7 million of excess tax
benefits offset by $0.1 million of tax deficiencies. In the year ended December 31, 2018, the net tax benefit from excess
tax deductions was $5.1 million; tax deficiencies were insignificant.
Restricted Stock Awards
Summarized information related to the Company’s nonvested RSAs for the years ended December 31, 2016,
2017 and 2018 is as follows:
2016
2017
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Grant Date
Fair Value Shares
Shares
Outstanding, beginning of period . . . . . . . . . . 1,109,622 $ 57.88 615,472 $ 58.71 31,102
11,795
77,744
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(31,102)
(571,894)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Outstanding, ending of period . . . . . . . . . . . .
11,795
615,472
14,959
(585,438)
(13,891)
31,102
65.52
58.03
—
58.71
70.20
58.33
65.97
68.00
Shares
2018
Weighted
Average
Grant Date
Fair Value
$68.00
89.05
68.00
—
89.05
(1) December 31, 2016 includes 60,069 shares associated with the AFSC acquisition.
As of December 31, 2018, there was $0.4 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 0.39 years.
Restricted Stock Units
Summarized information related to the Company’s nonvested RSUs for the years ended December 31, 2016,
2017 and 2018 is as follows:
2016
Weighted
Average
Grant Date
Fair Value
Outstanding, beginning of period . . . . . . . . . . . . 231,088 $ 61.53
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, ending of period . . . . . . . . . . . . . .
51,521
(53,839)
(28,592)
200,178
64.87
63.32
63.34
61.65
Shares
2017
Shares
Weighted
Average
Grant Date
Fair Value Shares
2018
Weighted
Average
Grant Date
Fair Value
200,178 $ 61.65 163,289 $ 66.46
99.29
107,417
65.20
(119,489)
84.17
(24,817)
86.68
163,289
111,033
(84,627)
(32,945)
156,750
68.53
60.38
65.87
66.46
As of December 31, 2018, there was $8.5 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 1.89 years.
F-32
Performance-Based Restricted Stock Units
Summarized information related to the Company’s nonvested PSUs for the years ended December 31, 2016,
2017 and 2018 is as follows:
2016
Weighted
Average
Grant Date
Shares
Fair Value
36,938 $ 85.00
Outstanding, beginning of period . . . . . . . . . . . . .
97.22
69,691
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91.89
(3,652)
Outstanding, end of period . . . . . . . . . . . . . . . . . . 102,977
93.03
2017
Weighted
Average
Grant Date
Fair Value
Shares
102,977 $ 93.03
76.24
101,989
—
—
87.75
(2,651)
84.63
202,315
Shares
2018
Weighted
Average
Grant Date
Fair Value
202,315 $ 84.63
141.61
80,502
85.00
(33,592)
100.96
(40,206)
103.38
209,019
The PSUs will entitle the grantee to receive a number of shares of the Company’s Common Stock determined
over a three-year performance period ending on December 31 of the year prior to the settlement date of the awards,
provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of
PSU awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a
percentage of shares for which the award is targeted and will depend on the Company’s total shareholder return (as
defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the
Company’s peer group (as defined below). The number of shares for which the PSUs will be settled vary from zero to
200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share
value of the Company’s Common Stock over the 30 trading days preceding January 1 of the year the awards are
scheduled to vest by the average share value of the Company’s Common Stock over the 30 trading days beginning on
January 1 of the year the awards were granted, with a deemed reinvestment of any dividends declared during the
performance period. The Company’s peer group includes companies which comprise the S&P Health Care Services
Industry Index, which was selected by the Compensation Committee of the Company’s Board of Directors and includes
a range of healthcare companies operating in several business segments.
The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2016 was
$97.22, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of
the awards granted include an expected dividend yield of 0%, a risk-free rate of 1%, and expected volatility of 16% to
81% (average of 32%).
The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2017 was
$76.24, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of
the awards granted include an expected dividend yield of 0%, a risk-free rate of 1.54%, and expected volatility of 18% to
61% (average of 33%).
