mgln_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                

 

Commission File No. 1‑6639

MAGELLAN HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

58‑1076937
(IRS Employer
Identification No.)

4800 N. Scottsdale Rd, Suite 4400
Scottsdale, Arizona
(Address of principal executive offices)

85251
(Zip code)

 

(602) 572‑6050

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

MGLN

The NASDAQ Global Market

 

The number of shares of Magellan Health Inc.’s common stock outstanding as of March 31, 2019 was 24,032,629.

 

 

 

 

 

 


 

Table of Contents

FORM 10‑Q

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page No.

 

PART IFinancial Information:

 

Item 1:

Financial Statements

2

 

Consolidated Balance Sheets—December 31, 2018 and March 31, 2019

2

 

Consolidated Statements of Comprehensive Income —For the Three Months Ended March 31, 2018 and 2019

3

 

Consolidated Statements Changes in Stockholders’ Equity—For the Three Months Ended March 31, 2018 and 2019

4

 

Consolidated Statements of Cash Flows—For the Three Months Ended March 31, 2018 and 2019

5

 

Notes to Consolidated Financial Statements

6

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4 

Controls and Procedures

39

 

PART IIOther Information:

 

Item 1:

Legal Proceedings

39

Item 1A:

Risk Factors

39

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3:

Defaults Upon Senior Securities

40

Item 4:

Mine Safety Disclosures

40

Item 5:

Other Information

40

Item 6:

Exhibits

40

Exhibit Index 

 

41

Signatures 

42

 

 

 

 

 

 

 

1


 

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

December 31, 

 

2019

 

 

 

2018

    

(Unaudited)

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents ($160,967 and $65,944 restricted at December 31, 2018 and March 31, 2019, respectively)

 

$

272,308

 

$

233,401

 

Accounts receivable, net

 

 

756,059

 

 

779,863

 

Short-term investments ($363,840 and $385,571 restricted at December 31, 2018 and March 31, 2019, respectively)

 

 

382,582

 

 

412,732

 

Pharmaceutical inventory

 

 

40,818

 

 

47,151

 

Other current assets ($43,401 and $45,006 restricted at December 31, 2018 and March 31, 2019, respectively)

 

 

95,400

 

 

99,908

 

Total Current Assets

 

 

1,547,167

 

 

1,573,055

 

Property and equipment, net

 

 

150,748

 

 

149,520

 

Long-term investments ($2,854 and $17,331 restricted at December 31, 2018 and March 31, 2019, respectively)

 

 

3,161

 

 

17,639

 

Deferred income taxes

 

 

3,411

 

 

3,581

 

Other long-term assets

 

 

24,530

 

 

90,997

 

Goodwill

 

 

1,018,156

 

 

1,018,156

 

Other intangible assets, net

 

 

231,883

 

 

218,209

 

Total Assets

 

$

2,979,056

 

$

3,071,157

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

72,077

 

$

75,041

 

Accrued liabilities

 

 

231,356

 

 

260,954

 

Short-term contingent consideration

 

 

8,000

 

 

 —

 

Medical claims payable

 

 

393,547

 

 

399,055

 

Other medical liabilities

 

 

169,639

 

 

183,802

 

Current debt, finance lease and deferred financing obligations

 

 

24,274

 

 

25,006

 

Total Current Liabilities

 

 

898,893

 

 

943,858

 

Long-term debt, finance lease and deferred financing obligations

 

 

728,608

 

 

722,925

 

Deferred income taxes

 

 

11,167

 

 

11,105

 

Tax contingencies

 

 

16,478

 

 

16,589

 

Long-term contingent consideration

 

 

2,124

 

 

2,268

 

Deferred credits and other long-term liabilities

 

 

36,483

 

 

81,022

 

Total Liabilities

 

 

1,693,753

 

 

1,777,767

 

Preferred stock, par value $.01 per share

 

 

 

 

 

 

 

Authorized—10,000 shares at December 31, 2018 and March 31, 2019-Issued and outstanding-none

 

 

 —

 

 

 —

 

Common stock, par value $.01 per share

 

 

 

 

 

 

 

Authorized—100,000 shares at December 31, 2018 and March 31, 2019-Issued and outstanding-53,536 and 23,935 shares at December 31, 2018, respectively, and 53,695 and 24,033 shares at March 31, 2019, respectively

 

 

535

 

 

537

 

