Medical Claims and Benefits Payable

The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated:



	September 30, 2014		December 31, 2013
	(In thousands)
Fee-for-service claims incurred but not paid (IBNP)	$	796,433	$	424,173
Pharmacy payable	62,322		45,037
Capitation payable	31,535		20,267
Other	233,556		180,310
	$	1,123,846	$	669,787

"Other" 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 income. Such non-risk provider payables amounted to $136.0 million and $151.3 million as of September 30, 2014 and December 31, 2013, respectively.

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



	Nine Months Ended			Year Ended
	September 30, 2014			December 31, 2013
	(Dollars in thousands)
Balances at beginning of period	$	669,787		$	494,530
Components of medical care costs related to:
Current period	5,795,404			5,434,443
Prior period	(41,033		)	(52,779		)
Total medical care costs	5,754,371			5,381,664

Change in non-risk provider payables	(15,344		)	111,267

Payments for medical care costs related to:
Current period	4,841,429			4,932,195
Prior period	443,539			385,479
Total paid	5,284,968			5,317,674
Balances at end of period	$	1,123,846		$	669,787

Benefit from prior period as a percentage of:
Balance at beginning of period	6.1		%	10.7		%
Premium revenue, trailing twelve months	0.5		%	0.9		%
Medical care costs, trailing twelve months	0.6		%	1.0		%

Assuming that our initial estimate of 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 2014 and 2013 were less than what we had expected when we established our reserves. For example, for the year ended December 31, 2013, the amounts ultimately paid out were less than the amount of the reserves we had established as of December 31, 2012 by 10.7%. 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.

While prior period development of our estimate as of December 31, 2013 through September 30, 2014 has been favorable by $41.0 million, that amount is substantially less than the favorable prior period development of $52.8 million that we recognized in all of 2013.

In estimating our claims liability at September 30, 2014, we adjusted our base calculation to take account of the numerous factors that we believe will likely change our final claims liability amount. We believe the most significant among those factors are:

•

Since January 1, 2014, we have added 314,500 members under Medicaid expansion in six of our health plans. Because these members are transitioning into managed care, and have different demographics than those of our legacy membership, we have little insight into their utilization of medical services. Additionally, as of September 30, 2014, we have relatively little medical claims payment history related to Medicaid expansion membership in Illinois, Michigan and Ohio because such membership was enrolled in these states later in the year. Accordingly, our estimates of the claims liability for this population are subject to a higher degree of uncertainty.


•	Since January 1, 2014, we have added 118,000 new members at our South Carolina health plan. Because we have only nine months of claims payment history, the reserves are subject to greater uncertainty than that of our legacy Medicaid membership.

•

At our New Mexico health plan, the state has been adding approximately 10,000 to 15,000 members per month on a retroactive basis since March 2014. Because we have no claims payment history for these members, our estimates of the claims liability for this population are subject to a higher degree of uncertainty. However, for these members, the state will reimburse the health plan for claims with dates of service during the retroactive period on a cost-plus basis, i.e., for claims paid plus an administration fee.


•	Beginning in the third quarter of 2014, there was a substantial backlog of inpatient claims at our Washington health plan. This backlog was a result of payments held as the state of Washington considered whether to adjust its payment methodology for inpatient claims. We have adjusted the inpatient reserves to reflect the estimated impact of the claims backlog.

The use of a consistent methodology in estimating our liability for medical claims and 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 2013, and for the nine months ended September 30, 2014, the absence of adverse development of the liability for medical claims and benefits payable at the close of the previous period resulted in the recognition of substantial favorable prior period development. In both periods, 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.