Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2018

Summary of Significant Accounting Policies

Summary of impacts of adoption of ASC 606

The cumulative effect of changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 were as follows (in thousands):

	Balance at December 31, 2017		Adjustments Due to ASC 606		Balance at January 1, 2018
Assets
Other current assets	$	72,323	$	(667)	$	71,656
Total Current Assets		1,483,353		(667)		1,482,686
Deferred income taxes		813		1,335		2,148
Other long-term assets		22,567		(1,333)		21,234
Total Assets		2,957,234		(665)		2,956,569
Liabilities and Stockholders' Equity
Accrued liabilities		193,635		(2,182)		191,453
Total Current Liabilities		892,303		(2,182)		890,121
Deferred credits and other long-term liabilities		19,100		5,744		24,844
Total Liabilities		1,680,740		3,562		1,684,302
Retained earnings		1,399,495		(4,227)		1,395,268
Total Stockholders' Equity		1,276,494		(4,227)		1,272,267
Total Liabilities and Stockholders' Equity		2,957,234		(665)		2,956,569

The impact of the adoption of ASC 606 on our consolidated balance sheet as of December 31, 2018 was as follows (in thousands):

	As Reported		Adjustments		Balance Without ASC 606 Adoption
Assets
Accounts receivable	$	756,059	$	(6,210)	$	749,849
Other current assets		95,400		2,218		97,618
Total Current Assets		1,547,167		(3,992)		1,543,175
Deferred income taxes		3,411		(1,335)		2,076
Other long-term assets		24,530		666		25,196
Total Assets		2,979,056		(4,661)		2,974,395
Liabilities and Stockholders' Equity
Accrued liabilities		231,356		3,390		234,746
Other medical liabilities		169,639		(165)		169,474
Total Current Liabilities		898,893		3,225		902,118
Deferred credits and other long-term liabilities		36,483		(8,030)		28,453
Total Liabilities		1,693,753		(4,805)		1,688,948
Retained earnings		1,419,449		144		1,419,593
Total Stockholders' Equity		1,285,303		144		1,285,447
Total Liabilities and Stockholders' Equity		2,979,056		(4,661)		2,974,395

The impact of the adoption of ASC 606 on our consolidated income statement for the year ended December 31, 2018 was as follows (in thousands):

	As Reported		Adjustments		Balance Without ASC 606 Adoption
Managed care and other	$	4,878,442	$	(5,634)	$	4,872,808
Total net revenue		7,314,151		(5,634)		7,308,517
Income before income taxes		43,194		(5,634)		37,560
Provision for income taxes		19,013		(1,551)		17,462
Net income		24,181		(4,083)		20,098
Net income attributable to Magellan		24,181		(4,083)		20,098

Schedule of disaggregation of revenue by major service line, type of customer and timing of revenue recognition

The following tables disaggregate our revenue for the year ended December 31, 2018 by major service line, type of customer and timing of revenue recognition (in thousands):

	Year Ended December 31, 2018
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	1,511,532	$	—	$	(263)	$	1,511,269
EAP risk-based		349,751		—		—		349,751
ASO		247,953		34,130		(344)		281,739
Magellan Complete Care
Risk-based, non-EAP		2,473,570		—		—		2,473,570
ASO		55,816		—		—		55,816
PBM, including dispensing		—		2,183,151		(189,708)		1,993,443
Medicare Part D		—		442,266		—		442,266
PBA		—		132,112		—		132,112
Formulary management		—		70,900		—		70,900
Other		—		3,285		—		3,285
Total net revenue	$	4,638,622	$	2,865,844	$	(190,315)	$	7,314,151
Type of Customer
Government	$	3,432,901	$	946,606	$	—	$	4,379,507
Non-government		1,205,721		1,919,238		(190,315)		2,934,644
Total net revenue	$	4,638,622	$	2,865,844	$	(190,315)	$	7,314,151
Timing of Revenue Recognition
Transferred at a point in time	$	—	$	2,625,417	$	(189,708)	$	2,435,709
Transferred over time		4,638,622		240,427		(607)		4,878,442
Total net revenue	$	4,638,622	$	2,865,844	$	(190,315)	$	7,314,151

