SEC Filing | Magellan Health, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

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, 2020
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)

(800) 642-1716

(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, 2020 was 25,607,241.

Table of Contents

FORM 10-Q

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX


		Page No.
	PART I — Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, 2019 and September 30, 2020	2
	Consolidated Statements of Comprehensive Income —For the Three and Nine Months Ended September 30, 2019 and 2020	3
	Consolidated Statements of Changes in Stockholders’ Equity—For the Three and Nine Months Ended September 30, 2019 and 2020	4
	Consolidated Statements of Cash Flows—For the Nine Months Ended September 30, 2019 and 2020	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4:	Controls and Procedures	45
	PART II — Other Information:
Item 1:	Legal Proceedings	45
Item 1A:	Risk Factors	46
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3:	Defaults Upon Senior Securities	49
Item 4:	Mine Safety Disclosures	49
Item 5:	Other Information	49
Item 6:	Exhibits	49
Exhibit Index		50
Signatures		51

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)



	December 31,		September 30,
	2019		2020
ASSETS
Current Assets:
Cash and cash equivalents ($51,253 and $48,806 restricted at December 31, 2019 and September 30, 2020, respectively)	$	115,752	$	152,050
Accounts receivable, net		680,569		769,159
Short-term investments ($82,772 and $77,073 restricted at December 31, 2019 and September 30, 2020, respectively)		98,797		92,686
Pharmaceutical inventory		44,962		37,637
Other current assets ($36,215 and $49,380 restricted at December 31, 2019 and September 30, 2020, respectively)		69,687		95,666
Current portion of assets held for sale		663,276		1,144,032
Total Current Assets		1,673,043		2,291,230
Property and equipment, net		131,712		131,869
Long-term investments ($2,307 and $3,585 restricted at December 31, 2019 and September 30, 2020, respectively)		2,864		5,623
Deferred income taxes		1,840		25,823
Other long-term assets		58,905		67,692
Goodwill		806,421		806,421
Other intangible assets, net		81,675		52,362
Assets held for sale, less current portion		335,713		—
Total Assets	$	3,092,173	$	3,381,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	83,790	$	122,020
Accrued liabilities		191,854		235,152
Medical claims payable		128,114		119,922
Other medical liabilities		92,915		123,205
Current debt, finance lease and deferred financing obligations		3,491		4,308
Current portion of liabilities held for sale		409,983		496,272
Total Current Liabilities		910,147		1,100,879
Long-term debt, finance lease and deferred financing obligations		679,125		637,093
Deferred income taxes		1,971		—
Tax contingencies		9,453		11,724
Deferred credits and other long-term liabilities		56,393		52,172
Liabilities held for sale, less current portion		37,301		—
Total Liabilities		1,694,390		1,801,868
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2019 and September 30, 2020-Issued and outstanding-none		—		—
Common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2019 and September 30, 2020-Issued and outstanding-54,285 and 24,623 shares at December 31, 2019, respectively, and 55,269 and 25,607 shares at September 30, 2020, respectively		543		553
Other Stockholders’ Equity:
Additional paid-in capital		1,386,616		1,455,009
Retained earnings		1,475,207		1,588,196
Accumulated other comprehensive income		144		121
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2019 and September 30, 2020, respectively		(1,464,727)		(1,464,727)
Total Stockholders’ Equity		1,397,783		1,579,152
Total Liabilities and Stockholders’ Equity	$	3,092,173	$	3,381,020

See accompanying notes to consolidated financial statements.

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,
	2019		2020		2019		2020
Net revenue:
Managed care and other	$	591,229	$	568,688	$	1,766,391	$	1,670,567
PBM		567,314		601,429		1,665,447		1,722,004
Total net revenue		1,158,543		1,170,117		3,431,838		3,392,571
Costs and expenses:
Cost of care		397,697		364,438		1,175,705		1,035,377
Cost of goods sold		523,973		560,269		1,551,368		1,621,577
Direct service costs and other operating expenses (1)		195,844		216,770		594,051		620,767
Depreciation and amortization		28,890		24,730		82,498		71,976
Interest expense		8,935		7,286		27,042		24,239
Interest and other income		(1,699)		(349)		(5,279)		(2,119)
Special charges		—		16,599		—		24,908
Total costs and expenses		1,153,640		1,189,743		3,425,385		3,396,725
Income (loss) from continuing operations before income taxes		4,903		(19,626)		6,453		(4,154)
Provision (benefit) for income taxes		782		(2,330)		3,308		(32,896)
Net income (loss) from continuing operations		4,121		(17,296)		3,145		28,742
Income from discontinued operations, net of tax		17,153		28,943		32,173		84,660
Net income	$	21,274	$	11,647	$	35,318	$	113,402

Net income (loss) per common share:
Basic (See Note A)
Continuing operations	$	0.17	$	(0.68)	$	0.13	$	1.15
Discontinued operations		0.70		1.14		1.33		3.37
Consolidated operations	$	0.87	$	0.46	$	1.46	$	4.52
Diluted (See Note A)
Continuing operations	$	0.17	$	(0.68)	$	0.13	$	1.14
Discontinued operations		0.69		1.14		1.31		3.34
Consolidated operations	$	0.86	$	0.46	$	1.44	$	4.48
Other comprehensive income
Unrealized gains (losses) on available-for-sale securities (2)		(98)		(481)		641		(23)
Comprehensive income	$	21,176	$	11,166	$	35,959	$	113,379

(1)	Includes stock compensation expense of $4,604 and $5,442, for the three months ended September 30, 2019 and 2020, respectively and $19,211 and $17,831 for the nine months ended September 30, 2019 and 2020, respectively.

