Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, other assets, trade accounts payable, medical claims and benefits payable, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities (excluding contingent consideration) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:

Level 1 — Observable Inputs

Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.

Level 2 — Directly or Indirectly Observable Inputs

Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, and certificates of deposit that are classified as current investments in the accompanying consolidated balance sheets. Such investments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.

Level 3 — Unobservable Inputs

Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Notes Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of September 30, 2014 included our common stock price, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 12, “Derivative Financial Instruments,” the 1.125% Call Option asset and the 1.125% Notes Conversion Option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.

Contingent consideration liability. Such liability relates to our South Carolina health plan acquisition described in Note 4, "Business Combinations," and is recorded in accounts payable and accrued liabilities. We applied discounted cash flow analysis to determine the fair value of this liability. Significant unobservable inputs primarily related to the probability weighted present value of the purchase price estimate for the projected membership.

Auction rate securities. Auction rate securities are designated as available-for-sale and are reported at fair value in other assets. To estimate the fair value of these securities we use valuation data from our primary pricing source, a third party who provides a marketplace for illiquid assets with over 10,000 participants. This valuation data is based on a range of prices that represent indicative bids from potential buyers. To validate the reasonableness of the data, we compare these valuations to data from other third-party pricing sources, which also provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2014.

Our financial instruments measured at fair value on a recurring basis at September 30, 2014, were as follows:



	Total		Level 1		Level 2		Level 3
	(In thousands)
Corporate debt securities	$	553,936	$	—	$	553,936	$	—
Municipal securities	96,873		—		96,873		—
GSEs	99,254		99,254		—		—
U.S. treasury notes	41,031		41,031		—		—
Certificates of deposit	51,589		—		51,589		—
Auction rate securities	6,891		—		—		6,891
1.125% Call Option derivative asset	222,997		—		—		222,997
Total assets measured at fair value on a recurring basis	$	1,072,571	$	140,285	$	702,398	$	229,888

1.125% Notes Conversion Option derivative liability	$	222,877	$	—	$	—	$	222,877
Contingent consideration liability	1,500		—		—		1,500
Total liabilities measured at fair value on a recurring basis	$	224,377	$	—	$	—	$	224,377

Our financial instruments measured at fair value on a recurring basis at December 31, 2013, were as follows:



	Total		Level 1		Level 2		Level 3
	(In thousands)
Corporate debt securities	$	449,772	$	—	$	449,772	$	—
Municipal securities	113,330		—		113,330		—
GSEs	68,817		68,817		—		—
U.S. treasury notes	37,376		37,376		—		—
Certificates of deposit	33,757		—		33,757		—
Auction rate securities	10,898		—		—		10,898
1.125% Call Option derivative asset	186,351		—		—		186,351
Total assets measured at fair value on a recurring basis	$	900,301	$	106,193	$	596,859	$	197,249

1.125 % Notes Conversion Option derivative liability	$	186,239	$	—	$	—	$	186,239
Contingent consideration liabilities	57,548		—		—		57,548
Total liabilities measured at fair value on a recurring basis	$	243,787	$	—	$	—	$	243,787

The following table presents activity relating to our assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



	Change in Level 3 Instruments
	Auction Rate Securities			Derivatives, Net		Contingent Consideration Liabilities
	(In thousands)
Balance at December 31, 2013	$	10,898		$	112	$	(57,548	)
Total gains for the period recognized in:
General and administrative expenses	—			—		5,699
Other expenses, net	—			8		—
Other comprehensive income	193			—		—

Settlements	(4,200		)	—		50,349
Balance at September 30, 2014	$	6,891		$	120	$	(1,500	)

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our convertible senior notes, which are classified as Level 2 financial instruments, are indicated in the following table. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.



	September 30, 2014
	Carrying Value		Total Fair Value		Level 1		Level 2		Level 3
	(In thousands)
1.125% Notes	$	430,484	$	649,770	$	—	$	649,770	$	—
1.625% Notes	266,726		302,908		—		302,908		—
3.75% Notes	10,449		15,290		—		15,290		—
	$	707,659	$	967,968	$	—	$	967,968	$	—

	December 31, 2013
	Carrying Value		Total Fair Value		Level 1		Level 2		Level 3
	(In thousands)
1.125% Notes	$	416,368	$	572,627	$	—	$	572,627	$	—
3.75% Notes	181,872		219,491		—		219,491		—
	$	598,240	$	792,118	$	—	$	792,118	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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