The weighted average estimated fair value of the PSUs granted in the year ended December 31, 2018 was
$141.61, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of
the awards granted include an expected dividend yield of 0%, a risk-free rate of 2.37%, and expected volatility of 20% to
82% (average of 35%).
As of December 31, 2018, there was $5.1 million of unrecognized stock compensation expense related to
nonvested PSUs. This cost is expected to be recognized over a weighted - average period of 1.78 years.
F-33
Net Income per Common Share Attributable to Magellan
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, 2016, 2017 and 2018 (in thousands, except per
share data):
2016
2017
2018
Numerator:
Net income attributable to Magellan . . . . . . . . . . . . . . . . . . . . $ 77,879 $ 110,207 $ 24,181
Denominator:
Weighted average number of common shares
outstanding— basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock equivalents—stock options . . . . . . . . . . . .
Common stock equivalents—RSAs . . . . . . . . . . . . . . . . . .
Common stock equivalents—RSUs . . . . . . . . . . . . . . . . . .
Common stock equivalents—PSUs . . . . . . . . . . . . . . . . . . .
Common stock equivalents—employee stock
23,181
289
593
45
45
23,333
530
376
64
134
24,349
493
15
37
137
purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
3
4
Weighted average number of common shares
outstanding— diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,156
24,440
25,035
Net income attributable to Magellan per common
share— basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.36 $
4.72 $ 0.99
Net income attributable to Magellan per common
share— diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.22 $
4.51 $ 0.97
The weighted average number of common shares outstanding for the years ended December 31, 2016, 2017 and
2018 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, 2016, 2017
and 2018 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, 2016, 2017 and 2018, the Company had additional potential dilutive
securities outstanding representing 1.5 million, 0.4 million and 0.5 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 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 October 26, 2015, 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 22, 2017. On July 26, 2017,
the Company’s board of directors approved an extension of the 2015 Repurchase Program through October 22, 2018. On
May 24, 2018, the Company’s board of directors approved an increase of $200 million to the current $200 million stock
repurchase plan which now authorizes the Company to purchase up to $400 million of its outstanding common stock
under the 2015 Repurchase Program. As of December 31, 2018, the remaining capacity under the 2015 Repurchase
Program was $190.0 million. The board also extended the program from October 22, 2018 to October 22, 2020. Pursuant
F-34
to this program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected
in millions):
Total Number Average
Period
October 26, 2015 - December 31, 2015 . . . . . . . . . . . . . . . . . .
January 1, 2016 - December 31, 2016 . . . . . . . . . . . . . . . . . . . 1,828,183
January 1, 2017 - December 31, 2017 . . . . . . . . . . . . . . . . . . .
280,140
January 1, 2018 - December 31, 2018 . . . . . . . . . . . . . . . . . . .
844,872
3,298,239
Price Paid Aggregate
per Share Cost
of Shares
Purchased
345,044 $53.46 $ 18.4
106.8
58.40
21.8
77.67
63.0
74.59
$ 210.0
The Company made additional open market purchases of 60,901 shares of the Company’s common stock at an
aggregate cost of $3.7 million (excluding broker commissions) during the period from January 1, 2019 through
February 22, 2019.
Recent Sales of Unregistered Securities
On May 15, 2016, the Company and AFSC entered into a purchase agreement pursuant to which on July 1,
2016, the sellers and key management of AFSC purchased 60,069 shares of the Company’s restricted stock for a total
purchase price of $4.0 million. The aggregate number of shares issued was determined by dividing $4.0 million by the
average trading prices per share of Magellan’s common stock on the NASDAQ over the five trading days ended on the
trading day prior to the execution of the purchase agreement. The shares received by such sellers and key management of
AFSC are subject to vesting over two years with 50% vesting on the first anniversary of the acquisition and 50% vesting
on the second anniversary of the acquisition, conditioned on continued employment with the Company on the applicable
vesting dates. The shares were issued to the sellers and key management of AFSC in a private placement pursuant to
Section 4(a)(2) of the Securities Act.
