Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2015

Summary of Significant Accounting Policies

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"), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. In July 2015, the FASB approved to defer the effective date of ASU 2014-09. This ASU is now effective for calendar years beginning after December 15, 2017. 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 June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12"), which revises the accounting treatment for stock compensation tied to performance targets. This ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014- 15"), which provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASU is effective for the annual period beginning after December 15, 2016 and for annual and interim reporting periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for annual and interim reporting periods of public entities beginning after December 31, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The Company elected to adopt the guidance effective for the fiscal year ended December 31, 2015 and apply it retrospectively for all periods presented.

In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance to clarify the customer's accounting for fees paid in a cloud computing arrangement. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement Period Adjustments" ("ASU 2015-16"). The amendment under this ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The amendment under this ASU requires that deferred income tax liabilities and assets be classified as noncurrent. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. The Company elected to adopt the guidance effective for the fiscal year ended December 31, 2015 and applied it retrospectively for all periods presented.

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. This guidance is effective for annual and iterim reporting periods of public entities beginning after December 15, 2018, 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 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, contingent consideration, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates.

Revenue Recognition

Managed Care and Other Revenue

Managed Care Revenue. Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $2.7 billion, $2.6 billion and $2.7 billion for the years ended December 31, 2013, 2014 and 2015, respectively.

Fee-For-Service and Cost-Plus Contracts. The Company has certain fee-for-service contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. This includes revenues received in relation to the Patient Protection and Affordable Care Act health insurer fee ("HIF fee") billed on a cost reimbursement basis. Revenues from these contracts approximated $215.1 million, $290.9 million and $342.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Rebate Revenue. The Company administers a rebate program for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues for the years ended December 31, 2013, 2014 and 2015 approximated $34.8 million, $43.6 million and $88.7 million, respectively.

In relation to the Company's PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

Pharmacy Benefit Management Revenue. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client's members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated $106.7 million, $575.7 million and $1.2 billion for the years ended December 31, 2013, 2014 and 2015, 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 approximated $376.6 million, $216.0 million and $211.6 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Significant Customers

Customers exceeding ten percent of the consolidated Company's net revenues

Through December 31, 2015, the Company provided behavioral healthcare management and other related services to members in the state of Iowa pursuant to contracts with the State of Iowa (the "Iowa Contracts"). The Iowa Contracts terminated on December 31, 2015. The Iowa Contracts generated net revenues of $321.1 million, $465.0 million and $530.3 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Through March 31, 2014, the Company provided behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona as the Regional Behavioral Health Authority for GSA6 ("Maricopa County") pursuant to a contract with the State of Arizona (the "Maricopa Contract"). The Maricopa Contract was for the management of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $755.0 million and $216.6 million for the years ended December 31, 2013 and 2014, respectively.

Customers exceeding ten percent of segment net revenues

In addition to the Iowa Contracts and 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, 2013, 2014 and 2015 (in thousands):

Segment	Term Date	2013			2014			2015
Healthcare
Customer A	December 31, 2018(1)	$	128,607	*	$	253,661	*	$	439,481
Pharmacy Management
Customer B	November 30, 2016 to December 31, 2016(2)		133,724			123,812			130,200	*
Customer C	December 31, 2016		—			171,936			324,809
Customer D	December 31, 2013		92,647			2,612	*		—


*	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 Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees receive integrated healthcare services, and phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program.
(2)	The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

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. Net revenues from the Pennsylvania Counties in the aggregate totaled $359.0 million, $369.9 million and $395.7 million for the years ended December 31, 2013, 2014 and 2015, respectively.

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

Income Taxes

The Company files a consolidated federal income tax return with most of its eighty-percent or more controlled subsidiaries. The Company files a separate consolidated federal income tax return for AlphaCare of New York, Inc. ("AlphaCare") and its parent, AlphaCare Holdings, Inc. ("AlphaCare Holdings"). 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. 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.

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. For 2014 and 2015, the HIF fees were $21.4 million and $26.5 million, respectively, which have been paid and which is included in direct service costs and other operating expenses in the consolidated statements of income. The Company recorded revenues of $36.5 million and $45.4 million in the years ended December 31, 2014 and 2015, respectively, associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers.

