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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 March 31, 2021

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 March 31, 2021 was 26,126,570.

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, 2020 and March 31, 2021

2

Consolidated Statements of Comprehensive Income —For the Three Months Ended March 31, 2020 and 2021

3

Consolidated Statements of Changes in Stockholders’ Equity—For the Three Months Ended March 31, 2020 and 2021

4

Consolidated Statements of Cash Flows—For the Three Months Ended March 31, 2020 and 2021

5

Notes to Consolidated Financial Statements

6

Item 2:

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

29

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4:

Controls and Procedures

40

PART IIOther Information:

Item 1:

Legal Proceedings

40

Item 1A:

Risk Factors

40

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3:

Defaults Upon Senior Securities

41

Item 4:

Mine Safety Disclosures

41

Item 5:

Other Information

41

Item 6:

Exhibits

41

Exhibit Index

42

Signatures

43

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)

December 31, 

March 31, 

2020

    

2021

(Unaudited)

ASSETS

Current Assets:

Cash and cash equivalents ($49,227 and $75,458 restricted at December 31, 2020 and March 31, 2021, respectively)

$

1,144,450

$

456,309

Accounts receivable, net

 

743,502

 

793,504

Short-term investments ($88,867 and $74,312 restricted at December 31, 2020 and March 31, 2021, respectively)

 

140,847

 

625,600

Pharmaceutical inventory

 

43,334

 

46,389

Other current assets ($43,547 and $51,511 restricted at December 31, 2020 and March 31, 2021, respectively)

 

84,264

 

101,462

Total Current Assets

 

2,156,397

 

2,023,264

Property and equipment, net

 

136,739

 

142,084

Long-term investments ($1,026 and $2,615 restricted at December 31, 2020 and March 31, 2021, respectively)

 

2,612

 

4,830

Deferred income taxes

1,842

921

Other long-term assets

 

108,797

 

119,947

Goodwill

 

873,779

 

873,830

Other intangible assets, net

 

79,689

 

71,631

Total Assets

$

3,359,855

$

3,236,507

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

137,380

$

149,760

Accrued liabilities

 

354,906

 

266,217

Medical claims payable

 

111,851

 

116,580

Other medical liabilities

 

126,921

 

123,109

Current debt, finance lease and deferred financing obligations

 

6,521

 

6,543

Total Current Liabilities

 

737,579

 

662,209

Long-term debt, finance lease and deferred financing obligations

 

631,855

 

526,682

Deferred income taxes

7,102

13,602

Tax contingencies

 

11,002

 

11,867

Deferred credits and other long-term liabilities

 

69,283

 

79,276

Total Liabilities

 

1,456,821

 

1,293,636

Redeemable non-controlling interest

 

33,062

 

33,303

Stockholder's Equity:

Preferred stock, par value $.01 per share

Authorized—10,000 shares at December 31, 2020 and March 31, 2021-Issued and outstanding-none

 

 

Common stock, par value $.01 per share

Authorized—100,000 shares at December 31, 2020 and March 31, 2021-Issued and outstanding-55,549 and 25,887 shares at December 31, 2020, respectively, and 55,789 and 26,127 shares at March 31, 2021, respectively

 

555

 

558

Other Stockholders’ Equity:

Additional paid-in capital

 

1,477,219

 

1,488,975

Retained earnings

 

1,857,130

 

1,884,957

Accumulated other comprehensive loss

 

(205)

 

(195)

Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2020 and March 31, 2021, respectively

 

(1,464,727)

 

(1,464,727)

Total Stockholders’ Equity

 

1,869,972

 

1,909,568

Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity

$

3,359,855

$

3,236,507

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

 

March 31, 

2020

    

2021

    

Net revenue:

Managed care and other

$

553,168

$

626,076

PBM

 

569,211

 

535,573

Total net revenue

 

1,122,379

 

1,161,649

Costs, expenses and other income:

Cost of care

 

349,108

 

379,191

Cost of goods sold

 

533,241

 

492,370

Direct service costs and other operating expenses (1)

 

204,241

 

231,021

Legal matter settlement

(9,000)

Depreciation and amortization

 

23,358

 

21,417

Interest expense

 

8,958

 

6,426

Interest and other income

 

(1,219)

 

(341)

Special charges

1,151

Total costs, expenses and other income

 

1,117,687

 

1,122,235

Income from continuing operations before income taxes

 

4,692

 