7. Income Taxes
Income Tax Expense
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax
Act”). The legislation includes a number of changes to existing U.S. tax laws that impact the Company, most notably a
reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. The legislation
also provides for the acceleration of depreciation on certain assets placed in service after September 27, 2017, as well as
changes beginning in 2018, including additional limitations on the deduction of executive compensation.
The components of income tax expense (benefit) for the following years ended December 31 were as follows
(in thousands):
Income taxes currently payable:
2016
2017
2018
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,343 $ 49,944 $ 13,593
7,145
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,738
6,120
56,064
5,675
65,018
Deferred income taxes (benefits):
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
307
(2,032)
(1,725)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,728 $ 25,083 $ 19,013
(31,941)
960
(30,981)
3,830
880
4,710
F-35
Total income tax expense for the years ended December 31 was different from the amount computed using the
statutory federal income tax rate in effect for each respective year for the following reasons (in thousands):
2016
2017
2018
Income tax expense at federal statutory rate . . . . . . . . . . . . . . $ 50,931 $ 47,328 $ 9,071
2,968
State income taxes, net of federal income tax benefit . . . . . .
State contingencies added . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,644
Tax contingencies reversed due to statute closings . . . . . . . .
(2,651)
Change in valuation allowances . . . . . . . . . . . . . . . . . . . . . . . .
(691)
Adjustments for Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
335
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,750)
Qualified research credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,781)
3,052
Non-deductible executive compensation . . . . . . . . . . . . . . . . .
8,246
Non-deductible HIF fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,570
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,728 $ 25,083 $ 19,013
4,993
2,161
(2,044)
(14,973)
(8,677)
(4,724)
(1,325)
104
—
2,240
5,799
2,120
(1,632)
2,130
—
(232)
(1,002)
34
10,204
1,376
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the
application of U.S. GAAP in situations when a registrant did not have the necessary information available, prepared, or
analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the
Tax Act. SAB 118 allows registrants to determine a reasonable estimate to be included as provisional amounts and
provides a measurement period by which the accounting must be completed.
Because the Company had not yet completed its accounting for the effects of the Tax Act at the time,
provisional amounts were recorded in 2017 for the enactment-date effects by applying the guidance in SAB 118. As a
result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, the Company
remeasured its ending net deferred tax liabilities at December 31, 2017 and recorded a provisional tax benefit of $8.2
million. The Company has now completed its accounting for all of the enactment-date income tax effects of the Tax Act.
As a result, an adjustment of $0.3 million to the provisional amounts is included as a component of income tax expense
for 2018.
F-36
Deferred Income Taxes
The significant components of deferred tax assets and liabilities at December 31 were as follows (in thousands):
2017
2018
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,384 $ 11,159
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,299
5,508
Other accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,053
Claims reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,368
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,057
Other non-deductible accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
3,296
Indirect tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,130
49,870
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,521)
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets after valuation allowances . . . . . . . . . . . . . . . . . . . . .
48,349
Deferred tax liabilities:
(21,350)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . .
(30,463)
(4,292)
Other deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56,105)
Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,485) $ (7,756)
9,639
6,195
4,527
2,606
5,362
2,847
2,051
46,611
(2,368)
44,243
(22,906)
(29,501)
(3,321)
(55,728)
The Company has $27.7 million of federal net operating loss carryforwards (“NOLs”) available to reduce
consolidated taxable income in 2019 and subsequent years. These NOLs (including $27.1 million incurred by AlphaCare
prior to its membership in the Magellan consolidated group) will expire in 2019 through 2035 if not used and are subject
to examination and adjustment by the IRS. In addition, the Company’s utilization of these NOLs is subject to limitations
under the Internal Revenue Code as to the timing and use. At this time, the Company does not believe these limitations
will restrict the Company’s ability to use any federal NOLs before they expire. The Company and its subsidiaries also
have $88.2 million of NOLs available to reduce state and local taxable income at certain subsidiaries in 2019 and
subsequent years. These NOLs will expire in 2019 through 2038 if not used and are subject to examination and
adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to
limitations as to the timing and use. At this time, the Company does not believe these limitations will restrict the
Company’s ability to use any of these state and local NOLs before they expire.
