Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Summary of Significant Accounting Policies

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 $2.4 billion, $2.2 billion and $2.5 billion for the years ended December 31, 2010, 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 $192.9 million, $174.5 million and $151.4 million for the years ended December 31, 2010, 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 $109.1 million, $114.4 million and $124.8 million for the years ended December 31, 2010, 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 $234.8 million, $247.4 million and $350.3 million for the years ended December 31, 2010, 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 may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts, among other factors. Performance-based revenues were $13.1 million, $26.5 million and $25.4 million for the years ended December 31, 2010, 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 $25.5 million, $32.8 million and $40.2 million for the years ended December 31, 2010, 2011 and 2012, respectively.

Significant Customers

Consolidated Company

The Company provides behavioral healthcare management and other related services to approximately 683,000 members in Maricopa County, Arizona, (the "Maricopa Contract").

The Maricopa Contract generated net revenues that exceeded, in the aggregate, ten percent of net revenues for the consolidated Company for the years ended December 31, 2010, 2011 and 2012. 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 ("SMI"), 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 $807.1 million, $779.5 million and $758.3 million for the years ended December 31, 2010, 2011 and 2012, respectively.

On October 4, 2012, the Arizona Department of Health Services ("ADHS") released a Request for Proposal ("RFP") for the ADHS Regional Behavioral Health Authority—GSA 6 (Maricopa County). The start date for any contract awarded pursuant to the RFP is expected to be October 1, 2013. This is a single RFP with two components: (i) the RFP maintains the current behavioral health carve-out for the lives the Company currently serves under the Maricopa Contract; (ii) the RFP also introduces a fully integrated program of physical, behavioral, and pharmacy care for approximately 14,000 individuals with SMI, both Medicaid and dual eligible. Under the current Maricopa Contract, these 14,000 individuals are receiving behavioral health and behavioral health pharmacy benefits. Magellan Complete Care of Arizona, Inc. ("MCCAZ"), a joint venture owned 80 percent by the Company and 20 percent by VHS Phoenix Health Plan, LLC (a subsidiary of Vanguard Health Systems, Inc.), has responded to the RFP. There can be no assurance that MCCAZ will be awarded a contract pursuant to the RFP; or that the terms of any contract awarded pursuant to the RFP will be similar to the current Maricopa Contract.

One of the Company's top ten customers during 2010 was WellPoint, Inc. The Company recorded net revenue from contracts with WellPoint, Inc. of $175.7 million for the year ended December 31, 2010. The Company's contracts with WellPoint, Inc. terminated on December 31, 2010.

By Segment

In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the years ended December 31, 2010, 2011 and 2012 (in thousands):

Segment	Term Date	2010			2011			2012

Commercial
Customer A	December 31, 2013(2)	$	243,399		$	171,109		$	192,415
Customer B	June 30, 2014		71,338			67,049			67,959	*
Customer C	December 31, 2012 to December 14, 2013(1)(3)		65,175	*		111,607			118,351
Customer D	December 31, 2019		—			—			134,885
Public Sector
Customer E	June 30, 2013(4)		153,650			191,063			240,224
Radiology Benefits Management
Customer F	December 31, 2015		121,401			134,257			117,739
Customer G	June 30, 2011 to November 30, 2011(1)(5)		66,970			38,297			—
Customer H	June 30, 2014		51,877			55,197			60,094
Customer I	July 31, 2015		10,448	*		36,293			57,455
Customer J	January 31, 2014		935	*		32,342	*		38,366
WellPoint, Inc.	December 31, 2010(5)		159,644			—			—
Specialty Pharmaceutical Management
Customer K	November 30, 2013 to December 31, 2013(1)		86,850			90,563			129,209
Customer L	April 29, 2013 to September 1, 2013(1)		57,198			56,115			60,350
Customer B	September 27, 2013 to December 31, 2013(1)		11,523	*		22,899	*		73,785
Customer F	September 30, 2013 to December 31, 2014(1)		32,877			25,006	*		19,787	*
Medicaid Administration
Customer M	December 4, 2011(5)		31,145			28,060			—
Customer N	September 30, 2013(6)		26,108			82,770			69,090
Customer O	March 31, 2015 to June 30, 2017(1)		24,432			23,683			25,103
Customer P	June 30, 2013 to June 30, 2016(1)		16,249	*		22,084			19,518
Customer Q	June 30, 2013 to September 30, 2013(1)		22,000			18,924	*		13,828	*

