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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 September 30, 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.)

4801 E. Washington Street
Phoenix, Arizona
(Address of principal executive offices)

85034
(Zip code)

(800642-1716

(Registrant’s telephone number, including area code)

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

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 

The number of shares of Magellan Health Inc.’s common stock outstanding as of September 30, 2019 was 24,468,993.

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 September 30, 2019

2

Consolidated Statements of Comprehensive Income —For the Three and Nine Months Ended September 30, 2018 and 2019

3

Consolidated Statements Changes in Stockholders’ Equity—For the Three and Nine Months Ended September 30, 2018 and 2019

4

Consolidated Statements of Cash Flows—For the Nine Months Ended September 30, 2018 and 2019

5

Notes to Consolidated Financial Statements

6

Item 2:

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

30

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4:

Controls and Procedures

42

PART IIOther Information:

Item 1:

Legal Proceedings

42

Item 1A:

Risk Factors

43

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3:

Defaults Upon Senior Securities

43

Item 4:

Mine Safety Disclosures

43

Item 5:

Other Information

43

Item 6:

Exhibits

43

Exhibit Index

44

Signatures

45

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)

September 30, 

December 31, 

2019

2018

    

(Unaudited)

    

ASSETS

Current Assets:

Cash and cash equivalents ($160,967 and $171,047 restricted at December 31, 2018 and September 30, 2019, respectively)

$

272,308

$

376,703

Accounts receivable, net

 

756,059

 

812,741

Short-term investments ($363,840 and $322,515 restricted at December 31, 2018 and September 30, 2019, respectively)

 

382,582

 

336,057

Pharmaceutical inventory

 

40,818

 

48,373

Other current assets ($43,401 and $42,161 restricted at December 31, 2018 and September 30, 2019, respectively)

 

95,400

 

87,098

Total Current Assets

 

1,547,167

 

1,660,972

Property and equipment, net

 

150,748

 

141,506

Long-term investments ($2,854 and $6,484 restricted at December 31, 2018 and September 30, 2019, respectively)

 

3,161

 

7,606

Deferred income taxes

3,411

2,618

Other long-term assets

 

24,530

 

129,086

Goodwill

 

1,018,156

 

1,018,156

Other intangible assets, net

 

231,883

 

181,777

Total Assets

$

2,979,056

$

3,141,721

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

72,077

$

92,362

Accrued liabilities

 

231,356

 

307,210

Short-term contingent consideration

8,000

123

Medical claims payable

 

393,547

 

430,345

Other medical liabilities

 

169,639

 

144,838

Current debt, finance lease and deferred financing obligations

 

24,274

 

3,546

Total Current Liabilities

 

898,893

 

978,424

Long-term debt, finance lease and deferred financing obligations

 

728,608

 

695,164

Deferred income taxes

11,167

15,088

Tax contingencies

 

16,478

 

16,228

Long-term contingent consideration

2,124

Deferred credits and other long-term liabilities

 

36,483

 

74,345

Total Liabilities

 

1,693,753

 

1,779,249

Preferred stock, par value $.01 per share

Authorized—10,000 shares at December 31, 2018 and September 30, 2019-Issued and outstanding-none

 

 

Common stock, par value $.01 per share

Authorized—100,000 shares at December 31, 2018 and September 30, 2019-Issued and outstanding-53,536 and 23,935 shares at December 31, 2018, respectively, and 54,131 and 24,469 shares at September 30, 2019, respectively

 

535

 

541

Other Stockholders’ Equity:

Additional paid-in capital

 

1,326,645

 

1,371,718

Retained earnings

 

1,419,449

 

1,454,623

Accumulated other comprehensive (loss) income

 

(324)

 

317

Treasury stock, at cost, 29,601 and 29,662 shares at December 31, 2018 and September 30, 2019, respectively

 

(1,461,002)

 

(1,464,727)

Total Stockholders’ Equity

 

1,285,303

 

1,362,472

Total Liabilities and Stockholders’ Equity

$

2,979,056

$

3,141,721

See accompanying notes to consolidated financial statements.