39,414

Provision for income taxes

 

5,762

 

10,905

Net (loss) income from continuing operations

(1,070)

28,509

Income (loss) from discontinued operations, net of tax

19,320

(682)

Net income

$

18,250

$

27,827

Net (loss) income per common share:

Basic (See Note A)

Continuing operations

$

(0.04)

$

1.10

Discontinued operations

0.78

(0.03)

Consolidated operations

$

0.74

$

1.07

Diluted (See Note A)

Continuing operations

$

(0.04)

$

1.07

Discontinued operations

0.78

(0.03)

Consolidated operations

$

0.74

$

1.04

Other comprehensive income

Unrealized gains (losses) on available-for-sale securities (2)

 

(201)

 

10

Comprehensive income

$

18,049

$

27,837

(1)Includes stock compensation expense of $5,797 and $7,057 for the three months ended March 31, 2020 and 2021, respectively.
(2)Net of income tax (benefit) provision of $(67) and $3 for the three months ended March 31, 2020 and 2021, respectively.

See accompanying notes to consolidated financial statements.

3

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 December 31, 2019

 

54,285

$

543

 

(29,662)

$

(1,464,727)

$

1,386,616

$

1,475,207

$

144

$

1,397,783

Stock compensation expense

 

 

 

 

 

6,057

 

 

 

6,057

Exercise of stock options

 

216

 

2

 

 

 

11,261

 

 

 

11,263

Issuance of equity

 

130

 

1

 

 

 

(1,137)

 

 

 

(1,136)

Net income

 

 

 

 

 

 

18,250

 

 

18,250

Other comprehensive loss—other

(201)

 

(201)

Adoption of ASC 326

 

 

 

 

 

 

(413)

 

 

(413)

Balance at March 31, 2020

54,631

$

546

(29,662)

$

(1,464,727)

$

1,402,797

$

1,493,044

$

(57)

$

1,431,603

Balance at December 31, 2020

 

55,549

$

555

 

(29,662)

$

(1,464,727)

$

1,477,219

$

1,857,130

$

(205)

$

1,869,972

Stock compensation expense

 

 

 

 

 

7,057

 

 

 

7,057

Exercise of stock options

 

110

 

2

 

 

 

7,465

 

 

 

7,467

Issuance of equity

 

130

 

1

 

 

 

(2,766)

 

 

 

(2,765)

Net income

 

 

 

 

 

 

27,827

 

 

27,827

Other comprehensive income—other

10

10

Balance at March 31, 2021

 

55,789

$

558

 

(29,662)

$

(1,464,727)

$

1,488,975

$

1,884,957

$

(195)

$

1,909,568

See accompanying notes to consolidated financial statements.

4

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)

    

2020

    

2021

Cash flows from operating activities:

Net income

$

18,250

$

27,827

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

Depreciation and amortization

 

28,684

 

21,417

Special charges

1,151

Non-cash interest expense

 

585

 

355

Non-cash stock compensation expense

 

6,057

 

7,057

Non-cash income tax provision

 

7,802

 

7,603

Non-cash accretion on investments

 

325

 

592

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

Accounts receivable, net

 

(33,291)

 

(50,013)

Pharmaceutical inventory

 

2,629

 

(3,055)

Other assets

 

(41,862)

 

(27,283)

Accounts payable and accrued liabilities

 

52,746

 

(76,183)

Medical claims payable and other medical liabilities

 

(13,622)

 

917

Tax contingencies

 

925

 

680

Deferred credits and other long-term liabilities

 

3,003

 

9,993

Other

 

(505)

 

1,067

Net cash provided by (used in) operating activities

31,726

(77,875)

Net cash provided by operating activities from discontinued operations

35,805

Net cash used in operating activities from continuing operations

 

(4,079)

 

(77,875)

Cash flows from investing activities:

Capital expenditures

 

(15,719)

 

(19,540)

Acquisitions and investments in businesses, net of cash acquired

 

(369)

 

(2,372)

Purchases of investments

 

(164,311)

 

(673,169)

Proceeds from maturities and sales of investments

 

152,394

 

185,619

Net cash used in investing activities

(28,005)

(509,462)

Net cash used in investing activities from discontinued operations

(19,154)

Net cash used in investing activities from continuing operations

 

(8,851)

 

(509,462)

Cash flows from financing activities:

Proceeds from borrowings on revolving line of credit

 

80,000

 

Proceeds from exercise of stock options

 