*: Revenue amount did not exceed ten percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.
(1): The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.
(2): The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.
(3): Revenues for the year ended December 31, 2012 of $50.0 million relate to a contract that terminated as of December 31, 2012.
(4): Contract has options for the customer to extend the term for two additional one-year periods.
(5): The contract has terminated.
(6): 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 $334.8 million, $351.6 million and $354.1 million for the years ended December 31, 2010, 2011 and 2012, respectively. Net revenues from the Florida Areas in the aggregate totaled $140.5 million, $131.8 million and $133.9 million for the years ended December 31, 2010, 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.

Income Taxes

Income Taxes

The Company files a consolidated federal income tax return for the Company and its eighty-percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various state and local jurisdictions.

The Company estimates income taxes for each of the jurisdictions in which it operates. This process involves determining both permanent and temporary differences resulting from differing treatment for tax and book purposes. Deferred tax assets and/or liabilities are determined by multiplying the temporary differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The Company establishes valuation allowances against deferred tax assets if it is more likely than not that the deferred tax asset will not be realized. The need for a valuation allowance is determined based on the evaluation of various factors, including expectations of future earnings and management's judgment. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.

Reversals of both valuation allowances and unrecognized tax benefits are recorded in the period they occur, typically as reductions to income tax expense. However, reversals of unrecognized tax benefits related to deductions for stock compensation in excess of the related book expense are recorded as increases in additional paid-in capital. To the extent reversals of unrecognized tax benefits cannot be specifically traced to these excess deductions due to complexities in the tax law, the Company records the tax benefit for such reversals to additional paid-in-capital on a pro-rata basis.

The Company recognizes interim period income taxes by estimating an annual effective tax rate and applying it to year-to-date results. The estimated annual effective tax rate is periodically updated throughout the year based on actual results to date and an updated projection of full year income. Although the effective tax rate approach is generally used for interim periods, taxes on significant, unusual and infrequent items are recognized at the statutory tax rate entirely in the period the amounts are realized.

Cash and Cash Equivalents

Cash 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, 2012, the Company's excess capital and undistributed earnings for the Company's regulated subsidiaries of $47.3 million are included in cash and cash equivalents.

Restricted Assets

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, 2011 and 2012 were as follows (in thousands):

	2011		2012

Restricted cash	$	185,794	$	226,554
Restricted short-term investments		129,599		88,332
Restricted deposits (included in other current assets)		20,453		20,846
Restricted long-term investments		7,956		32,563

Total	$	343,802	$	368,295

Investments

Investments

All of the Company's investments are classified as "available-for-sale" and are carried at fair value. Securities which have been classified as Level 1 are measured using quoted market prices while those which have been classified as Level 2 are measured using quoted prices for identical assets and liabilities in markets that are not active. The Company's policy is to classify all investments with contractual maturities within one year as current. Investment income is recognized when earned and reported net of investment expenses. Net unrealized holding gains or losses are excluded from earnings and are reported, net of tax, as "accumulated other comprehensive income (loss)" in the accompanying consolidated balance sheets and consolidated statements of comprehensive income until realized, unless the losses are deemed to be other-than-temporary. Realized gains or losses, including any provision for other-than-temporary declines in value, are included in the consolidated statements of comprehensive income.

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

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses entirely caused by non-credit related factors related to debt securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

As of December 31, 2011 and 2012, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the years ended December 31, 2010, 2011 or 2012. The following is a summary of short-term and long-term investments at December 31, 2011 and 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

	December 31, 2012

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		6,126		4		(2	)		6,128
Corporate debt securities		214,603		66		(122	)		214,547
Certificates of deposit		150		—		—			150
Taxable municipal bonds		11,805				(5	)		11,800

Total investments at December 31, 2012	$	233,749	$	70	$	(129	)	$	233,690

(1): Includes investments in notes issued by the Federal Home Loan Bank.