The Company’s valuation allowances against deferred tax assets were $2.4 million and $1.5 million as of
December 31, 2017 and 2018, respectively. The change in valuation allowance of $0.9 million was reflected as a
reduction to income tax expense. These allowances primarily relate to uncertainties regarding the eventual realization of
certain state NOLs.
Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax
expense. 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 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. Future changes in the estimated realizability of deferred tax
assets could materially affect the Company’s financial condition and results of operations.
F-37
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in
thousands):
2016
2017
2018
Balance as of beginning of period . . . . . . . . . . . . . . . . . . . . . $ 12,597 $ 13,604 $ 13,580
4,955
Additions for current year tax positions . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . .
512
Reductions for tax positions of prior years . . . . . . . . . . . . . .
(398)
Reductions due to lapses of applicable statutes of
3,274
141
(173)
3,243
342
(114)
(3,005)
limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes due to Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
339
Reductions due to settlements with taxing authorities . . . . .
(300)
Balance as of end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,604 $ 13,580 $ 15,683
(2,693)
(509)
(293)
(2,235)
—
—
If these unrecognized tax benefits had been realized as of December 31, 2017 and 2018, $10.7 million and
$12.3 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 that, based on the technical merits, 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 typically reflected as increases or decreases to income tax expense in the period in
which they are determined.
The statutes of limitations regarding the assessment of federal and most state and local income taxes for 2014
expired during 2018. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2017 were
reversed in the current year, of which $2.4 million was reflected as a reduction to income tax expense and $0.6 million as
a decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2018 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 most state and local income taxes for 2013
expired during 2017. As a result, $3.0 million of tax contingency reserves recorded as of December 31, 2016 were
reversed in 2017, of which $2.0 million was reflected as a reduction to income tax expense and $1.0 million as a
decrease to deferred tax assets. Additionally, $0.2 million of accrued interest was reversed in 2017 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 most state and local income taxes for 2012
expired during 2016. As a result, $2.2 million of tax contingency reserves recorded as of December 31, 2015 were
reversed in 2016, of which $1.5 million was reflected as a reduction to income tax expense and $0.7 million as a
decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in 2016 and reflected as
reductions to income tax expense due to the closing of statutes of limitations on tax assessments.
With few exceptions, the Company is no longer subject to income tax assessments by tax authorities for years
ended prior to 2015. Further, it is reasonably possible the statutes of limitations regarding the assessment of federal and
most state and local income taxes for 2015 could expire during 2019. Up to $3.6 million of unrecognized tax benefits
recorded as of December 31, 2018 could be reversed during 2019 as a result of statute expirations, of which $2.9 million
would be reflected as a reduction to income tax expense and $0.7 million as a decrease to deferred tax assets. All
reversals from statute expirations would be reflected as discrete adjustments during the quarter in which the respective
event occurs. As of December 31, 2017 and 2018, the Company had accrued approximately $0.5 million and
$0.6 million, respectively, for the potential payment of interest and penalties. The Company accrues interest and
F-38
penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended December 31,
2016, 2017 and 2018, the Company recorded approximately $0.1 million, $0.2 million and $0.1 million, respectively, in
interest and penalties.
8. Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31, 2016, 2017 and 2018 is as follows (in
thousands):
Income taxes paid, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . $ 54,442 $ 59,474 $ 40,179
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,378 $ 15,415 $ 34,223
Assets acquired through capital leases and deferred financing . $ 4,491 $ 2,418 $ 20,576
2016
2017
2018
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, 2018 to June 17, 2019. 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 dispensing operations. The specialty pharmaceutical dispensing operations
insurance policy has a one - year term for the period June 17, 2018 to June 17, 2019. 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 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 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.