(2)	Net of income tax (benefit) provision of $(31) and $(160) for the three months ended September 30, 2019 and 2020, respectively, and $201 and $(8) for the nine months ended September 30, 2019 and 2020, respectively.

See accompanying notes to consolidated financial statements.

Table of Contents

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, 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
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 June 30, 2020	54,972	$	550		(29,662)	$	(1,464,727)	$	1,429,995	$	1,576,549	$	602	$	1,542,969
Stock compensation expense	—		—		—		—		5,839		—		—		5,839
Exercise of stock options	263		3		—		—		17,138		—		—		17,141
Issuance of equity	34		—		—		—		2,037		—		—		2,037
Net income	—		—		—		—		—		11,647		—		11,647
Other comprehensive (loss)—other	—		—		—		—		—		—		(481)		(481)
Balance at September 30, 2020	55,269	$	553		(29,662)	$	(1,464,727)	$	1,455,009	$	1,588,196	$	121	$	1,579,152

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

Balance at December 31, 2019	54,285	$	543		(29,662)	$	(1,464,727)	$	1,386,616	$	1,475,207	$	144	$	1,397,783
Stock compensation expense	—		—		—		—		18,854		—		—		18,854
Exercise of stock options	803		9		—		—		48,639		—		—		48,648
Issuance of equity	181		1		—		—		900		—		—		901
Net income	—		—		—		—		—		113,402		—		113,402
Other comprehensive (loss)—other	—		—		—		—		—		—		(23)		(23)
Adoption of ASC 326	—		—		—		—		—		(413)		—		(413)
Balance at September 30, 2020	55,269	$	553		(29,662)	$	(1,464,727)	$	1,455,009	$	1,588,196	$	121	$	1,579,152

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands)


	2019		2020
Cash flows from operating activities:
Net income	$	35,318	$	113,402
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		98,355		88,061
Special charges		—		24,908
Non-cash interest expense		1,069		1,297
Non-cash stock compensation expense		19,832		18,854
Non-cash income tax provision (benefit)		4,567		(26,537)
Non-cash (amortization) accretion on investments		(509)		2,371
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(54,261)		(78,682)
Pharmaceutical inventory		(7,555)		7,325
Other assets		(35,714)		(66,612)
Accounts payable and accrued liabilities		83,976		110,710
Medical claims payable and other medical liabilities		11,997		47,478
Contingent consideration		(3,754)		—
Tax contingencies		(251)		1,914
Deferred credits and other long-term liabilities		(9,566)		(11,572)
Other		919		(965)
Net cash provided by operating activities		144,423		231,952
Net cash provided by operating activities from discontinued operations		25,079		177,800
Net cash provided by operating activities from continuing operations		119,344		54,152
Cash flows from investing activities:
Capital expenditures		(44,234)		(56,006)
Acquisitions and investments in businesses, net of cash acquired		(320)		(2,066)
Purchases of investments		(391,062)		(661,004)
Proceeds from maturities and sales of investments		434,493		500,660
Net cash used in investing activities		(1,123)		(218,416)
Net cash provided by (used in) investing activities from discontinued operations		46,196		(164,836)
Net cash used in investing activities from continuing operations		(47,319)		(53,580)
Cash flows from financing activities:
Proceeds from borrowings on revolving line of credit		—		80,000
Payments to acquire treasury stock		(4,124)		—
Proceeds from exercise of stock options		20,653		48,284
Payments on debt, finance lease and deferred financing obligations		(50,950)		(126,110)
Payments on contingent consideration		(6,247)		—
Other		1,763		902
Net cash (used in) provided by financing activities		(38,905)		3,076
Net cash used in financing activities from discontinued operations		—		(32,650)
Net cash (used in) provided by financing activities from continuing operations		(38,905)		35,726
Net increase in cash and cash equivalents from continuing operations		33,120		36,298
Cash and cash equivalents at beginning of period		86,923		115,752
Cash and cash equivalents at end of period	$	120,043	$	152,050

Supplemental cash flow data:
Non-cash investing activities:
Assets acquired under finance leases and deferred financing obligations	$	3,302	$	3,599

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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, 2020 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. On April 30, 2020, the Company and Molina Healthcare, Inc. (“Molina”) entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company has agreed to sell its Magellan Complete Care (“MCC”) business to Molina (the “MCC Sale”) for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as discontinued operations. See Note E—“Discontinued Operations” for additional information.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2020.

Business Overview

The Company provides managed care and pharmacy solutions for some of the most complex areas of healthcare. The Company offers innovative solutions that combine analytics, technology and clinical rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers Magellan serves. 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 Segment

The Healthcare segment (“Healthcare”) previously consisted of two reporting units – Behavioral & Specialty Health and MCC. As a result of the pending MCC Sale, the Healthcare segment now only includes the Behavioral and Specialty Health reporting unit.

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 (i) behavioral health, (ii) employee assistance plans (“EAP”) and (iii) 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.

MCC, which is now reflected as discontinued operations, 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 more acute 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.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2020

(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 contractual arrangements, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month (“PMPM”) fee, or (ii) administrative services only (“ASO”) contractual arrangements, 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 Segment

The Pharmacy Management segment (“Pharmacy Management”) is comprised of services that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s customer solutions include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations and Medicare Part D; (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 managed care organizations, employers, third party administrators, state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy services to its existing customers and market its pharmacy solutions to the Healthcare customer base, including through integrated Pharmacy Management and Healthcare service offerings.

Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management provides services for most of the MCC business.

On May 11, 2020, the Company announced its decision to exit the Medicare Part D business at the end of 2020. The Company will retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM needs of its existing and prospective Medicare customers.

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.

Summary of Significant Accounting Policies

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

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2020

(Unaudited)

relation to revenue recognition under Accounting Standard Codification 606 (“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 and nine months ended September 30, 2019 and 2020 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