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

	Amortized Cost		Estimated Fair Value

2013	$	201,198	$	201,127
2014		32,551		32,563

Total investments at December 31, 2012	$	233,749	$	233,690

Accounts Receivable

Accounts Receivable

The Company's accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Management believes the allowance for doubtful accounts is adequate to provide for normal credit losses.

Concentration of Credit Risk

Concentration of Credit Risk

Accounts receivable subjects the Company to a concentration of credit risk with third party payors that include health insurance companies, managed healthcare organizations, healthcare providers and governmental entities.

The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation ("FDIC"). At times, balances in certain bank accounts may exceed the FDIC insured limits.

Pharmaceutical Inventory

Pharmaceutical Inventory

Pharmaceutical inventory consists solely of finished goods (primarily prescription drugs) and are stated at the lower of first-in first-out cost or market.

Long-lived Assets

Long-lived Assets

Long-lived assets, including property and equipment and intangible assets to be held and used, are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed. Impairment is determined by comparing the carrying value of these long-lived assets to management's best estimate of the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. The cash flow projections used to make this assessment are consistent with the cash flow projections that management uses internally in making key decisions. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or the discounted present value of expected future cash flows.

Property and Equipment

Property and Equipment

Property and equipment is stated at cost, except for assets that have been impaired, for which the carrying amount has been reduced to estimated fair value. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. The Company capitalizes costs incurred to develop internal-use software during the application development stage. Capitalization of software development costs occurs after the preliminary project stage is complete, management authorizes the project, and it is probable that the project will be completed and the software will be used for the function intended. Amortization of capital lease assets is included in depreciation expense and is included in accumulated depreciation as reflected in the table below. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which is generally two to ten years for building improvements (or the lease term, if shorter), three to fifteen years for equipment and three to five years for capitalized internal-use software. The net capitalized internal use software as of December 31, 2011 and 2012 was $62.0 million and $71.1 million, respectively. Depreciation expense was $43.9 million, $47.9 million and $50.8 million for the years ended December 31, 2010, 2011 and 2012, respectively. Included in depreciation expense for the years ended December 31, 2010, 2011 and 2012 was $26.6 million, $28.9 million and $28.8 million, respectively, related to capitalized internal use software.

Property and equipment, net, consisted of the following at December 31, 2011 and 2012 (in thousands):

	2011			2012

Building improvements	$	5,037		$	7,285
Equipment		150,874			168,400
Capitalized internal-use software		224,190			261,833

		380,101			437,518
Accumulated depreciation		(262,079	)		(300,970	)

Property and equipment, net	$	118,022		$	136,548

Goodwill

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.

The fair value of the Health Plan (a component of the Commercial segment), Radiology Benefits Management and Specialty Pharmaceutical 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 fair value of the Medicaid Administration reporting unit was determined using discounted cash flow, guideline company and similar transaction methods. Key assumptions for the discounted cash flow method are consistent with those described above. For the guideline company method, revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiples for guideline companies were applied to the reporting unit's actual revenue and EDITDA for the twelve-month period ended September 30, 2012 and to the reporting unit's projected revenue and EBITDA for 2013. For the similar transaction method, revenue and EBITDA multiples based on merger and acquisition transactions for similar companies were applied to the reporting unit's actual revenue and EBITDA for the twelve-month period ended September 30, 2012. The weighting applied to the fair values determined using the discounted cash flow, guideline company and similar transaction methods to determine an overall fair value for the Medicaid Administration reporting unit was 75 percent, 22.5 percent and 2.5 percent, respectively. The weighting of each of the methods described above was based on the relevance of the approach. A change in the weighting would not change the outcome of the first step of the impairment test.

As a result of the first step of the 2012 annual goodwill impairment analysis, the fair value of each reporting unit with goodwill exceeded its carrying value. Therefore, the second step was not necessary. However, a 20 percent decline in the fair value of Health Plan, a 56 percent decline in fair value of Radiology Benefits Management, a 35 percent decline in fair value of Specialty Pharmaceutical Management and a 30 percent decline in fair value of Medicaid Administration reporting units would have caused the carrying values for these reporting units to be in excess of fair values, which would require the second step to be performed. The second step could have resulted in an impairment loss for goodwill.

