Significant Accounting Policies (Policy)

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased. We had checks outstanding, net of deposits, of $26,000 as of March 31, 2013 and $23.8 million as of December 31, 2012. Checks outstanding, net of deposits are classified as accounts payable and other liabilities in the consolidated balance sheets and the changes are reflected in the line item net increase (decrease) in checks outstanding, net of deposits within the cash flows from financing activities in the consolidated statements of cash flows.

Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. We analyze all debt investments that have unrealized losses for impairment consideration and assess the intent to sell such securities. If such intent exists, impaired securities are considered other-than-temporarily impaired. Management also assesses if we may be required to sell the debt investments prior to the recovery of amortized cost, which may also trigger an impairment charge. If securities are considered other-than-temporarily impaired based on intent or ability, we assess whether the amortized costs of the securities can be recovered. If management anticipates recovering an amount less than the amortized cost of the securities, an impairment charge is calculated based on the expected discounted cash flows of the securities. Any deficit between the amortized cost and the expected cash flows is recorded through earnings as a charge. All other temporary impairment changes are recorded through other comprehensive income. During the three months ended March 31, 2013 and 2012, respectively, no losses were recognized from other-than-temporary impairments.

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available-for-sale, premiums and other receivables, notes receivable and notes payable have been determined by using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of premiums and other receivables, long-term notes receivable and nonmarketable securities approximates the fair value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair value of our fixed-rate borrowings was $429.0 million and $424.0 million as of March 31, 2013 and December 31, 2012, respectively. For both periods ending March 31, 2013 and December 31, 2012, the fair value of our variable-rate borrowings under our revolving credit facility was $100.0 million. The fair value of our fixed-rate borrowings was determined using the quoted market price, which is a Level 1 input in the fair value hierarchy. The fair value of our variable-rate borrowings was estimated to equal the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. Since the pricing inputs are other than quoted prices and fair value is determined using an income approach, our variable-rate borrowings are classified as a Level 2 in the fair value hierarchy. See Notes 7 and 8 for additional information regarding our financing arrangements and fair value measurements, respectively.

Health Plan Services Health Care Cost

The cost of health care services is recognized in the period in which services are provided and includes an estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals and outpatient care facilities, and the costs associated with managing the extent of such care.

Our health care cost can also include from time to time remediation of certain claims as a result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for health care service costs incurred but not yet reported ("IBNR") in accordance with GAAP and using standard actuarial developmental methodologies based upon historical data including the period between the date services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation, seasonality patterns and changes in membership, among other things.

Our IBNR best estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. This provision for adverse deviation is intended to capture the potential adverse development from known environmental factors such as our entry into new geographical markets, changes in our geographic or product mix, the introduction of new customer populations such as our Seniors and Persons with Disabilities population in California, variation in benefit utilization, disease outbreaks, changes in provider reimbursement, fluctuations in medical cost trend, variation in claim submission patterns and variation in claims processing speed and payment patterns, changes in technology that provide faster access to claims data or change the speed of adjudication and settlement of claims, variability in claim inventory levels, non-standard claim development, and/or exceptional situations that require judgmental adjustments in setting the reserves for claims.

We consistently apply our IBNR estimation methodology from period to period. Our IBNR best estimate is made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. As additional information becomes known to us, we adjust our assumptions accordingly to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete claims information in the following period, then our prior period estimates will be revised downward, resulting in favorable development. However, any favorable prior period reserve development would increase current period net income only to the extent that the current period provision for adverse deviation is less than the benefit recognized from the prior period favorable development. If moderately adverse conditions occur and are more acute than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income. For the three months ended March 31, 2013, there were no material reserve developments related to prior years. For the quarter ended March 31, 2012, health care cost was impacted by approximately $25 million attributable to the revision of the previous estimate of incurred claims for prior years as a result of adverse prior year development. We believe this unfavorable reserve development for the three months ended March 31, 2012 was primarily due to significant delays in claims submissions for the fourth quarter of 2011 arising from issues related to a new billing format required by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") coupled with an unanticipated flattening of commercial trends.