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
F-39
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’s
wholly owned subsidiary, AFSC, conducts business with federal agency customers and federal contractors to such
agencies. The Company is investigating, with the assistance of outside counsel, matters relating to compliance by AFSC
with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors
and has reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA
regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was
disclosed to Magellan prior to its acquisition of AFSC. The Company is voluntarily responding to government requests
for further information regarding the Company’s investigation. Contingencies, if any, arising from the results of this
investigation and self-reporting could require us to record balance sheet liabilities or accrue expenses, the amount of
which we are not able to currently estimate. While the Company believes that it has responded appropriately by self-
reporting findings regarding matters that incepted prior to its acquisition of AFSC in order to mitigate the risk of adverse
consequences, should the SBA, Department of Defense and/or other federal agencies seek to hold the Company or AFSC
responsible for the reported conduct, we may be required to pay damages and/or penalties and AFSC could be suspended
or debarred from government contracting. For 2017 and 2018 AFSC’s total revenue comprised approximately 3% and
2%, respectively, of the total revenues of the Company.
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.
The Company is also subject to or party to certain class actions and other litigation and claims relating to its
operations or business practices. The Company has recorded reserves that, in the opinion of management, 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.
A Pharmacy Management segment network provider and the Company are currently in dispute regarding
pricing and associated calculations pertaining to network reconciliations for a multi-year period. Depending upon the
resolution of the dispute, the Company could incur liability to this provider. The unrecorded, potential loss related to
these network reconciliations is estimated to range from $0 to $22 million. The ultimate resolution of this matter, if
unfavorable, could be material to the Company’s results of operations.
Operating Leases
The Company leases certain of its operating facilities and equipment. The leases, which expire at various dates
through November 2025, generally require the Company to pay all maintenance, property tax and insurance costs.
At December 31, 2018, aggregate amounts of future minimum payments under operating leases were as
follows: 2019—$20.9 million; 2020—$16.4 million; 2021—$14.1 million; 2022—$12.4 million; 2023—$8.0 million;
2024 and beyond—$10.4 million. Operating lease obligations include estimated future lease payments for both open and
closed offices.
At December 31, 2018, aggregate amounts of future minimum rentals to be received under operating subleases
were $0.4 million. All of the Company’s operating subleases at December 31, 2018 are scheduled to terminate in 2019.
Operating sublease rentals to be received mainly relate to a portion of the Company’s former headquarters.
F-40
Rent expense is recognized on a straight - line basis over the terms of the leases. Rent expense was $16.2 million,
$19.0 million and $22.5 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Capital Leases and Deferred Financing Obligations
At December 31, 2017, aggregate future amounts of minimum payments under capital leases and deferred
financing obligations, net of leasehold improvement allowances, were as follows: 2019—$8.9 million; 2020—
$10.5 million; 2021—$3.9 million; 2022—$3.7 million; 2023—$3.7 million; 2024 and beyond—$3.8 million. Included
in the future amounts payable under capital lease and deferred financing commitments is imputed interest of
$3.3 million.
10. Business Segment Information
The accounting policies of the Company’s segments are the same as those described in Note 2—“Summary of
Significant Accounting Policies.” 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, changes in the fair value of contingent consideration recorded in relation to acquisitions, 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. Healthcare subcontracts with
Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare’s customers. In
addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under
its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are
eliminated. The Company’s segments are defined in Note 1—“General.”
The following tables summarize, for the periods indicated, operating results by business segment (in thousands):
Pharmacy
Corporate
and
Healthcare
Management Elimination Consolidated
Year Ended December 31, 2016
Managed care and other revenue . . . . . . . . . . . . . . . . . . . . . . $ 2,659,685 $
PBM and dispensing revenue . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense (1) . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration (1) . . . . .
Impairment of intangible assets (1) . . . . . . . . . . . . . . . . . . . .
Less: non-controlling interest segment profit (loss) (2) . . . .
