General (Policies)

3 Months Ended

Mar. 31, 2012

General

Use of Estimates

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates.

Revenue recognition

Managed Care Revenue

        Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $550.0 million and $601.8 million for the three months ended March 31, 2011 and 2012, respectively.

Fee-For-Service and Cost-Plus Contracts

        The Company has certain FFS contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. Revenues from these contracts approximated $42.4 million and $36.0 million for the three months ended March 31, 2011 and 2012, respectively.

Block Grant Revenues

        Public Sector has a contract that is partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $26.2 million and $28.9 million for the three months ended March 31, 2011 and 2012, respectively.

Dispensing Revenue

        The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. At the time of shipment, the earnings process is complete; the obligation of the Company's customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $60.4 million and $87.2 million for the three months ended March 31, 2011 and 2012, respectively.

Performance-Based Revenue

        The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $3.1 million and $8.0 million for the three months ended March 31, 2011 and 2012, respectively.

Rebate Revenue

        The Company administers a rebate program for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues were $6.8 million and $9.7 million for the three months ended March 31, 2011 and 2012, respectively.

Significant Customers

• Consolidated Company

        The Company provides behavioral healthcare management and other related services to approximately 715,000 members in Maricopa County, Arizona, the ("Maricopa Contract").

        Under the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance Program) of the Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental illness, and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through September 30, 2013 unless sooner terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately upon notice from the State. The Maricopa Contract generated net revenues of $191.0 million and $193.1 million for the three months ended March 31, 2011 and 2012, respectively.

• By Segment

        In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2011 and 2012 (in thousands):

Segment	Term Date	2011			2012
Commercial
Customer A	December 31, 2012	$	50,438		$	49,743
Customer B	June 30, 2014		17,008			16,085
Customer C	December 31, 2012 to December 14, 2013(1)		27,552			29,326
Customer D	December 31, 2019		—			33,727
Public Sector
Customer E	June 30, 2013(2)		40,318			55,236
Radiology Benefits Management
Customer F	December 31, 2015		33,247			26,556
Customer G	June 30, 2011 to November 30, 2011(1)(3)		16,663			—
Customer H	June 30, 2014		13,340			14,378
Customer I	March 31, 2013		7,990	*		12,253
Customer J	January 31, 2014		6,508	*		9,104
Specialty Pharmaceutical Management
Customer K	April 30, 2012 to December 31, 2013(1)		22,004			31,044
Customer L	April 29, 2012 to September 1, 2012(1)		14,760			15,626
Customer B	December 31, 2012 to September 27, 2013(1)		3,709	*		14,647
Medicaid Administration
Customer M	December 4, 2011(3)		7,221			—
Customer N	September 30, 2013(4)		20,531			21,108
Customer O	March 31, 2015 to June 30, 2017(1)		6,019			6,803
Customer P	June 30, 2013 to September 30, 2014(1)		4,169	*		4,914

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(2)

Contract has options for the customer to extend the term for two additional one-year periods.

(3)

The contract has terminated.

(4)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

• Concentration of Business

        The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the "Pennsylvania Counties") which are part of the Pennsylvania Medicaid program, and with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $84.6 million and $92.3 million for the three months ended March 31, 2011 and 2012, respectively. Net revenues from the Florida Areas in the aggregate totaled $33.4 million and $34.1 million for the three months ended March 31, 2011 and 2012, respectively.

        The Company's contracts with customers typically have terms of one to three years, and in certain cases contain renewal provisions (at the customer's option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company's contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 60 and 180 days) or upon the occurrence of other specified events. In addition, the Company's contracts with federal, state and local governmental agencies generally are conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made.