The majority of the IBNR reserve balance held at each quarter-end is associated with the most recent months' incurred services because these are the services for which the fewest claims have been paid. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months' incurred services. Revised estimates for prior periods are determined in each quarter based on the most recent updates of paid claims for prior periods. Estimates for service costs incurred but not yet reported are subject to the impact of changes in the regulatory environment, economic conditions, changes in claims trends, and numerous other factors. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts estimated.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. The federal government is the primary customer of our Government Contracts reportable segment with fees and premiums associated with this customer accounting for 95% of our Government Contracts revenue. In addition, the federal government is a significant customer of our Western Region Operations reportable segment as a result of our contract with Centers for Medicare & Medicaid Services ("CMS") for coverage of Medicare-eligible individuals. Furthermore, all of our Medicaid revenue is currently derived from our participation in the state Medicaid program in California ("Medi-Cal") through our relationship with the State of California Department of Health Care Services ("DHCS"). As a result, DHCS is a significant customer of our Western Region Operations reportable segment.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income (loss), net unrealized appreciation (depreciation) after tax on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan.

Our accumulated other comprehensive income (loss) for the three months ended March 31, 2013 and 2012 is as follows:



	Unrealized Gains (Losses) on investments available-for-sale			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (loss)
				(Dollars in millions)
Balance as of January 1, 2012	$	29.8		$	(13.2	)	$	16.6
Other comprehensive income before reclassifications	2.4			—			2.4
Amounts reclassified from accumulated other comprehensive income	(8.4		)	0.6			(7.8		)
Other comprehensive (loss) income for the three months ended March 31, 2012	(6.0		)	0.6			(5.4		)
Balance as of March 31, 2012	$	23.8		$	(12.6	)	$	11.2

Balance as of January 1, 2013	$	38.0		$	(11.0	)	$	27.0
Other comprehensive loss before reclassifications	(5.9		)	—			(5.9		)
Amounts reclassified from accumulated other comprehensive income	(11.2		)	0.4			(10.8		)
Other comprehensive (loss) income for the three months ended March 31, 2013	(17.1		)	0.4			(16.7		)
Balance as of March 31, 2013	$	20.9		$	(10.6	)	$	10.3

The following table shows reclassifications out of accumulated other comprehensive income and the affected line items in the consolidated statements of operations for the three months ended March 31, 2013 and 2012:



	Three months ended March 31,						Affected line item in the Consolidated Statements of Operations
	2013			2012
	(Dollars in millions)
Unrealized gains (losses) on investments available-for-sale	$	17.3		$	12.9		Net investment income
	17.3			12.9			Total before tax
	6.1			4.5			Tax expense (benefit)
	11.2			8.4			Net of tax
Amortization of defined benefit pension items:
Prior-service cost	—			—			(a)
Actuarial gains (losses)	(0.6		)	(1.0		)	(a)
	(0.6		)	(1.0		)	Total before tax
	(0.2		)	(0.4		)	Tax expense (benefit)
	(0.4		)	(0.6		)	Net of tax

Total reclassifications for the period	$	10.8		$	7.8		Net of tax

__________


(a)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that could occur if stock options were exercised and restricted stock units ("RSUs") and performance share units ("PSUs") were vested) outstanding during the periods presented.

The inclusion or exclusion of common stock equivalents arising from stock options, RSUs and PSUs in the computation of diluted earnings per share is determined using the treasury stock method. For the three months ended March 31, 2013, 981,000 shares of dilutive common stock equivalents were outstanding and were included in the computation of diluted earnings per share. For the three months ended March 31, 2012, 1,774,000 shares of common stock equivalents were excluded from the computation of loss per share due to their anti-dilutive effect.

For the three months ended March 31, 2013, an aggregate of 1,678,000 shares of common stock equivalents were considered anti-dilutive and were not included in the computation of diluted earnings per share. Stock options expire at various times through April 2019.

In May 2011, our Board of Directors authorized a stock repurchase program for the repurchase of up to $300 million of our outstanding common stock (our "stock repurchase program"). On March 8, 2012, our Board of Directors approved a $323.7 million increase to our stock repurchase program. As of December 31, 2012, the remaining authorization under our stock repurchase program was $350.0 million. The remaining authorization under our stock repurchase program as of March 31, 2013 was $280.0 million. See Note 6 for more information regarding our stock repurchase program

Goodwill and Other Intangible Assets

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2012 for our Western Region Operations reporting unit and also re-evaluated the useful lives of our other intangible assets. No goodwill impairment was identified. We also determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives.