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, 2015, the Company's excess capital and undistributed earnings for the Company's regulated subsidiaries of $85.3 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, 2014 and 2015 were as follows (in thousands):

	2014		2015
Restricted cash	$	215,325	$	133,597
Restricted short-term investments		132,808		277,556
Restricted deposits (included in other current assets)		30,620		27,752
Restricted long-term investments		43,293		3,826

Total	$	422,046	$	442,731

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, 2014 and 2015 (in thousands):

	Fair Value Measurements at December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	139,280	$	—	$	139,280
Restricted cash(2)		—		65,992		—		65,992
Investments:
U.S. Government and agency securities		4,303		—		—		4,303
Obligations of government-sponsored enterprises(3)		—		15,315		—		15,315
Corporate debt securities		—		246,886		—		246,886
Certificates of deposit		—		1,150		—		1,150

Total assets held at fair value	$	4,303	$	468,623	$	—	$	472,926


Liabilities
Contingent consideration	$	—	$	—	$	58,153	$	58,153

Total liabilities held at fair value	$	—	$	—	$	58,153	$	58,153

	Fair Value Measurements at December 31, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	6,009	$	—	$	6,009
Restricted cash(5)		—		82,808		—		82,808
Investments:
U.S. Government and agency securities		5,514		—		—		5,514
Obligations of government-sponsored enterprises(6)		—		50,525		—		50,525
Corporate debt securities		—		268,976		—		268,976
Certificates of deposit		—		1,150		—		1,150

Total assets held at fair value	$	5,514	$	409,468	$	—	$	414,982


Liabilities
Contingent consideration	$	—	$	—	$	92,426	$	92,426

Total liabilities held at fair value	$	—	$	—	$	92,426	$	92,426


(1)	Excludes $116.0 million of cash held in bank accounts by the Company.
(2)	Excludes $149.3 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 $109.4 million of cash held in bank accounts by the Company.
(5)	Excludes $50.8 million of restricted cash held in bank accounts by the Company.
(6)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

For the years ended December 31, 2014 and 2015, 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 estimated fair value of the Company's term loan of $234.4 million as of December 31, 2015 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.

The contingent consideration liability reflects the fair value of potential future payments related to the CDMI, LLC ("CDMI"), 4D Pharmacy Management Systems, Inc. ("4D") and Cobalt Therapeutics, LLC ("Cobalt") acquisitions. The CDMI purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion and gross profit milestones through December 31, 2016. The Cobalt purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The 4D purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $30.0 million. The potential future payments are contingent upon the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and retention of certain business through 2018.

As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, client base, member engagement, and new contract execution. The projected revenues, gross profits, client base, member engagement and new contract execution are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates or projected payment dates may result in a change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income. 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.

For CDMI, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 0.33 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 100 percent; and (iii) projected payment date of 2016. For CDMI, the Company estimated undiscounted future contingent payments of $65.7 million and $90.1 million as of December 31, 2014 and 2015, respectively. The net increase is due to changes in operational forecasts and probabilities of payment of $34.3 million, partially offset by a decrease of $9.9 million due to payments. As of December 31, 2015, the fair value of the short-term contingent consideration for CDMI was $89.9 million.

For Cobalt, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately 2 to 33 percent; and (iii) projected payment dates of 2016 to 2017. For Cobalt, the Company estimated undiscounted future contingent payments of $4.2 million and $1.7 million as of December 31, 2014 and 2015, respectively. The decrease is due to changes in operational forecasts and probabilities of payment of $2.2 million and payments of $0.3 million. As of December 31, 2015, the fair value of the short term and long term contingent consideration for Cobalt was $0.7 million and $0.8 million, respectively.

For 4D, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 0.14 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately 100 percent; and (iii) projected payment date of 2016. For 4D, the Company estimated undiscounted future contingent payments of $20.6 million as of the acquisition date. As of December 31, 2015, the Company estimated net undiscounted future payments of $1.0 million. The $19.6 million decrease is due to payments of $19.0 million and changes in operational forecasts of $0.6 million. As of December 31, 2015, the fair value of the contingent consideration for 4D was $1.0 million.

As of December 31, 2014, the fair value of the short-term and long-term contingent consideration was $8.3 million and $49.8 million, respectively, and is included in short-term and long-term contingent consideration, respectively, in the consolidated balance sheets. The change in the fair value of the contingent consideration was $9.3 million for the year ended December 31, 2014, $6.2 million and $3.1 million of which was recorded in the consolidated statements of income as direct service costs and other operating expenses, and as interest expense, respectively.

As of December 31, 2015, the fair value of the short-term and long-term contingent consideration was $91.6 million and $0.8 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 $44.3 million for the year ended December 31, 2015, which was recorded as direct service costs and other operating expenses in the consolidated statements of income. The increase was mainly a result of changes in the present value and estimated undiscounted liability, as noted above.