2

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

    

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

2018

    

2019

    

2018

    

2019

    

Net revenue:

Managed care and other

$

1,235,787

$

1,303,936

$

3,670,890

$

3,811,058

PBM

 

617,719

 

525,005

 

1,798,616

 

1,545,708

Total net revenue

 

1,853,506

 

1,828,941

 

5,469,506

 

5,356,766

Costs and expenses:

Cost of care

 

938,031

 

1,013,006

 

2,802,506

 

2,956,853

Cost of goods sold

 

571,145

 

482,277

 

1,689,229

 

1,433,257

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

 

265,471

 

266,322

 

793,700

 

804,680

Depreciation and amortization

 

33,047

 

34,157

 

97,302

 

98,355

Interest expense

 

8,990

 

9,007

 

26,034

 

27,255

Interest and other income

 

(4,139)

 

(4,970)

 

(9,978)

 

(14,965)

Total costs and expenses

 

1,812,545

 

1,799,799

 

5,398,793

 

5,305,435

Income before income taxes

 

40,961

 

29,142

 

70,713

 

51,331

Provision for income taxes

 

13,816

 

7,868

 

18,565

 

16,013

Net income

 

27,145

 

21,274

$

52,148

$

35,318

Net income per common share:

Basic (See Note B)

$

1.11

$

0.87

$

2.13

$

1.46

Diluted (See Note B)

$

1.09

$

0.86

$

2.06

$

1.44

Other comprehensive income

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

 

194

 

(98)

 

7

 

641

Comprehensive income

$

27,339

$

21,176

$

52,155

$

35,959

(1)Includes stock compensation expense of $9,320 and $4,811 for the three months ended September 30, 2018 and 2019, respectively, and $27,405 and $19,832 for the nine months ended September 30, 2018 and 2019, respectively.
(2)Includes changes in fair value of contingent consideration of $148 and $4 for the three months ended September 30, 2018 and 2019, respectively, and $451 and $(2,001) for the nine months ended September 30, 2018 and 2019, respectively.
(3)Net of income tax provision (benefit) of $61 and $(31) for the three months ended September 30, 2018 and 2019, respectively, and $3 and $201 for the nine months ended September 30, 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

    

(Loss) Income

    

Equity

 

Balance at June 30, 2018

53,475

$

535

 

(28,920)

$

(1,412,785)

$

1,311,316

$

1,420,271

$

(567)

$

1,318,770

Stock compensation expense

 

 

 

 

9,320

 

 

 

9,320

Exercise of stock options

22

 

 

 

 

1,111

 

 

 

1,111

Issuance of equity

29

 

 

 

 

2,429

 

 

 

2,429

Repurchase of stock

 

 

(351)

 

(27,218)

 

 

 

 

(27,218)

Net income

 

 

 

 

 

27,145

 

 

27,145

Other comprehensive income—other

194

 

194

Balance at September 30, 2018

53,526

$

535

(29,271)

$

(1,440,003)

$

1,324,176

$

1,447,416

$

(373)

$

1,331,751

Balance at June 30, 2019

54,063

$

541

 

(29,662)

$

(1,464,727)

$

1,364,693

$

1,433,348

$

415

$

1,334,270

Stock compensation expense

 

 

 

 

4,811

 

 

 

4,811

Exercise of stock options

 

 

 

 

5

 

 

 

5

Issuance of equity

68

 

 

 

 

2,209

 

 

 

2,209

Repurchase of stock

 

 

 

 

 

 

 

Net income

 

 

 

 

 

21,274

 

 

21,274

Other comprehensive (loss)—other

1

(98)

(97)

Balance at September 30, 2019

54,131

$

541

 

(29,662)

$

(1,464,727)

$

1,371,718

$

1,454,623

$

317

$

1,362,472

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

 

 

 

 

 

27,405

 

 

 

27,405

Exercise of stock options

 

401

 

4

 

 

 

22,583

 

 

 

22,587

Issuance of equity

 

152

 

1

 

 

 

(623)

 

 

 

(622)

Repurchase of stock

 

 

 

(500)

 

(42,041)

 

 

 

 

(42,041)

Net income

 

 

 

 

 

 

52,148

 

 

52,148

Other comprehensive income—other

7

 

7

Adoption of ASC 606

 

 

 

 

 

 

(4,227)

 

 

(4,227)

Balance at September 30, 2018

53,526

$

535

(29,271)

$

(1,440,003)

$

1,324,176

$

1,447,416

$

(373)

$

1,331,751

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

 

 

 

 

 

19,832

 

 

 

19,832

Exercise of stock options

 

389

 

5

 

 

 

23,479

 

 

 

23,484

Issuance of equity

 

206

 

1

 

 

 

1,762

 

 

 

1,763

Repurchase of stock

 

 

 

(61)

 

(3,725)

 

 

 

 

(3,725)

Net income

 

 

 

 

 

 

35,318

 

 