While there are numerous assumptions that impact the calculation of the fair value of the reporting units, the most sensitive assumptions relate to the discount rate and estimated future cash flows when determining fair value using the discounted cash flow method. For those reporting units with a projected fair value within 30 percent of the carrying value, the impact of changes in the discount rate and estimated future cash flows was reviewed for sensitivity.

For Health Plan, a 20 percent decline in fair value, or approximately $40 million, would have caused the carrying value to be in excess of its fair value as of October 1, 2012. A decline in fair value of approximately $40 million would occur upon either: (1) an increase of 338 basis points in the discount rate utilized to determine the present value of the projected net cash flows; or (2) a decline between 20 and 40 percent in estimated future cash flows, with the percentage decrease varying depending upon whether the cash flow decrease were to occur in the near term or long term. For Medicaid Administration, a 30 percent decline in fair value, or approximately $50 million, would have caused the carrying value to be in excess of its fair value as of October 1, 2012. A decline in fair value of approximately $50 million would occur upon either: (1) an increase of 350 basis points in the discount rate utilized to determine the present value of the projected net cash flows; or (2) a decline of between 30 and 40 percent in estimated future cash flows, with the percentage decrease varying depending upon whether the cash flow decrease were to occur in the near term or the long term. Such declines in the future cash flows could be the result of a loss of one or more significant customers without the generation of new business to offset such losses or an inability to meet the respective reporting unit's growth targets, which could include expansion into new product offerings. A decline in the fair values for Health Plan and Medicaid Administration could result in carrying values in excess of fair values, which would require the second step of goodwill testing to be performed. The second step could result in an impairment loss for goodwill.

Goodwill for each of the Company's reporting units are as follows (in thousands):

	December 31,

	2011		2012
Health Plan	$	120,485	$	120,485
Radiology Benefits Management		104,549		104,549
Specialty Pharmaceutical Management		142,291		142,291
Medicaid Administration		59,614		59,614

Total	$	426,939	$	426,939

Intangible Assets

Intangible Assets

The following is a summary of intangible assets at December 31, 2011 and 2012, and the estimated useful lives for such assets (in thousands):

	December 31, 2011

Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	3 to 18 years	$	121,490	$	(81,388	)	$	40,102
Provider networks and other	5 to 16 years		8,743		(4,256	)		4,487

		$	130,233	$	(85,644	)	$	44,589

	December 31, 2012

Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	3 to 18 years	$	121,490	$	(90,548	)	$	30,942
Provider networks and other	5 to 16 years		8,743		(4,750	)		3,993

		$	130,233	$	(95,298	)	$	34,935

Amortization expense was $10.8 million, $10.7 million and $9.7 million for the years ended December 31, 2010, 2011 and 2012, respectively. The Company estimates amortization expense will be $9.1 million, $9.1 million, $8.0 million, $5.3 million and $1.9 million for the years ending December 31, 2013, 2014, 2015, 2016, and 2017 respectively.

Cost of Care, Medical Claims Payable and Other Medical Liabilities

Cost of Care, Medical Claims Payable and Other Medical Liabilities

Cost of care is recognized in the period in which members receive managed healthcare services. In addition to actual benefits paid, cost of care in a period also includes the impact of accruals for estimates of medical claims payable. Medical claims payable represents the liability for healthcare claims reported but not yet paid and claims incurred but not yet reported ("IBNR") related to the Company's managed healthcare businesses. Such liabilities are determined by employing actuarial methods that are commonly used by health insurance actuaries and that meet actuarial standards of practice.

The IBNR portion of medical claims payable is estimated based on past claims payment experience for member groups, enrollment data, utilization statistics, authorized healthcare services and other factors. This data is incorporated into contract-specific actuarial reserve models and is further analyzed to create "completion factors" that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Factors that affect estimated completion factors include benefit changes, enrollment changes, shifts in product mix, seasonality influences, provider reimbursement changes, changes in claims inventory levels, the speed of claims processing and changes in paid claim levels. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims. For the most recent incurred months (generally the most recent two months), the percentage of claims paid for claims incurred in those months is generally low. This makes the completion factor methodology less reliable for such months. Therefore, incurred claims for any month with a completion factor that is less than 70 percent are generally not projected from historical completion and payment patterns; rather they are projected by estimating claims expense based on recent monthly estimated cost incurred per member per month times membership, taking into account seasonality influences, benefit changes and healthcare trend levels, collectively considered to be "trend factors."