Segment profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Identifiable assets by business segment (3)
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(1,882,614)
—
(573,706)
4,440
(231)
4,800
(567)
212,941 $
81,608 $
191,058
293,034
—
350,576
55,756
243,561 $
2,053,188
—
(1,933,086)
(261,570)
20,509
127
—
—
(119,246)
—
114,366
(41,336)
12,473
—
—
(170)
(304) $ 2,902,942
1,933,942
(1,882,614)
(1,818,720)
(876,612)
37,422
(104)
4,800
(737)
301,793
122,729 $ (33,877) $
1 $
167 $
405,611
10,703
58,995
391,478
130,476
10,095
1,516
—
—
—
81,776
606,764
305,253
58,995
742,054
186,232
F-41
Healthcare
Pharmacy
and
Management Elimination Consolidated
Corporate
Year Ended December 31, 2017
Managed care and other revenue . . . . . . . . . . . . . . . . . . . $ 3,206,277 $
PBM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense (1) . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration (1) . .
Less: non-controlling interest segment profit (loss) (2) .
Segment profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Identifiable assets by business segment (3)
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,413,770)
—
(601,201)
10,689
696
(56)
202,747 $
220,786 $
244,486
327,865
—
610,867
165,159
273,489 $
2,491,044
—
(2,341,979)
(302,525)
19,881
—
—
139,910 $
(584) $ 3,479,182
2,359,401
(2,413,770)
(2,211,910)
(941,883)
39,116
696
(59)
310,891
(131,643)
—
130,069
(38,157)
8,546
—
(3)
(31,766) $
8,059 $
403,880
—
40,945
395,421
103,129
168 $
12,409
—
—
—
—
229,013
660,775
327,865
40,945
1,006,288
268,288
Healthcare
Pharmacy
and
Management Elimination Consolidated
Corporate
Year Ended December 31, 2018
Managed care and other revenue . . . . . . . . . . . . . . . . . . . $ 4,638,622 $
PBM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense (1) . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration (1) . .
Segment profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Identifiable assets by business segment (3)
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pharmaceutical inventory . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . .
—
(3,762,412)
—
(735,366)
6,982
1,307
149,133 $
157,437 $
290,564
378,706
—
622,604
136,644
240,427 $
2,625,417
—
(2,468,170)
(298,713)
5,458
—
104,419 $
(607) $ 4,878,442
2,435,709
(3,762,412)
(2,283,022)
(1,071,535)
29,472
1,307
227,961
(189,708)
—
185,148
(37,456)
17,032
—
(25,591) $
576 $
465,345
7,037
40,818
395,552
82,072
2,954 $
150
—
—
—
13,167
160,967
756,059
385,743
40,818
1,018,156
231,883
(1) Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to the
acquisitions and impairment of intangible assets are included in direct service costs and other operating expenses;
however, these amounts are excluded from the computation of Segment Profit.
(2) The non-controlling interest portion of AlphaCare’s segment profit (loss) is excluded from the computation of
Segment Profit in 2016 and 2017.
(3) 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.