Other Stockholders’ Equity:

 

 

 

 

 

 

 

Additional paid-in capital

 

 

1,326,645

 

 

1,337,849

 

Retained earnings

 

 

1,419,449

 

 

1,419,735

 

Accumulated other comprehensive loss

 

 

(324)

 

 

(4)

 

Treasury stock, at cost, 29,601 and 29,662 shares at December 31, 2018 and March 31, 2019, respectively

 

 

(1,461,002)

 

 

(1,464,727)

 

Total Stockholders’ Equity

 

 

1,285,303

 

 

1,293,390

 

Total Liabilities and Stockholders’ Equity

 

$

2,979,056

 

$

3,071,157

 

 

See accompanying notes to consolidated financial statements.

 

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

 

March 31, 

 

 

 

 

2018

    

2019

    

 

Net revenue:

 

 

 

 

 

 

 

 

Managed care and other

 

$

1,219,763

 

$

1,223,979

 

 

PBM

 

 

585,314

 

 

515,510

 

 

Total net revenue

 

 

1,805,077

 

 

1,739,489

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of care

 

 

928,661

 

 

941,961

 

 

Cost of goods sold

 

 

559,665

 

 

489,793

 

 

Direct service costs and other operating expenses (1)(2)

 

 

269,077

 

 

271,924

 

 

Depreciation and amortization

 

 

30,407

 

 

30,708

 

 

Interest expense

 

 

8,366

 

 

9,107

 

 

Interest and other income

 

 

(2,476)

 

 

(4,974)

 

 

Total costs and expenses

 

 

1,793,700

 

 

1,738,519

 

 

Income before income taxes

 

 

11,377

 

 

970

 

 

(Benefit) provision for income taxes

 

 

(75)

 

 

539

 

 

Net income

 

$

11,452

 

$

431

 

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic (See Note B)

 

$

0.47

 

$

0.02

 

 

Diluted (See Note B)

 

$

0.45

 

$

0.02

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available-for-sale securities(3)

 

 

(319)

 

 

320

 

 

Comprehensive income

 

$

11,133

 

$

751

 

 


(1)

Includes stock compensation expense of $7,646 and $9,607 for the three months ended March 31, 2018 and 2019, respectively.

(2)

Includes changes in fair value of contingent consideration of $233 and $144 for the three months ended March 31, 2018 and 2019, respectively.

(3)

Net of income tax (benefit) expense of $(101) and $100 for the three months ended March 31, 2018 and 2019, respectively.

See accompanying notes to consolidated financial statements.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                  

 

 

 

 

Accumulated

 

                   

 

 

 

                               

 

Common Stock

 

Additional

 

 

 

Other

 

Total

 

 

 

 Common Stock

 

 

In Treasury

 

Paid in

 

Retained

 

  Comprehensive  

 

Stockholders’

 

 

    

Shares

    

 Amount 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income

    

Equity

 

Balance at December 31, 2017

 

52,973

 

$

530

 

 

(28,771)

 

$

(1,397,962)

 

$

1,274,811

 

$

1,399,495

 

$

(380)

 

$

1,276,494

 

Stock compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,646

 

 

 —

 

 

 —

 

 

7,646

 

Exercise of stock options

 

300

 

 

 3

 

 

 —

 

 

 —

 

 

17,131

 

 

 —

 

 

 —

 

 

17,134

 

Issuance of equity

 

125

 

 

 1

 

 

 —

 

 

 —

 

 

(3,052)

 

 

 —

 

 

 —

 

 

(3,051)

 

Repurchase of stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

11,452

 

 

 —

 

 

11,452

 

Other comprehensive (loss)—other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(319)

 

 

(319)

 

Adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,227)

 

 

 —

 

 

(4,227)

 

Balance at March 31, 2018

 

53,398

 

$

534

 

 

(28,771)

 

$

(1,397,962)

 

$

1,296,536

 

$

1,406,720

 

$

(699)

 

$

1,305,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

53,536

 

$

535

 

 

(29,601)

 

$

(1,461,002)

 

$

1,326,645

 

$

1,419,449

 

$

(324)

 

$

1,285,303

 

Stock compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,607

 

 

 —

 

 

 —

 

 

9,607

 

Exercise of stock options

 

41

 

 

 1

 

 

 —

 

 

 —

 

 

2,044

 

 

 —

 

 

 —

 

 