Schedule of accounts receivable, contract assets and contract liabilities

	January 1,		December 31,
	2018		2018		$ Change		% Change
Accounts receivable	$	679,269	$	786,395	$	107,126		15.8%
Contract assets		8,564		4,647		(3,917)		(45.7%)
Contract liabilities - current		14,299		16,853		2,554		17.9%
Contract liabilities - long-term		12,303		13,441		1,138		9.2%

Schedule of customers generating in excess of ten percent of net revenues for respective segment

In addition to the Florida Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the years ended December 31, 2016, 2017 and 2018 (in thousands):

Segment	Term Date	2016			2017			2018
Healthcare
Customer A	(1)	$	138,966	*	$	265,192	*	$	691,616
Customer B	December 31, 2019 to December 31, 2020 (2)		—			109,049	*		682,059
Customer C	December 31, 2022		—			73,758	*		476,671
Pharmacy Management
Customer D	March 31, 2020		152,218	*		346,405			344,479
Customer E	December 31, 2016 (3)		264,152			4,764	*		2,864	*

* Revenue amount did not exceed 10 percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.

(1) The Company, along with other participating managed care plans in this state, continues to provide services while a new contract is being finalized.

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

(3) A vast majority of this customer’s revenues were generated from drug acquisition costs related to PBM services which terminated on September 1, 2016. The Company continues to provide specialty drug formulary management services to the customer and is in negotiations with the customer to extend the contract.

Schedule of significant restricted assets

Significant restricted assets of the Company as of December 31, 2017 and 2018 were as follows (in thousands):

	2017		2018
Restricted cash and cash equivalents	$	229,013	$	160,967
Restricted short-term investments		219,111		363,840
Restricted deposits (included in other current assets)		41,121		43,401
Restricted long-term investments		17,287		2,854
Total	$	506,532	$	571,062

Schedule of fair value of financial assets and liabilities

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value as of December 31, 2017 and 2018 (in thousands):

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	284,064	$	—	$	284,064
Investments:
U.S. Government and agency securities		28,231		—		—		28,231
Obligations of government-sponsored enterprises (2)		—		22,088		—		22,088
Corporate debt securities		—		269,788		—		269,788
Taxable municipal bonds		—		5,000		—		5,000
Certificates of deposit		—		2,758		—		2,758
Total assets held at fair value	$	28,231	$	583,698	$	—	$	611,929
Liabilities
Contingent consideration	$	—	$	—	$	8,817	$	8,817
Total liabilities held at fair value	$	—	$	—	$	8,817	$	8,817

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (3)	$	—	$	263,462	$	—	$	263,462
Investments:
U.S. Government and agency securities		67,815		—		—		67,815
Obligations of government-sponsored enterprises (2)		—		5,229		—		5,229
Corporate debt securities		—		292,049		—		292,049
Certificates of deposit		—		20,650		—		20,650
Total assets held at fair value	$	67,815	$	581,390	$	—	$	649,205
Liabilities
Contingent consideration	$	—	$	—	$	10,124	$	10,124
Total liabilities held at fair value	$	—	$	—	$	10,124	$	10,124

(1) Excludes $114.7 million of cash held in bank accounts by the Company.

(2) Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal National Mortgage Association.

(3) Excludes $8.8 million of cash held in bank accounts by the Company.

Summary of the Company's liability for contingent consideration

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

	December 31,		December 31,
	2017		2018
Balance as of beginning of period	$	11,153	$	8,817
Changes in fair value		696		1,307
Payments		(3,032)		—
Balance as of end of period	$	8,817	$	10,124

Summary of short-term and long-term investments

The following is a summary of short-term and long-term investments at December 31, 2017 and 2018 (in thousands):

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		FairValue
U.S. Government and agency securities	$	28,313	$	—	$	(82)	$	28,231
Obligations of government-sponsored enterprises (1)		22,139		—		(51)		22,088
Corporate debt securities		270,154		1		(367)		269,788
Taxable municipal bonds		5,000		—		—		5,000
Certificates of deposit		2,758		—		—		2,758
Total investments at December 31, 2017	$	328,364	$	1	$	(500)	$	327,865

	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		FairValue
U.S. Government and agency securities	$	67,870	$	17	$	(72)	$	67,815
Obligations of government-sponsored enterprises (1)		5,257		—		(28)		5,229
Corporate debt securities		292,392		6		(349)		292,049
Certificates of deposit		20,650		—		—		20,650
Total investments at December 31, 2018	$	386,169	$	23	$	(449)	$	385,743

(1) Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.