Fair Value Measurements

Fair Value Measurements

        The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

•         Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

          Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and 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, 2011 and March 31, 2012 (in thousands):

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents(1)	$	—	$	1,296	$	—	$	1,296
Restricted Cash(2)		—		47,972		—		47,972
Investments:
U.S. Government and agency securities		697		—		—		697
Obligations of government-sponsored enterprises(3)		—		8,293		—		8,293
Corporate debt securities		—		191,813		—		191,813
Taxable municipal bonds		—		—		—		—
Certificates of deposit		—		100		—		100
December 31, 2011	$	697	$	249,474	$	—	$	250,171

	March 31, 2012
	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents(4)	$	—	$	31,735	$	—	$	31,735
Restricted Cash(5)		—		70,017		—		70,017
Investments:
U.S. Government and agency securities		696		—		—		696
Obligations of government-sponsored enterprises(6)		—		8,259		—		8,259
Corporate debt securities		—		155,182		—		155,182
Taxable municipal bonds		—		—		—		—
Certificates of deposit		—		100		—		100
March 31, 2012	$	696	$	265,293	$	—	$	265,989

(1)

Excludes $118.6 million of cash held in bank accounts by the Company.

(2)

Excludes $137.8 million of restricted cash held in bank accounts by the Company.

(3)

Includes investments in notes issued by the Federal Home Loan Bank.

(4)

Excludes $139.9 million of cash held in bank accounts by the Company.

(5)

Excludes $114.9 million of restricted cash held in bank accounts by the Company.

(6)

Includes investments in notes issued by the Federal Home Loan Bank.

        For the three months ended March 31, 2012, the Company has not transferred any assets between fair value measurement levels.

        All of the Company's investments are classified as "available-for-sale" and are carried at fair value.

        If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2011 and March 31, 2012, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the three months ended March 31, 2011 or 2012. The following is a summary of short-term and long-term investments at December 31, 2011 and March 31, 2012 (in thousands):

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	697	$	—	$	—		$	697
Obligations of government-sponsored enterprises(1)		8,293		3		(3	)		8,293
Corporate debt securities		192,059		31		(277	)		191,813
Certificates of deposit		100		—		—			100
Total investments at December 31, 2011	$	201,149	$	34	$	(280	)	$	200,903

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	696	$	—	$	—		$	696
Obligations of government-sponsored enterprises(1)		8,256		3		—			8,259
Corporate debt securities		155,147		97		(62	)		155,182
Certificates of deposit		100		—		—			100
Total investments at March 31, 2012	$	164,199	$	100	$	(62	)	$	164,237

(1)

Includes investments in notes issued by the Federal Home Loan Bank.

        The maturity dates of the Company's investments as of March 31, 2012 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2012	$	144,574	$	144,602
2013		19,625		19,635
Total investments at March 31, 2012	$	164,199	$	164,237

Income Taxes

Income Taxes

        The Company's effective income tax rates were 40.2 percent and 41.1 percent for the three months ended March 31, 2011 and 2012, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and permanent differences between book and tax income. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the three months ended March 31, 2012 is higher than the effective rate for the three months ended March 31, 2011 mainly due to an increase in effective state tax rates.

Stock Compensation

Stock Compensation

        At December 31, 2011 and March 31, 2012, the Company had equity-based employee incentive plans, which are described more fully in Note 6 in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The Company recorded stock compensation expense of $4.8 million and $5.1 million for the three months ended March 31, 2011 and 2012, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three months ended March 31, 2011 and 2012 has been reduced for estimated forfeitures, estimated at four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the three months ended March 31, 2012 was $11.80 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 30.3 percent based on the historical volatility of the Company's stock price.

        The benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the three months ended March 31, 2011 and 2012, $0.5 million and $0.4 million, respectively, of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows. For the quarter ended March 31, 2011 the change to additional paid in capital related to tax benefits (deficiencies) was $0.5 million which includes the $0.6 million of excess tax benefits offset by $(0.1) million of tax deficiencies. For the three months ended March 31, 2012, the change to additional paid in capital related to tax benefits (deficiencies) was $0.3 million which includes the $0.4 million of excess tax benefits offset by $(0.1) million of tax deficiencies.

Long Term Debt and Capital Lease Obligations

Long Term Debt and Capital Lease Obligations

        On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company (the "2011 Credit Facility"). At such point, the previous credit facility was terminated. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility will mature on December 9, 2014.

        Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 1.00 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00%, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 2.00 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 2.125 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.

        There were no material capital lease obligations at December 31, 2011 or March 31, 2012. The Company had $68.1 million and $58.1 million of letters of credit outstanding at December 31, 2011 and March 31, 2012, respectively, and no Revolving Loan borrowings at December 31, 2011 or March 31, 2012.