2,045

 

Issuance of equity

 

118

 

 

 1

 

 

 —

 

 

 —

 

 

(447)

 

 

 —

 

 

 —

 

 

(446)

 

Repurchase of stock

 

 —

 

 

 —

 

 

(61)

 

 

(3,725)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,725)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

431

 

 

 —

 

 

431

 

Other comprehensive income—other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

320

 

 

320

 

Adoption of ASC 842

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(145)

 

 

 —

 

 

(145)

 

Balance at March 31, 2019

 

53,695

 

$

537

 

 

(29,662)

 

$

(1,464,727)

 

$

1,337,849

 

$

1,419,735

 

$

(4)

 

$

1,293,390

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

    

2018

    

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

11,452

 

$

431

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30,407

 

 

30,708

 

Non-cash interest expense

 

 

307

 

 

326

 

Non-cash stock compensation expense

 

 

7,646

 

 

9,607

 

Non-cash income tax provision (benefit)

 

 

62

 

 

(250)

 

Non-cash amortization on investments

 

 

809

 

 

(192)

 

Changes in assets and liabilities, net of effects from acquisitions of businesses:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(87,178)

 

 

(23,804)

 

Pharmaceutical inventory

 

 

3,067

 

 

(6,333)

 

Other assets

 

 

(37,914)

 

 

(10,835)

 

Accounts payable and accrued liabilities

 

 

26,529

 

 

20,399

 

Medical claims payable and other medical liabilities

 

 

107,569

 

 

19,671

 

Contingent consideration

 

 

233

 

 

(1,609)

 

Tax contingencies

 

 

448

 

 

83

 

Deferred credits and other long-term liabilities

 

 

17,685

 

 

(2,889)

 

Other

 

 

(90)

 

 

111

 

Net cash provided by operating activities

 

 

81,032

 

 

35,424

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(19,502)

 

 

(12,642)

 

Acquisitions and investments in businesses, net of cash acquired

 

 

 —

 

 

(320)

 

Purchases of investments

 

 

(142,886)

 

 

(172,766)

 

Proceeds from maturities and sales of investments

 

 

118,999

 

 

128,748

 

Net cash used in investing activities

 

 

(43,389)

 

 

(56,980)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments to acquire treasury stock

 

 

 —

 

 

(4,124)

 

Proceeds from exercise of stock options

 

 

16,897

 

 

2,045

 

Payments on debt, finance lease and deferred financing obligations

 

 

(55,895)

 

 

(7,323)

 

Payments on contingent consideration

 

 

 —

 

 

(6,247)

 

Other

 

 

(3,051)

 

 

(1,702)

 

Net cash used in financing activities

 

 

(42,049)

 

 

(17,351)

 

Net decrease in cash and cash equivalents

 

 

(4,406)

 

 

(38,907)

 

Cash and cash equivalents at beginning of period

 

 

398,732

 

 

272,308

 

Cash and cash equivalents at end of period

 

$

394,326

 

$

233,401

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

Assets acquired under finance leases and deferred financing

 

$

51

 

$

3,302

 

 

See accompanying notes to consolidated financial statements.

 

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

 

NOTE A—General

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019.

Business Overview

The Company is a leader within the healthcare management business, and is focused on delivering innovative specialty solutions for the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits, and other specialty carve-out areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers we serve. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and third party administrators (“TPAs”). Magellan operates three segments: Healthcare, Pharmacy Management and Corporate.

Healthcare

During the third quarter of 2018, the Company re-evaluated how it was managing the Healthcare business segment and decided a reorganization was necessary to effectively manage the business going forward. As a result of this business reorganization, the Company concluded that changes to Healthcare’s reporting units were warranted. Healthcare now consists of two reporting units – Behavioral & Specialty Health and Magellan Complete Care (“MCC”). Effective August 1, 2018, the Company evaluated the impact of the reorganization on its previously identified reporting units. The Company allocated goodwill to the new reporting units using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and immediately after the reallocation and determined that no impairment existed.

The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care organizations (“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for behavioral health, employee assistance plans (“EAP”) and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies.

The MCC reporting unit contracts with state Medicaid agencies and the Centers for Medicare and Medicaid Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a wide range of services from total medical cost to carve out long-term support services. MCC largely focuses on managing care for special populations including individuals with serious mental illness (“SMI”), dual eligibles, aged, blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

Magellan’s coordination and management of these healthcare and long-term support services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non‑medical counseling under certain government contracts.