The following table summarizes the Company's liability for contingent consideration (in thousands):

	December 31, 2014		December 31, 2015
Balance as of beginning of period	$	—	$	58,153
Acquisition of CDMI		45,778		—
Acquisition of Cobalt		3,071		—
Acquisition of 4D		—		19,290
Changes in fair value		9,304		44,257
Payments		—		(29,274	)

Balance as of end of period	$	58,153	$	92,426

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 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, 2014 and 2015, 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, 2013, 2014, or 2015. The following is a summary of short-term and long-term investments at December 31, 2014 and 2015 (in thousands):

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	4,305	$	—	$	(2	)	$	4,303
Obligations of government-sponsored enterprises(1)		15,318		1		(4	)		15,315
Corporate debt securities		247,118		8		(240	)		246,886
Certificates of deposit		1,150		—		—			1,150

Total investments at December 31, 2014	$	267,891	$	9	$	(246	)	$	267,654

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and agency securities	$	5,524	$	—	$	(10	)	$	5,514
Obligations of government-sponsored enterprises(2)		50,575		4		(54	)		50,525
Corporate debt securities		269,340		—		(364	)		268,976
Certificates of deposit		1,150		—		—			1,150

Total investments at December 31, 2015	$	326,589	$	4	$	(428	)	$	326,165


(1)	Includes investments in notes issued by the Federal Home Loan Bank.
(2)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

The maturity dates of the Company's investments as of December 31, 2015 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2016	$	322,747	$	322,339
2017		3,842		3,826

Total investments at December 31, 2015	$	326,589	$	326,165

Accounts Receivable

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

Concentration of Credit Risk

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

The Company maintains cash and cash equivalents balances at financial institutions 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 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 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, 2014 and 2015 was $85.6 million and $84.8 million, respectively. Depreciation expense was $61.4 million, $68.3 million and $73.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. Included in depreciation expense for the years ended December 31, 2013, 2014 and 2015 was $34.8 million, $40.9 million and $45.6 million, respectively, related to capitalized internal use software.

Property and equipment, net, consisted of the following at December 31, 2014 and 2015 (in thousands):

	2014			2015
Building improvements	$	13,416		$	13,655
Equipment		185,391			207,667
Capital leases—property		26,945			26,945
Capital leases—equipment		7,883			12,335
Capitalized internal-use software		351,978			396,794

		585,613			657,396
Accumulated depreciation		(413,697	)		(482,651	)

Property and equipment, net	$	171,916		$	174,745

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, with the Company's reporting units with goodwill as of December 31, 2015 comprised of Commercial, Government and Pharmacy Management. Prior to July 1, 2015, the Company's reporting units included Health Plan, Specialty Solutions, Pharmacy Management and Magellan Complete Care. Effective July 1, 2015, the goodwill associated with Health Plan and Specialty Solutions was combined and is now reported as Commercial and Magellan Complete Care is now reported as Government. The change in reporting units was attributable to the Company's segment reorganization and the fact that discrete financial information is now being reviewed at these levels.

The fair value of the Commercial (a component of the Healthcare segment), Government (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.

In connection with the annual impairment testing process, the Company performed a sensitivity analysis for goodwill impairment with respect to each of its reporting units and determined that a hypothetical 10% decline in the fair value would not result in an impairment of goodwill for any reporting unit. Therefore, the second step was not necessary.

Goodwill for each of the Company's reporting units with goodwill at December 31, 2014 and 2015 were as follows (in thousands):

	2014		2015
Commercial	$	233,591	$	242,255
Government		20,879		18,363
Pharmacy Management		311,636		360,772

Total	$	566,106	$	621,390

The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2015 are reflected in the table below (in thousands):

	2014		2015
Balance as of beginning of period	$	488,206	$	566,106
Acquisition of CDMI		69,092		—
Acquisition of 4D		—		49,136
Other acquisitions and measurement period adjustments		8,808		6,148

Balance as of end of period	$	566,106	$	621,390

Intangible Assets

The following is a summary of intangible assets at December 31, 2014 and 2015, and the estimated useful lives for such assets (in thousands):

	December 31, 2014
Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	2.5 to 18 years	$	249,390	$	(121,788	)	$	127,602
Provider networks and other	1 to 16 years		13,013		(6,897	)		6,116

		$	262,403	$	(128,685	)	$	133,718

	December 31, 2015
Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	2.5 to 18 years	$	274,790	$	(148,795	)	$	125,995
Provider networks and other	1 to 16 years		16,663		(9,284	)		7,379

		$	291,453	$	(158,079	)	$	133,374

Amortization expense was $10.6 million, $22.8 million and $29.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. The Company estimates amortization expense will be $26.8 million, $21.1 million, $18.8 million, $18.3 million and $17.2 million for the years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively.