Medical claims payable balances are continually monitored and reviewed. If it is determined that the Company's assumptions in estimating such liabilities are significantly different than actual results, the Company's results of operations and financial position could be impacted in future periods. Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of care in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to the net income recorded in that period. Prior period development is recognized immediately upon the actuary's judgment that a portion of the prior period liability is no longer needed or that additional liability should have been accrued. The following table presents the components of the change in medical claims payable for the years ended December 31, 2010, 2011 and 2012 (in thousands):

	2010			2011			2012

Claims payable and IBNR, beginning of period	$	168,851		$	166,095		$	157,099
Cost of care:
Current year		1,919,785			1,790,124			2,076,190
Prior years		(11,800	)		(5,400	)		(4,300	)

Total cost of care		1,907,985			1,784,724			2,071,890

Claim payments and transfers to other medical liabilities(1):
Current year		1,777,356			1,657,291			1,877,459
Prior years		133,385			136,429			128,601

Total claim payments and transfers to other medical liabilities		1,910,741			1,793,720			2,006,060

Claims payable and IBNR, end of period		166,095			157,099			222,929
Withhold receivables, end of period(2)		(23,424	)		(19,126	)		(24,500	)

Medical claims payable, end of period	$	142,671		$	137,973		$	198,429

(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.

Actuarial standards of practice require that the claim liabilities be adequate under moderately adverse circumstances. Adverse circumstances are situations in which the actual claims experience could be higher than the otherwise estimated value of such claims. In many situations, the claims paid amount experienced will be less than the estimate that satisfies the actuarial standards of practice.

Due to the existence of risk sharing and reinvestment provisions in certain customer contracts, principally in the Public Sector segment, a change in the estimate for medical claims payable does not necessarily result in an equivalent impact on cost of care.

The Company believes that the amount of medical claims payable is adequate to cover its ultimate liability for unpaid claims as of December 31, 2012; however, actual claims payments may differ from established estimates.

Other medical liabilities consist primarily of "reinvestment" payables under certain managed behavioral 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.

Accrued Liabilities

Accrued Liabilities

As of December 31, 2011 and 2012, the only individual current liability that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $32.7 million and $36.5 million, respectively.

Net Income per Common Share

Net Income per Common Share

Net income per common share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period (see Note 6—"Stockholders' Equity").

Stock Compensation

Stock Compensation

The Company uses the Black-Scholes-Merton formula to estimate the fair value of substantially all stock options granted to employees, and recorded stock compensation expense of $15.1 million, $17.4 million and $17.8 million for the years ended December 31, 2010, 2011 and 2012, respectively. As stock compensation expense recognized in the consolidated statements of comprehensive income for the years ended December 31, 2010, 2011 and 2012 is based on awards ultimately expected to vest, it has been reduced for annual estimated forfeitures of five percent, four percent and four percent, respectively. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods. If vesting of an award is conditioned upon the achievement of performance goals, compensation expense during the performance period is estimated using the most probable outcome of the performance goals, and adjusted as the expected outcome changes. The Company recognizes compensation costs for awards that do not contain performance conditions on a straight-line basis over the requisite service period, which is generally the vesting term of three years. For restricted stock units that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period.

Fair Value Measurements

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 2012 (in thousands):

	Fair Value Measurements at 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
Certificates of deposit		—		100		—		100

December 31, 2011	$	697	$	249,474	$	—	$	250,171

	Fair Value Measurements at December 31, 2012

	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents(4)	$	—	$	102,137	$	—	$	102,137
Restricted Cash(5)		—		82,839		—		82,839
Investments:
U.S. Government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		6,128		—		6,128
Corporate debt securities		—		214,547		—		214,547
Taxable municipal bonds		—		11,800		—		11,800
Certificates of deposit		—		150		—		150

December 31, 2012	$	1,065	$	417,601	$	—	$	418,666

(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 $87.3 million of cash held in bank accounts by the Company.
(5): Excludes $143.7 million of restricted cash held in bank accounts by the Company.

Reclassifications

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.