The Company provides its Healthcare management services primarily through: (i) risk‑based products, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed PMPM fee, or  (ii) administrative services only (“ASO”) products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in some instances, a gain share.

Pharmacy Management

The Pharmacy Management segment (“Pharmacy Management”) is comprised of products and solutions that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s services include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other government sponsored programs; (iii)  clinical and formulary management programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.

These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to health plans, employers, third party administrators, managed care organizations, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy products to its existing customers and market its pharmacy solutions to the Healthcare customer base.

Pharmacy Management contracts with its customers for services using risk‑based, gain share or ASO arrangements. In addition, Pharmacy Management provides services to the Healthcare segment for its MCC business.

Corporate

This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

 

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. The FASB also issued various ASUs which subsequently amended ASU 2016-02. These amendments and ASU 2016-02, collectively known as Accounting Standard Codification 842 (“ASC 842”), are effective for annual and interim reporting periods of public entities beginning after December 15, 2018. The Company adopted ASC 842 on a modified retrospective basis on January 1, 2019. The Company applied the transition method which does not require adjustments to comparative periods nor requires modified disclosures in those comparative periods. In addition, the Company elected the package of practical expedients, the practical expedient which permits combining lease and non-lease components (which was applicable to our real estate leases) and the short-term lease practical expedient. The Company implemented new leasing software capable of producing the data to prepare the required accounting and disclosures prescribed by ASC 842. Adoption of ASC 842 resulted in the recognition of right-of-use (“ROU”) assets and lease liabilities of $59.8 million and $67.9 million, respectively as of January 1, 2019. The difference between the right-of-use asset and lease liability was recorded as an adjustment to retained earnings. The adoption of ASC 842 did not have a material impact on the Company’s consolidated results of operations or cash flows.

The cumulative effect of the change to our consolidated January 1, 2019 balance sheet for the adoption of ASC 842 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

    

Adjustments Due to ASC 842

    

Balance at January 1, 2019

Assets

 

 

 

 

 

 

 

 

Deferred income taxes

$

3,411

 

$

52

 

$

3,463

Other long-term assets

 

24,530

 

 

59,820

 

 

84,350

Total Assets

 

2,979,056

 

 

59,872

 

 

3,038,928

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accrued liabilities

 

231,356

 

 

13,018

 

 

244,374

Total Current Liabilities

 

898,893

 

 

13,018

 

 

911,911

Deferred credits and other long-term liabilities

 

36,483

 

 

46,999

 

 

83,482

Total Liabilities

 

1,693,753

 

 

60,017

 

 

1,753,770

Retained earnings

 

1,419,449

 

 

(145)

 

 

1,419,304

Total Stockholders' Equity

 

1,285,303

 

 

(145)

 

 

1,285,158

Total Liabilities and Stockholders' Equity

 

2,979,056

 

 

59,872

 

 

3,038,928

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

The impact of the adoption of ASC 842 on our consolidated balance sheet as of March 31, 2019 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

As Reported

    

Adjustments

    

Balance Without ASC 842 Adoption

 

Assets

 

 

 

 

 

 

 

 

 

Other long-term assets

$

90,997

 

$

(56,008)

 

$

34,989

 

Total Assets

 

3,071,157

 

 

(56,008)

 

 

3,015,149

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

260,954

 

 

(12,555)

 

 

248,399

 

Total Current Liabilities

 

943,858

 

 

(12,555)

 

 

931,303

 

Deferred credits and other long-term liabilities

 

81,022

 

 

(43,613)

 

 

37,409

 

Total Liabilities

 

1,777,767

 

 

(56,168)

 

 

1,721,599

 

Retained earnings

 

1,419,735

 

 

160

 

 

1,419,895

 

Total Stockholders' Equity

 

1,293,390

 

 

160

 

 

1,293,550

 

Total Liabilities and Stockholders' Equity

 

3,071,157

 

 

(56,008)

 

 

3,015,149

 

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This ASU amends the accounting on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 31, 2018. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operation, financial position and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this ASU eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, 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.

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s federal income tax rate from 35% to 21%. ASU 2018-02 changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2018. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company adopted ASU 2018-02 on January 1, 2019, which had no impact on the Company.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, 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.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

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 can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under ASC 606 which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.