F-42
The following table reconciles consolidated income before income taxes to Segment Profit for the years ended
December 31, 2016, 2017 and 2018 (in thousands):
2016
2017
2018
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,517 $ 135,224 $ 43,194
29,472
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,307
Impairment of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Non-controlling interest segment (profit) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
132,660
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,396
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,068)
Segment Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 301,793 $ 310,891 $ 227,961
39,116
696
—
59
115,706
25,977
(5,887)
37,422
(104)
4,800
737
106,046
10,193
(2,818)
11. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31,
2017 and 2018 (in thousands, except per share amounts):
March 31,
2017
June 30,
2017
September 30, December 31,
2017
2017
For the Quarter Ended
Year Ended December 31, 2017
Net revenue:
Managed care and other . . . . . . . . . . . . . . . . . . . . . . . . . . $ 729,340 $ 821,699 $
PBM and dispensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses:
597,440
1,419,139
576,283
1,305,623
834,358 $ 1,093,785
600,630
585,048
1,694,415
1,419,406
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating expenses
(1) (2) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net income (loss) attributable to non-controlling
482,054
542,633
583,264
562,355
569,306
543,682
779,146
563,240
221,486
26,976
4,148
(949)
1,276,348
29,275
11,806
17,469
231,372
27,731
4,900
(1,071)
1,408,551
10,588
5,661
4,927
227,372
28,189
7,663
(1,781)
1,374,431
44,975
11,739
33,236
261,653
32,810
9,266
(2,086)
1,644,029
50,386
(4,123)
54,509
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Magellan . . . . . . . . . . . . . . . . . . $
Weighted average number of common shares
(278)
17,747 $
(573)
5,500 $
785
32,451 $
—
54,509
outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,012
23,108
23,282
23,921
Weighted average number of common shares
outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,038
24,038
24,563
25,113
Net income per common share attributable to Magellan:
Net income per common share—basic: . . . . . . . . . . . . . . . . $
Net income per common share—diluted: . . . . . . . . . . . . . . $
0.77 $
0.74 $
0.24 $
0.23 $
1.39 $
1.32 $
2.28
2.17
F-43
Year Ended December 31, 2018
Net revenue:
For the Quarter Ended
March 31,
2018
June 30,
2018
September 30, December 31,
2018
2018
Managed care and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,219,763 $1,215,340 $ 1,235,787 $ 1,207,552
PBM and dispensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
637,093
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,844,645
Costs and expenses:
617,719
1,853,506
595,583
1,810,923
585,314
1,805,077
Cost of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct service costs and other operating expenses (3)(4) .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . .
(Benefit) provision for income taxes . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Magellan . . . . . . . . . . . . . . .
Weighted average number of common shares
928,661
559,665
269,077
30,407
8,366
(2,476)
1,793,700
11,377
(75)
11,452
935,814
558,419
259,152
33,848
8,678
(3,363)
1,792,548
18,375
4,824
13,551
938,031
571,145
265,471
33,047
8,990
(4,139)
1,812,545
40,961
13,816
27,145
959,906
593,793
277,835
35,358
9,362
(4,090)
1,872,164
(27,519)
448
(27,967)
outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,349
24,569
24,433
24,048
Weighted average number of common shares
outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,612
25,407
24,928
24,048
Net income (loss) per common share attributable to
Magellan:
Net income (loss) per common share—basic: . . . . . . . . . . . . . $
Net income (loss) per common share—diluted: . . . . . . . . . . . $
0.47 $
0.45 $
0.55 $
0.53 $
1.11 $
1.09 $
(1.16)
(1.16)
(1) Includes stock compensation expense of $10,140, $11,371, $10,323 and $7,282 for the quarters ended March 31,
June 30, September 30 and December 31, 2017, respectively.
(2) Includes changes in fair value of contingent consideration of $(49), $252, $(834) and $1,327 for the quarters ended
March 31, June 30, September 30 and December 31, 2017, respectively.
(3) Includes stock compensation expense of $7,646, $10,439, $9,320 and $2,067 for the quarters ended March 31,
June 30, September 30 and December 31, 2018, respectively.
(4) Includes changes in fair value of contingent consideration of $233, $70, $148 and $856 for the quarters ended
March 31, June 30, September 30 and December 31, 2018, respectively.
F-44
Shareholder Information
Corporate
Headquarters
4800 North Scottsdale Road
Suite 4400
Scottsdale, Arizona 85251
MagellanHealth.com
Auditors
Ernst & Young LLP
Baltimore, Maryland
Stock Listing
Symbol: MGLN
NASDAQ Stock Exchange
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
Safe Harbor Statement
Certain of the statements
made in this report
constitute forward-looking
statements contemplated
under the Private Securities
Litigation Reform Act of
1995 and are qualified
in their entirety by the
complete discussion of
Our transfer agent can help with
risks set forth in the section
a variety of shareholder-related
services, including:
• Change of address
• Lost stock certificates
entitled “Risk Factors” in
Magellan’s Annual Report
on Form 10-K for the year
ended December 31, 2018,
• Transfer of stock to another person
attached herein.
Investor Relations
This annual report, along with an
online version and 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.
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.
MagellanHealth.com