10,903

 

7,467

Payments on debt, finance lease and deferred financing obligations

(34,774)

(105,506)

Other

 

(1,136)

 

(2,765)

Net cash provided by (used in) financing activities

54,993

(100,804)

Net cash provided by financing activities from discontinued operations

Net cash provided by (used in) financing activities from continuing operations

 

54,993

 

(100,804)

Net increase (decrease) in cash and cash equivalents from continuing operations

 

42,063

 

(688,141)

Cash and cash equivalents at beginning of period

 

115,752

 

1,144,450

Cash and cash equivalents at end of period

$

157,815

$

456,309

Supplemental cash flow data:

Non-cash investing activities:

Assets acquired under finance leases and deferred financing obligations

$

3,599

$

See accompanying notes to consolidated financial statements.

5

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(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, 2021 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 December 31, 2020, Magellan completed the sale of its Magellan Complete Care business (the “MCC Business”) to Molina Healthcare, Inc. (“Molina”), pursuant to a Stock and Asset Purchase Agreement, dated as of April 30, 2020, by and between the Company and Molina, for cash in the amount of $850 million plus closing adjustments of $158 million (subject to post-closing adjustments, if any), and the assumption by Molina of liabilities of the MCC Business (the “MCC Sale”). The MCC Business was the Company’s business of contracting with state Medicaid agencies and the U.S. Centers for Medicare and Medicaid Services to manage total medical benefits or long-term support services for Medicaid and dual eligible Medicaid and Medicare populations.

On January 4, 2021, the Company and Centene Corporation (“Centene”) entered into an Agreement of Plan of Merger (the “Merger Agreement”) by and among the Company, Centene, and Mayflower Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Centene (“Merger Sub”), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving such merger (the “Merger”) as a wholly-owned subsidiary of Centene. Pursuant to the Merger Agreement, each issued and outstanding share of the Company’s common stock will be automatically canceled and converted into the right to receive $95.00 in cash. The Company expects to complete the transaction in the second half of 2021.

The Merger has been approved by the Company’s board of directors, the Company’s stockholders and Centene’s board of directors. The completion of the Merger is subject to customary closing conditions, including, among others, the receipt of various regulatory approvals. For additional information on the Merger Agreement and the Merger, please refer to the Company’s Current Reports on Forms 8-K, filed with the SEC on January 4, 2021 and March 31, 2021, and our definitive proxy statement filed with the SEC on February 19, 2021 (the “Proxy Statement”). The Company cannot guarantee that the Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.

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”) customers include health plans, accountable care organizations

6

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

(“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 reporting unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies, as well as certain provider assets that deliver primary care and behavioral healthcare services through an integrated approach.

Magellan’s coordination and management of these healthcare 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. In addition to the Company’s provider assets where it provides treatment services in certain geographies, the Company also employs 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; (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, 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. Any activity related to Medicare Part D business reflected in the three months ended March 31, 2021 is related to final run-out of the 2020 Part D contract provision. The Company continues to 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.

7

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in the first quarter of 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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 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 months ended March 31, 2020 and 2021 by major service line, type of customer and timing of revenue recognition (in thousands):

Three Months Ended March 31, 2020

Healthcare

    

Pharmacy Management

    

Elimination

    

Total

Major Service Lines

Behavioral & Specialty Health

Risk-based, non-EAP

$

349,845

$

$

(90)

$

349,755

EAP risk-based

79,938

79,938

ASO

59,123

11,534

(83)

70,574

PBM, including dispensing

518,112

(4,567)

513,545

Medicare Part D

55,666

55,666

PBA

30,129

30,129

Formulary management

22,161

22,161

Other

611

611

Total net revenue

$

488,906

$

638,213

$

(4,740)

$

1,122,379

Type of Customer

Government

$

227,102

$

203,957

$

$

431,059

Non-government

261,804

434,256

(4,740)

691,320

Total net revenue

$

488,906

$

638,213

$

(4,740)

$

1,122,379

Timing of Revenue Recognition

Transferred at a point in time

$

$

573,778

$

(4,567)

$

569,211

Transferred over time

488,906

64,435

(173)

553,168

Total net revenue

$

488,906

$

638,213

$

(4,740)

$

1,122,379

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

Three Months Ended March 31, 2021

Healthcare

    

Pharmacy Management

    

Elimination

    

Total

Major Service Lines

Behavioral & Specialty Health

Risk-based, non-EAP

$

373,442

$

$

(86)