Revenue Recognition

Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three months ended March 31, 2019 by major service line, type of customer and timing of revenue recognition (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Healthcare

    

Pharmacy Management

    

Elimination

    

Total

Major Service Lines

 

 

 

 

 

 

 

 

 

 

 

Behavioral & Specialty Health

 

 

 

 

 

 

 

 

 

 

 

Risk-based, non-EAP

$

361,808

 

$

 —

 

$

(78)

 

$

361,730

EAP risk-based

 

89,617

 

 

 —

 

 

 —

 

 

89,617

ASO

 

55,203

 

 

8,143

 

 

(91)

 

 

63,255

Magellan Complete Care

 

 

 

 

 

 

 

 

 

 

 

Risk-based, non-EAP

 

642,571

 

 

 —

 

 

 —

 

 

642,571

ASO

 

15,054

 

 

 —

 

 

 —

 

 

15,054

PBM, including dispensing

 

 —

 

 

493,224

 

 

(41,055)

 

 

452,169

Medicare Part D

 

 —

 

 

63,341

 

 

 —

 

 

63,341

PBA

 

 —

 

 

33,977

 

 

 —

 

 

33,977

Formulary management

 

 —

 

 

17,183

 

 

 —

 

 

17,183

Other

 

 —

 

 

592

 

 

 —

 

 

592

Total net revenue

$

1,164,253

 

$

616,460

 

$

(41,224)

 

$

1,739,489

 

 

 

 

 

 

 

 

 

 

 

 

Type of Customer

 

 

 

 

 

 

 

 

 

 

 

Government

$

888,492

 

$

203,271

 

$

 —

 

$

1,091,763

Non-government

 

275,761

 

 

413,189

 

 

(41,224)

 

 

647,726

Total net revenue

$

1,164,253

 

$

616,460

 

$

(41,224)

 

$

1,739,489

 

 

 

 

 

 

 

 

 

 

 

 

Timing of Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

Transferred at a point in time

$

 —

 

$

556,565

 

$

(41,055)

 

$

515,510

Transferred over time

 

1,164,253

 

 

59,895

 

 

(169)

 

 

1,223,979

Total net revenue

$

1,164,253

 

$

616,460

 

$

(41,224)

 

$

1,739,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Member Per Month (“PMPM”) Revenue.  Almost all of the Healthcare revenue and a small portion of the Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of behavioral healthcare, specialty healthcare, pharmacy management, or fully integrated healthcare services. PMPM contracts generally have a term of one year or longer, with the exception of government contracts where the customer can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is entirely variable as it

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include adjustments for things such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using an expected value methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service. The remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership as a measure of progress.

Under certain government contracts, our risk scores are compared with the overall average risk scores for the relevant state and market pool. Generally, if our risk score is below the average risk score we are required to make a risk adjustment payment into the risk pool, and if our risk score is above the average risk score we will receive a risk adjustment payment from the risk pool. Risk adjustments can have a positive or negative retroactive impact to rates.

Pharmacy Benefit Management Revenue.  The Company’s customers for PBM business, including pharmaceutical dispensing operations, are generally comprised of MCOs, employer groups and health plans. PBM relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The acceptance of each individual claim creates enforceable rights and obligations for each party and represents a separate contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co‑payments and any associated administrative fees, when claims are adjudicated or the drugs are shipped. 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, controls the underlying service, 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. For dispensing, 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.

Medicare Part D.  The Company is contracted with CMS as a Prescription Drug Plan (“PDP”) to provide prescription drug benefits to Medicare beneficiaries. The accounting for Medicare Part D revenue is primarily the same as that for PBM, as previously discussed. However, there is certain variable consideration present only in Medicare Part D arrangements. The Company estimates the annual amount of variable consideration using a most likely amount methodology, which is allocated to each reporting period based upon actual utilization as a percentage of estimated utilization for the year. Amounts estimated throughout the year for interim reporting are substantially resolved and fixed as of December 31st, the end of the plan year.

Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and other government sponsored programs. PBA contracts are generally multi-year arrangements but include language regarding early termination for convenience without material penalty provisions that results in enforceable rights and obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the claims processing activities, and has concluded that a time-based measure is appropriate for recognizing PBA revenue. For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

benefit of the material right, which generally ranges from 2 to 10 years.