35,318

Other comprehensive income—other

641

641

Adoption of ASC 842

(144)

(144)

Balance at September 30, 2019

 

54,131

$

541

 

(29,662)

$

(1,464,727)

$

1,371,718

$

1,454,623

$

317

$

1,362,472

See accompanying notes to consolidated financial statements.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands)

    

2018

    

2019

Cash flows from operating activities:

Net income

$

52,148

$

35,318

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

Depreciation and amortization

 

97,302

 

98,355

Non-cash interest expense

 

919

 

1,069

Non-cash stock compensation expense

 

27,405

 

19,832

Non-cash income tax provision

 

1,814

 

4,567

Non-cash amortization on investments

 

1,404

 

(509)

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

Accounts receivable, net

 

(160,904)

 

(54,261)

Pharmaceutical inventory

 

(3,090)

 

(7,555)

Other assets

 

(60,008)

 

(35,714)

Accounts payable and accrued liabilities

 

(13,781)

 

83,976

Medical claims payable and other medical liabilities

 

73,667

 

11,997

Contingent consideration

451

(3,754)

Tax contingencies

 

100

 

(251)

Deferred credits and other long-term liabilities

 

16,497

 

(9,566)

Other

 

93

 

919

Net cash provided by operating activities

 

34,017

 

144,423

Cash flows from investing activities:

Capital expenditures

 

(51,244)

 

(44,234)

Acquisitions and investments in businesses, net of cash acquired

 

(402)

 

(320)

Purchases of investments

 

(453,007)

 

(391,062)

Proceeds from maturities and sales of investments

 

400,683

 

434,493

Net cash used in investing activities

 

(103,970)

 

(1,123)

Cash flows from financing activities:

Payments to acquire treasury stock

 

(41,039)

 

(4,124)

Proceeds from exercise of stock options

 

22,587

 

20,653

Payments on debt, finance lease and deferred financing obligations

(75,043)

(50,950)

Payments on contingent consideration

(6,247)

Other

 

(1,020)

 

1,763

Net cash used in financing activities

 

(94,515)

 

(38,905)

Net (decrease) increase in cash and cash equivalents

 

(164,468)

 

104,395

Cash and cash equivalents at beginning of period

 

398,732

 

272,308

Cash and cash equivalents at end of period

$

234,264

$

376,703

Supplemental cash flow data:

Non-cash investing activities:

Assets acquired under finance leases and deferred financing

$

19,545

$

3,302

See accompanying notes to consolidated financial statements.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 and nine months ended September 30, 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

The Healthcare segment “Healthcare” consists of two reporting units – Behavioral & Specialty Health and Magellan Complete Care (“MCC”).

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.

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.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2019

(Unaudited)

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)

September 30, 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 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

$

51

$

3,462

Other long-term assets

24,530

59,820

84,350

Total Assets

2,979,056

59,871

3,038,927

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

(144)

1,419,305

Total Stockholders' Equity

1,285,303

(144)

1,285,159

Total Liabilities and Stockholders' Equity

2,979,056

59,871

3,038,927

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2019

(Unaudited)

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 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.

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.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2019

(Unaudited)

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 and nine months ended September 30, 2019 by major service line, type of customer and timing of revenue recognition (in thousands):

Three Months Ended September 30, 2019

Healthcare

    

Pharmacy Management

    

Elimination

    

Total

Major Service Lines

Behavioral & Specialty Health

Risk-based, non-EAP

$

383,386

$

$

(76)

$

383,310

EAP risk-based

80,076

80,076

ASO

57,535

9,475

(42)

66,968

Magellan Complete Care

Risk-based, non-EAP

697,321

697,321

ASO

15,768

15,768

PBM, including dispensing

495,759

(47,081)

448,678

Medicare Part D

76,327

76,327

PBA

35,768

35,768

Formulary management

23,976

23,976

Other

749

749

Total net revenue

$

1,234,086

$

642,054

$

(47,199)

$

1,828,941

Type of Customer

Government

$

940,971

$

215,197

$

$

1,156,168

Non-government

293,115

426,857

(47,199)

672,773

Total net revenue

$

1,234,086

$

642,054

$

(47,199)

$

1,828,941

Timing of Revenue Recognition

Transferred at a point in time

$

$

572,086

$

(47,081)

$

525,005

Transferred over time

1,234,086

69,968

(118)

1,303,936

Total net revenue

$

1,234,086

$

642,054

$

(47,199)

$

1,828,941

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2019

(Unaudited)