Cost of Care, Medical Claims Payable and Other Medical Liabilities

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

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

Medical claims payable balances are continually monitored and reviewed. If it is determined that the Company's assumptions in estimating such liabilities are significantly different than actual results, the Company's results of operations and financial position could be impacted in future periods. Adjustments of prior period estimates may result in additional cost of care or a reduction of cost of care in the period an adjustment is made. Further, due to the considerable variability of healthcare costs, adjustments to claim liabilities occur each period and are sometimes significant as compared to the net income recorded in that period. Prior period development is recognized immediately upon the actuary's judgment that a portion of the prior period liability is no longer needed or that additional liability should have been accrued. The following table presents the components of the change in medical claims payable for the years ended December 31, 2013, 2014 and 2015 (in thousands):

	2013			2014			2015
Claims payable and IBNR, beginning of period	$	222,929		$	242,229		$	278,803
Cost of care:
Current year		2,264,276			2,097,395			2,297,255
Prior years(3)		(31,300	)		(8,800	)		(22,500	)

Total cost of care		2,232,976			2,088,595			2,274,755

Claim payments and transfers to other medical liabilities(1):
Current year		2,053,274			1,845,325			2,077,729
Prior years		160,402			206,696			222,530

Total claim payments and transfers to other medical liabilities		2,213,676			2,052,021			2,300,259

Claims payable and IBNR, end of period		242,229			278,803			253,299
Withhold receivables, end of period(2)		(13,888	)		(321	)		(2,850	)

Medical claims payable, end of period	$	228,341		$	278,482		$	250,449


(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 2013, 2014 and 2015 was $31.3 million, $8.8 million and $22.5 million, respectively. Development for 2013 was impacted by several factors, including approximately $15.1 million of adjustments resulting from an annual reconciliation process with certain providers, $8.3 million of adjustments related to new contracts in 2012 for which we did not have historical claim payment patterns, and $7.9 million related to faster claims completion rates and lower medical cost trends than originally estimated. The annual reconciliation process for one of our Public Sector contracts, which contract terminated March 31, 2014, identified block payments to providers which exceeded the cost of care incurred by such providers; these particular provider contracts required the providers to return such excess block payments to the Company. Favorable prior year care development for 2014 was related to lower medical trends and faster claims completion than originally assumed in all business segments. Favorable prior year care development for 2015 was related to faster claims completion than originally assumed, primarily due to new contracts.

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.

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, 2015; 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. Other medical liabilities also include "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.

Advertising Costs

Advertising costs consist primarily of printed media services, event sponsorships, and promotional items, which are expensed as incurred. Advertising expense was approximately $2.3 million, $2.7 million, and $2.5 million for the fiscal years ended December 31, 2013, 2014, and 2015, respectively.

Accrued Liabilities

As of December 31, 2014, the only individual current liabilities that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $47.0 million and deferred revenue of $29.8 million. As of December 31, 2015, the only individual current liability that exceeded five percent of total current liabilities related to accrued employee compensation liabilities of $37.6 million.

Net Income per Common Share

Net Income per Common Share attributable to Magellan Health, Inc.

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

Redeemable Non-controlling Interest

Redeemable Non-Controlling Interest

As of December 31, 2015 the Company held an 82% equity interest in AlphaCare Holdings. The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to 50% of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings have the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase all remaining shares. Non-controlling interests with redemption features, such as put options, that are not solely within the Company's control are considered redeemable non-controlling interests. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders' equity on the Company's consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income or loss or its redemption value. The carrying value of the non-controlling interest as of December 31, 2014 and December 31, 2015 was $6.0 million and $5.9 million, respectively. The $0.1 million decrease in carrying value is a result of operating losses, partially offset by the impact of additional capital provided by the Company. The Company evaluates the redemption value on a quarterly basis. If the redemption value is greater than the carrying value, the Company adjusts the carrying amount of the non-controlling interest to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share ("EPS") calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of December 31, 2015, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

Stock Compensation

At December 31, 2014 and 2015, 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 associated with the Partners Rx Management, LLC ("Partners Rx") and CDMI acquisitions, 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 $21.3 million, $40.6 million and $50.4 million for the years ended December 31, 2013, 2014 and 2015, respectively. As stock compensation expense recognized in the consolidated statements of income for the years ended December 31, 2013, 2014 and 2015 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 that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period.

Reclassifications

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

The Company elected to adopt ASU 2015-03 effective for the fiscal year ended December 31, 2015 and applied it retrospectively. As a result of the company's adoption of ASU 2015-13, we now present deferred loan costs as a reduction to debt. The impact of the guidance resulted in a reclassification from other long-term assets to long-term debt and capital lease obligations of $1.7 million as of December 31, 2014.

The Company elected to adopt ASU 2015-17 effective for the fiscal year ended December 31, 2015 and applied it retrospectively. As a result of the company's adoption of ASU 2015-17, we now present all deferred tax assets and liabilities as noncurrent. The impact of the guidance resulted in reclassifications from other current assets of $27.2 million to other long-term assets of $3.7 million and deferred income tax liabilities of $23.5 million as of December 31, 2014.