Formulary Management Revenue.  The Company administers formulary management programs 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. Formulary management contracts generally have a term of one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each quarter, therefore, the transaction price itself is variable. The Company uses the expected value methodology to estimate the total rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate revenue any rebates that are passed through to its clients.

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.

Government EAP Risk-Based Revenue.  The Company has certain contracts with federal customers for the provision of various managed care services, which are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a cost reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with the value to the customer of the Company’s performance completed to date, therefore, the Company is utilizing the “right to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.

The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or services purchased by the customer, such as the operation of a counseling services group or call center. The performance obligation represents a series for the duration of the arrangement. The reimbursement rate is fixed per the contract; however, the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it relates has been provided (i.e. as the Company provides hours, counselors or units of service).

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the Company’s PBM and Part D business, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. For the Company’s contracts that pertain to these exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily includes net PMPM fees associated with unspecified membership that fluctuates throughout the contract.

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March 31, 2019

(Unaudited)

 

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

    

March 31, 

    

 

    

 

 

 

2018

 

2019

 

$ Change

 

% Change

 

Accounts receivable

$

786,395

 

$

797,938

 

$

11,543

 

 

1.5%

 

Contract assets

 

4,647

 

 

8,055

 

 

3,408

 

 

73.3%

 

Contract liabilities - current

 

16,853

 

 

8,071

 

 

(8,782)

 

 

(52.1%)

 

Contract liabilities - long-term

 

13,441

 

 

12,963

 

 

(478)

 

 

(3.6%)

 

 

Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by $11.5 million, mainly due to timing. Contract assets, which are included in other current assets on the consolidated balance sheets, increased by $3.4 million, mainly due to the timing of accrual of certain performance incentives. Contract liabilities – current, which are included in accrued liabilities on the consolidated balance sheets, decreased by $8.8 million, mainly due to the timing of receipts related to January 2019 revenues. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, decreased by $0.5 million, mainly due to certain balances which became current.

During the three months ended March 31, 2019, the Company recognized revenue of $12.2 million that was included in current contract liabilities at December 31, 2018. The estimated timing of recognition of amounts included in contract liabilities at March 31, 2019 are as follows: 2019—$7.1 million; 2020—$3.5 million; 2021—$3.0 million; 2022 and beyond—$7.4 million. During the three months ended March 31, 2019, the revenue the Company recognized related to performance obligations that were satisfied, or partially satisfied, in previous periods was not material.

The Company’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service, or within a few months thereafter. The timing of payments from customers from time to time generate contract assets or contract liabilities; however, these amounts are immaterial.

Significant Customers

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

The Company has contracts with the Commonwealth of Virginia (the “Virginia Contracts”). The Company began providing Medicaid managed long-term services and supports to enrollees in the Commonwealth Coordinated Care Plus (“CCC Plus”) program on August 1, 2017. The CCC Plus contract expires annually on December 31, and automatically renews annually on January 1 for a period of five calendar years, with potential of up to five 12-month extensions. The Commonwealth of Virginia has the right to terminate the CCC Plus contract with cause at any time and for convenience upon 90 days’ notice. On August 1, 2018, the Company began providing integrated healthcare services to Medicaid enrollees in the Commonwealth of Virginia under the Medallion 4.0/FAMIS Managed Care Program (“Medallion”). The initial term of the Medallion contract is from August 1, 2018 through June 30, 2019, with six 12- month renewal options. The Commonwealth of Virginia has the right to terminate the Medallion contract with cause at any time and for convenience upon 180 days’ notice. The Virginia Contracts generated net revenues of $117.3 million and $193.9 million for the three months ended March 31, 2018 and 2019, respectively.

The Company had a contract with the State of New York (the “New York Contract”) to provide integrated managed care services to Medicaid and Medicare enrollees in the State of New York. The Company’s New York Contract terminated on December 31, 2016; however, the Company, along with other participating managed care plans in the state, continues to provide services while a new contract is being finalized. The Company began recognizing revenue in relation to the New York Contract on January 1, 2014 as a result of the acquisition of AlphaCare Holdings, Inc. The Company’s revenues under the New York Contracts increased starting on November 1, 2017 as a result of the

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acquisition of SWH Holdings, Inc. The New York Contracts generated net revenues of $180.5 million and $195.2 million for the three months ended March 31, 2018 and 2019, respectively.

