Medical Claims and Benefits Payable

As of September 30, 2013, medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of operations. As of September 30, 2013, we recorded provider payables of approximately $64.1 million, and $69.7 million accounts receivable for new intermediary arrangements that began in the third quarter of 2013.

The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts displayed for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period were (more) or less than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The following table shows the components of the change in medical claims and benefits payable from continuing and discontinued operations for the periods indicated:



	Nine Months Ended			Three Months Ended			Year Ended
	September 30, 2013			September 30, 2013			December 31, 2012
	(Dollars in thousands)
Balances at beginning of period	$	494,530		$	465,487		$	402,476
Components of medical care costs related to:
Current period	4,021,461			1,415,670			5,136,055
Prior periods	(54,040		)	(32,575		)	(39,295		)
Total medical care costs	3,967,421			1,383,095			5,096,760
Payments for medical care costs related to:
Current period	3,410,689			851,025			4,649,363
Prior periods	418,556			364,851			355,343
Total paid	3,829,245			1,215,876			5,004,706
Balances at end of period	$	632,706		$	632,706		$	494,530
Benefit from prior period as a percentage of:
Balance at beginning of period	10.9		%	7.0		%	9.8		%
Premium revenue, trailing twelve months	0.9		%	0.5		%	0.7		%
Medical care costs, trailing twelve months	1.0		%	0.6		%	0.8		%

Assuming that our initial estimate of claims incurred but not paid (IBNP) is accurate, we believe that amounts ultimately paid out would generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion in that liability of the allowance for adverse claims development and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate - we only know when the circumstances for any one or more factors are out of the ordinary.

As indicated above, the amounts ultimately paid out on our liabilities in fiscal years 2013 and 2012 were less than what we had expected when we had established our reserves. For example, for the year ended December 31, 2012, the amounts ultimately paid out were less than the amount of the reserves we had established as of December 31, 2011 by 9.8%. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.

We recognized favorable prior period claims development in the amount of $54.0 million for the nine months ended September 30, 2013. This amount represents our estimate, as of September 30, 2013, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation of our claims liability at December 31, 2012 was due primarily to the following factors:

•

At our Washington health plan prior to July 2012, certain high-cost newborns that were approved for supplemental security income (SSI) coverage by the state were retroactively dis-enrolled from our Healthy Options (TANF) coverage, and the health plan was reimbursed for the claims paid on behalf of these members. Starting July 1, 2012, these newborns, as well as other high-cost disabled members, are now covered by the health plan under the Healthy Options Blind and Disabled (HOBD) program. At the end of 2012, we had limited claims history with which to estimate the claims liability of the HOBD members, and as a result the liability for these high-cost members was overstated.


•	At our New Mexico health plan, we overestimated the impact of certain high-dollar outstanding claim payments as of December 31, 2012.


•	At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to our aged, blind or disabled (ABD) members.

We recognized favorable prior period claims development in the amount of $32.6 million for the three months ended September 30, 2013. This amount represents our estimate as of September 30, 2013, of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2013 was more than the amount that will ultimately be paid out in satisfaction of that liability. This amount of favorable development was considerably less than we typically experience, and was significant enough to have a materially unfavorable impact upon our third quarter financial performance. We believe the overestimation of our claims liability at June 30, 2013 was due primarily to the following factors:


•	At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to critically ill members.


•	At our Michigan health plan, we underestimated the impact of future claims overpayment recoveries when establishing reserves at June 30, 2013.

•

The overestimation of our liability for medical claims and benefits payable was partially offset by an underestimation of that liability at our Texas health plan as a result of the costs associated with an unusually large number of older claims. This anomaly was caused primarily by the payment of claims that were delayed as a result of hospital provider disputes that have been resolved. The underestimation of the liability at our Texas health plan was responsible for the relatively small amount of prior period development noted above.

We recognized favorable prior period claims development in the amount of $37.7 million and $39.3 million for the nine months ended September 30, 2012, and the year ended December 31, 2012, respectively. This was primarily caused by the overestimation of our liability claims and medical benefits at December 31, 2011, as a result of the following factors:


•	At our Washington health plan, we underestimated the amount of recoveries we would collect for certain high-cost newborn claims, resulting in an overestimation of reserves at year end.


•	At our Texas health plan, we overestimated the cost of new members in STAR+PLUS, in the Dallas region.


•	The overestimation of our liability for medical claims and benefits payable was partially offset by an underestimation of that liability at our Missouri health plan, as a result of the costs associated with an unusually large number of premature infants during the fourth quarter of 2011.

In estimating our claims liability at September 30, 2013, we adjusted our base calculation to take account of the following factors which we believe are reasonably likely to change our final claims liability amount:


•	At our Texas health plan, we have noted an unusually large number of older claims dated older than 12 months. This has caused some distortion in the claims lag pattern that we use to estimate the incurred claims.

•

At our Michigan health plan, there were a large number of claim recoveries recorded in June 2013 due to overpayments that resulted from a system configuration issue. These recoveries impacted the completion factors used to estimate incurred claims. While we attempted to remove this distortion from the claims data to develop a more accurate reserve estimate, this type of correction in claims data adds a degree of uncertainty for the Michigan reserves as of September 30, 2013.

•

Our New Mexico health plan acquired approximately 80,000 new members in August 2013 from another health plan. This acquisition roughly doubled the size of the membership in a single month. For the September 30, 2013 reserve calculation, we have assumed that these new members will incur costs at about the same rate as the New Mexico members that were previously enrolled. With only two months of paid claims for these new members, it is too soon to know whether that assumption is correct or not.

The use of a consistent methodology in estimating our liability for claims and medical benefits payable minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect consolidated results of operations in subsequent periods. In particular, the use of a consistent methodology should result in the replenishment of reserves during any given period in a manner that generally offsets the benefit of favorable prior period development in that period. Facts and circumstances unique to the estimation process at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent periods. Any absence of adverse claims development (as well as the expensing through general and administrative expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate. In 2012, and for the nine months ended September 30, 2013, the absence of adverse development of the liability for claims and medical benefits payable at the close of the previous period resulted in the recognition of substantial favorable prior period development. In both years, however, the recognition of a benefit from prior period claims development did not have a material impact on our consolidated results of operations because the replenishment of reserves in the respective periods generally offset the benefit from the prior period.