Summary of maturity dates of investments

The maturity dates of the Company’s investments as of December 31, 2018 are summarized below (in thousands):

	Amortized		Estimated
	Cost		Fair Value
2019	$	383,022	$	382,582
2020		3,147		3,161
Total investments at December 31, 2018	$	386,169	$	385,743

Schedule of net property and equipment

Property and equipment, net, consisted of the following at December 31, 2017 and 2018 (in thousands):

	2017		2018
Building improvements	$	17,974	$	18,954
Equipment		204,632		201,343
Capital leases - property		26,945		26,945
Capital leases - equipment		18,183		24,932
Capitalized internal-use software		486,013		527,129
		753,747		799,303
Accumulated depreciation		(595,109)		(648,555)
Property and equipment, net	$	158,638	$	150,748

Schedule of allocation of goodwill by reporting units

Goodwill for each of the Company’s reporting units with goodwill at December 31, 2017 was as follows (in thousands):

	2017
Commercial	$	242,255
Government		368,612
Pharmacy Management		395,421
Total	$	1,006,288

Goodwill for each of the Company’s reporting units with goodwill at December 31, 2018 was as follows (in thousands):

	2018
Behavioral & Specialty Health	$	410,869
Magellan Complete Care		211,735
Pharmacy Management		395,552
Total	$	1,018,156

Summary of changes in the carrying amount of goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2018 are reflected in the table below (in thousands):

	2017		2018
Balance as of beginning of period	$	742,054	$	1,006,288
Acquisition of Veridicus		1,647		—
Acquisition of SWH		260,139		—
Other acquisitions and measurement period adjustments		2,448		11,868
Balance as of end of period	$	1,006,288	$	1,018,156

Schedule of intangible assets

The following is a summary of intangible assets at December 31, 2017 and 2018, and the estimated useful lives for such assets (in thousands, except useful lives):

	December 31, 2017
					Weighted Avg		Gross				Net
	Original				Remaining		Carrying		Accumulated		Carrying
Asset	Useful Life				Useful Life		Amount		Amortization		Amount
Customer agreements and lists	2.5	to	18	years	5.3	years	$	441,346	$	(218,335)	$	223,011
Provider networks and other	1	to	16	years	3.0	years		25,410		(14,433)		10,977
Trade names and licenses	indefinite				indefinite			34,300		—		34,300
							$	501,056	$	(232,768)	$	268,288

	December 31, 2018
					Weighted Avg		Gross				Net
	Original				Remaining		Carrying		Accumulated		Carrying
Asset	Useful Life				Useful Life		Amount		Amortization		Amount
Customer agreements and lists	2.5	to	18	years	4.5	years	$	441,346	$	(262,729)	$	178,617
Provider networks and other	1	to	16	years	2.3	years		44,635		(21,789)		22,846
Trade names and licenses	indefinite				indefinite			30,420		—		30,420
							$	516,401	$	(284,518)	$	231,883

Schedule of changes in medical claims payable

The following table presents the components of the change in medical claims payable for the years ended December 31, 2016, 2017 and 2018 (in thousands):

	2016		2017		2018
Claims payable and IBNR, beginning of period	$	253,299	$	188,618	$	326,642
Cost of care:
Current year		1,892,914		2,421,270		3,772,112
Prior years(3)		(10,300)		(7,500)		(9,700)
Total cost of care		1,882,614		2,413,770		3,762,412
Claim payments and transfers to other medical liabilities(1):
Current year		1,733,310		2,210,346		3,402,010
Prior years		213,985		161,798		292,904
Total claim payments and transfers to other medical liabilities		1,947,295		2,372,144		3,694,914
Acquisition of SWH		—		96,398		—
Claims payable and IBNR, end of period		188,618		326,642		394,140
Withhold (receivables) payable, end of period(2)		(4,482)		983		(593)
Medical claims payable, end of period	$	184,136	$	327,625	$	393,547

(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.

Favorable development in 2016, 2017 and 2018 was $10.3 million, $7.5 million and $9.7 million, respectively, and was mainly related to lower medical trends and faster claims completion than originally assumed.