The Company has contracts with the Commonwealth of Massachusetts (the “Massachusetts Contracts”) to provide integrated managed care services to Medicaid and Medicare enrollees in the Commonwealth of Massachusetts. Medicaid services are provided under a Senior Care Options contract (“SCO Contract”) which began on January 1, 2016 and extends through December 31, 2020, with the potential for up to five additional one year extensions. The Commonwealth of Massachusetts may terminate the contract with cause without prior notice and upon 180 days’ notice without cause. Medicare services are provided under a one-year contract with the Center for Medicare and Medicaid Services (“CMS”). The CMS contract currently extends through December 31, 2019. The Company began recognizing revenue in relation to the Massachusetts Contracts on November 1, 2017 as a result of the acquisition of SWH Holdings, Inc. The Massachusetts Contracts generated net revenues of $163.7 million and $179.2 million for the three months ended March 31, 2018 and 2019, respectively.

Customers exceeding ten percent of segment net revenues

In addition to the Massachusetts Contract, New York Contract and Virginia Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2018 and 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

Segment

    

Term Date

    

2018

    

2019

 

Healthcare

 

 

 

 

 

 

 

 

 

Customer A

 

December 31, 2023

 

$

152,386

 

$

62,929

 

 

 

 

 

 

 

 

 

 

 

Pharmacy Management

 

 

 

 

 

 

 

 

 

Customer B

 

March 31, 2021

 

 

91,442

 

 

89,340

 

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, with members under its contract with CMS and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled $136.9 million and $131.7 million for the three months ended March 31, 2018 and 2019, respectively. Net revenues from members in relation to its contracts with CMS in aggregate totaled $98.4 million and $63.3 million for the three months ended March 31, 2018 and 2019, respectively. As of December 31, 2018 and March 31, 2019, the Company had $131.0 million and $128.4 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $84.6 million and $79.5 million for the three months ended March 31, 2018 and 2019, respectively.

The Company’s contracts with customers typically have stated 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 30 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.

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Leases

The Company leases certain office space, distribution centers, land and equipment. We assess our contracts to determine if it contains a lease. This assessment is based on (i) the right to control the use of an identified asset; (ii) the right to obtain substantially all of the economic benefits from the use of the identified asset; and (iii) the right to use the identified asset. The Company elected the short-term lease practical expedient; thus, leases with an initial term of twelve months or less are not capitalized and the expense is recognized on a straight-line basis. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of renewal options are at the sole discretion of the Company. Renewal options that the Company is reasonably certain to accept are recognized as part of the ROU asset.

Operating leases are included in other long-term assets, accrued liabilities and deferred credits and other long-term liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current debt, capital lease deferred financing obligations and long-term debt, capital lease and deferred financing obligations in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments per the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the rate implicit in most of our leases is not readily determinable, the Company used its incremental borrowing rate to determine the present value of lease payments.

The following table shows the components of lease expenses for the three months ended March 31, 2019 (in thousands):

 

 

 

 

 

Three months ended March 31, 2019

    

Operating lease cost

$

4,725

 

Finance lease cost:

 

 

 

Amortization of right-of-use asset

 

940

 

Interest on lease liabilities

 

216

 

Total finance lease cost

 

1,156

 

Short-term lease cost

 

318

 

Variable lease cost

 

874

 

Total lease cost

 

7,073

 

Sublease income

 

(98)

 

Net lease cost

$

6,975

 

 

 

 

 

15


 

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2019

(Unaudited)

 

The following table shows the components of the lease assets and liabilities as of March 31, 2019 (in thousands):

 

 

 

 

March 31, 2019

Operating leases:

 

 

Other long-term assets

$

56,008

 

 

 

Accrued liabilities

$

14,200

Deferred credits and other long-term liabilities

 

50,015

Total operating lease liabilities

$

64,215

 

 

 

Finance leases:

 

 

Property and equipment, net

$

15,611

 

 

 

Current debt, finance lease and deferred financing obligations

$

4,192

Long-term debt, finance lease and deferred financing obligations

 

16,936

Total finance lease liabilities

$

21,128

 

 

 

The maturity dates of the Company’s leases as of March 31, 2019 are summarized below (in thousands):

 

 

 

 

March 31, 2019

2019

$

14,648

2020

 

16,885

2021

 

16,248

2022

 

15,217

2023

 

11,228

2024 and beyond

 

13,672

Total lease payments

 

87,898

Less interest

 

(2,555)

Present value of lease liabilities

$

85,343