$

373,356

EAP risk-based

88,120

88,120

ASO

71,448

11,817

(75)

83,190

PBM, including dispensing

538,796

(3,399)

535,397

Medicare Part D

176

176

PBA

49,882

49,882

Formulary management

29,183

29,183

Other

2,345

2,345

Total net revenue

$

533,010

$

632,199

$

(3,560)

$

1,161,649

Type of Customer

Government

$

256,292

$

156,038

$

$

412,330

Non-government

276,718

476,161

(3,560)

749,319

Total net revenue

$

533,010

$

632,199

$

(3,560)

$

1,161,649

Timing of Revenue Recognition

Transferred at a point in time

$

$

538,972

$

(3,399)

$

535,573

Transferred over time

533,010

93,227

(161)

626,076

Total net revenue

$

533,010

$

632,199

$

(3,560)

$

1,161,649

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 or pharmacy management. 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 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.

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

9

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2021

(Unaudited)

(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, collecting 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.

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 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

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(Unaudited)

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 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.

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, 

    

    

 

2020

2021

$ Change

% Change

Accounts receivable

$

799,803

$

824,067

$

24,264

3.0%

Contract assets

3,566

4,678

1,112

31.2%

Contract liabilities - current

6,772

6,968

196

2.9%

Contract liabilities - long-term

11,073

11,453

380

3.4%

Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by $24.3 million, mainly due to timing of receipts. Contract assets, which are included in other current assets on the consolidated balance sheets, increased by $1.1 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, increased by $0.2 million, mainly due to certain revenue payments received in advance. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, increased by $0.4 million mainly due to payments received for which recognition will be long term partially offset by certain balances which became current.

During the three months ended March 31 2021, the Company recognized revenue of $2.0 million that was included in current contract liabilities at December 31, 2020. The estimated timing of recognition of amounts included in contract liabilities at March 31, 2021 are as follows: 2021—$6.0 million; 2022—$4.0 million; 2023—$3.6 million; 2024 and beyond—$4.8 million. During the three months ended March 31, 2021, 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 generates contract assets or contract liabilities; however, these amounts are immaterial.

The Company’s accounts receivable is net of an allowance for credit losses. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each platform given the individual lines of business and market. Pooling was further

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(Unaudited)

disaggregated based on either geography or product type.

The Company leveraged historical write offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts through the use of an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses, giving consideration to the location and risks associated with the Company’s customers.

Significant Customers

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

The Company had no customers that exceeded ten percent of the Company’s net revenues from continuing operations.

Customers exceeding ten percent of segment net revenues

The following customers generated in excess of ten percent of net revenues from continuing operations for the respective segment for the three months ended March 31, 2020 and 2021 (in thousands):

Segment

    

Term Date

    

2020

    

2021

 

Healthcare

Customer A

December 31, 2021

$

88,539

$

92,982

Customer B

December 31, 2022

49,438

55,486

Pharmacy Management

Customer C

March 31, 2024

98,617

88,651

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 Centers for Medicare and Medicaid Services (“CMS”) and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled $137.0 million and $152.7 million for the three months ended March 31, 2020 and 2021, respectively. Net revenues from members in relation to its contracts with CMS in aggregate totaled $55.7 million and $0.2 million for the three months ended March 31, 2020 and 2021, respectively. As of December 31, 2020 and March 31, 2021, the Company had $69.6 million and $55.2 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. In May 2020, the Company announced its decision to exit the Part D business at the end of 2020. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $69.9 million and $77.7 million for the three months ended March 31, 2020 and 2021, 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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(Unaudited)

Leases

The Company leases certain office space, distribution centers, land and equipment. We assess each contract 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 right-of-use (“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, finance lease deferred financing obligations and long-term debt, finance 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, 2021 (in thousands):

Three Months Ended

March 31, 2021

    

Operating lease cost

$

2,408

Finance lease cost:

Amortization of right-of-use asset

707

Interest on lease liabilities

166

Total finance lease cost

873

Short-term lease cost

40

Variable lease cost

224

Total lease cost

3,545

Sublease income

(7)

Net lease cost

$

3,538

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The following table shows the components of the lease assets and liabilities as of March 31, 2021 (in thousands):

March 31, 2021

Operating leases:

Other long-term assets

$

32,053

Accrued liabilities

$

10,597

Deferred credits and other long-term liabilities