The carrying amount of goodwill by reporting unit is as follows:



	Western Region Operations		Total
	(Dollars in millions)
Balance as of December 31, 2012	$	565.9	$	565.9
Balance as of March 31, 2013	$	565.9	$	565.9

Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market assumptions, the Company’s ability to adequately incorporate into its premium rates the future costs of premium-based assessments imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA"), and assumptions related to the achievement of certain administrative cost reductions and the profitable implementation of California's Coordinated Care Initiative, which includes the dual eligibles demonstration. Changes to any of these assumptions could cause the fair value of our Western Region Operations reporting unit to be below its carrying value. As of June 30, 2012, the ratio of the fair value of our Western Region Operations reporting unit to its carrying value was approximately 115%.

The intangible assets that continue to be subject to amortization using the straight-line method over their estimated lives are as follows:



	Gross Carrying Amount		Accumulated Amortization			Net Balance		Weighted Average Life (in years)
	(Dollars in millions)
As of March 31, 2013:
Provider networks	$	40.5	$	(34.9	)	$	5.6	19.4
Customer relationships and other	29.5		(18.7		)	10.8		11.1
	$	70.0	$	(53.6	)	$	16.4

As of December 31, 2012:
Provider networks	$	40.5	$	(34.6	)	$	5.9	19.4
Customer relationships and other	29.5		(18.1		)	11.4		11.1
	$	70.0	$	(52.7	)	$	17.3

Estimated annual pretax amortization expense for other intangible assets for each of the next five years ending December 31 is as follows (dollars in millions):



Year	Amount
2013	$	3.4
2014	2.8
2015	2.6
2016	2.0
2017	2.0

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds that may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of March 31, 2013 and December 31, 2012 the restricted cash and cash equivalents balances totaled $0.2 million and $0.8 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $26.5 million and $25.5 million as of March 31, 2013 and December 31, 2012, respectively, and are included in investments available-for-sale.

Medicaid/Medi-Cal Rate Adjustment and Medi-Cal Rate Reduction

Medicaid/Medi-Cal Rate Adjustment

Our revenue from the Medi-Cal program, including seniors and persons with disabilities ("SPD") programs, and other state-sponsored health programs are subject to certain retroactive rate adjustments based on expected and actual health care cost. We recognize such changes when the amounts become determinable and the collectability is reasonably assured. For the three months ended March 31, 2013, we recognized $42 million of premium revenues as a result of retroactive rate adjustments related to 2011 and 2012 for our SPD and non-SPD members. Such retroactive rate adjustments related to 2010 and 2011 for our SPD and non-SPD members were not material for the three months ended March 31, 2012.

Medi-Cal Rate Reduction

In October 2011, CMS approved certain elements of California's 2011-2012 budget proposals to reduce Medi-Cal provider reimbursement rates as authorized by California Assembly Bill 97 ("AB 97"). The elements approved by CMS include a 10 percent reduction in a number of provider reimbursement rates. DHCS preliminarily indicated that the Medi-Cal managed care rate reductions could be effective retroactive to July 1, 2011. However, a series of legal challenges has enjoined the implementation of AB 97 and no such reductions have been made through March 31, 2013. The reimbursement rate reductions authorized by AB 97 have again been reflected in the California 2013-2014 budget proposal announced in January 2013. While the implementation of AB 97 remains subject to appeal in the Ninth U.S. Circuit Court of Appeals, and the budget proposal is subject to change prior to its approval by the California legislature, if the reductions are implemented as currently proposed, they would be applied as of April 1, 2013 on a prospective basis. However, the impact of such cuts could be limited since they would need to be reconciled with minimum payment rates for primary care physicians dictated by the ACA for 2013 and 2014. Due to the uncertainty regarding the final implementation of AB 97, we cannot reasonably estimate the range of reductions in premiums and/or related health care cost recoveries, if any, that may result in connection with AB 97.

CMS Risk Factor Adjustments

We have an arrangement with CMS that relates to certain of our Medicare products and pursuant to which periodic changes in our risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium revenues. We recognize such changes when the amounts become determinable and the collectability is reasonably assured. Because the recorded revenue is based on our best estimate at the time, the actual payment we receive from CMS for risk adjustment reimbursement settlements may be materially different than the amounts we have initially recognized on our financial statements. The change in our estimate for the risk adjustment revenue in each of the three months ended March 31, 2013 and 2012 was not significant.