9. Medical Claims and Benefits Payable

The following table presents the components of the change in our medical claims and benefits payable as of and 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.


	Nine Months Ended			Three Months Ended			Year Ended
	September 30, 2012			September 30, 2012			Dec. 31, 2011
	(Dollars in thousands)
Balances at beginning of period	$	402,476		$	525,538		$	354,356
Components of medical care costs related to:
Current period		3,860,825			1,361,539			3,911,803
Prior periods		(37,689	)		(46,968	)		(51,809	)

Total medical care costs		3,823,136			1,314,571			3,859,994

Payments for medical care costs related to:
Current period		3,332,896			875,236			3,516,994
Prior periods		356,253			428,410			294,880

Total paid		3,689,149			1,303,646			3,811,874

Balances at end of period	$	536,463		$	536,463		$	402,476

Benefit from prior period as a percentage of:
Balance at beginning of period		9.4	%		8.9	%		14.6	%
Premium revenue		0.9	%		3.2	%		1.1	%
Total medical care costs		1.0	%		3.6	%		1.3	%

We recognized favorable prior period claims development in the amount of $37.7 million for the nine months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2011 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at December 31, 2011 was due primarily to the following factors:

•

For 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.

•

For our Texas health plan, we overestimated the cost of new members in STAR+PLUS (the name of our ABD program in Texas), in the Dallas region.

•

In early 2011, the state of Michigan was delayed in the enrollment of newborns in managed care plans; the delay was resolved by mid-2011. This caused a large number of claims with older dates of service to be paid during late 2011, resulting in an artificial increase in the lag time for claims payment at our Michigan health plan. We adjusted reserves downward for this issue at December 31, 2011, but the adjustment did not capture all of the claims overestimation.

•

Offsetting some of the overestimation items described above, our Missouri health plan reserves were underestimated as a result of an unusually large number of premature infants during the fourth quarter of 2011.

We recognized favorable prior period claims development in the amount of $47.0 million for the three months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at June 30, 2012 was due primarily to the following factors:

•

For our Texas health plan, we had only four months of paid claims data for the expansion regions that were added March 1, 2012. As a result, we overestimated the medical costs for those regions.

•

Our contract with the state of Missouri expired without renewal on June 30, 2012; however we continue to be liable for services rendered to members who were admitted to the hospital on or before June 30, 2012, until the earlier of 90 days or their date of discharge. We overestimated the impact of 90 days of run-out claims for these members.

•

For our Washington health plan, we overpaid certain outpatient claims during 2011 and early 2012, disrupting our payment patterns and leading to an overstatement of our liability at June 30, 2012.

•

For our Michigan health plan, certain inpatient claims with an unusually long run-out were paid in late 2011 and early 2012, resulting in an artificial increase in the amount of time we typically apply for claims payments when estimating the reserve. In the process of developing the reserves as of June 30, 2012, an adjustment was applied to offset these late claim payments, but the adjustment did not completely remove the effect. As a result, reserves were overstated as of June 30, 2012.

We recognized favorable prior period claims development in the amount of $49.5 million and $51.8 million for the nine months ended September 30, 2011, and the year ended December 31, 2011, respectively. This was primarily caused by the overestimation of our liability for claims and medical benefits payable at December 31, 2010, as a result of the following factors:

•

We overestimated the impact of a buildup in claims inventory in Ohio.

•

We overestimated the impact of the settlement of disputed provider claims in California.

•

We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule reduction in New Mexico effective November 2010.

In estimating our claims liability at September 30, 2012, 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:

•

Our Texas health plan membership nearly doubled effective March 1, 2012. In addition, effective March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not previously responsible. Reserves for new coverage and new regions are now based on the newly developing claims lag patterns and comparisons with similar coverage in other regions with more historical data. The lag patterns are still incomplete and therefore the true reserve liability is more uncertain than usual.

•

Our California health plan has enrolled approximately 20,000 new ABD members since September 30, 2011, as a result of the mandatory assignment of ABD members to managed care plans effective July 1, 2011. These new members converted from a fee-for-service environment. Due to the relatively recent transition of these members to managed care, their utilization of medical services is less predictable than it is for many of our other members.

•

Our claims inventory had increased significantly during the first quarter of 2012, followed by a significant reduction in claims inventory in the second quarter of 2012 and a slight drop in the third quarter. Changes in claims inventory can impact historical claims lag patterns.

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. 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 2011 and for the nine months ended September 30, 2012, 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 amount of benefit recognized in each year was roughly consistent with that recognized in the previous year.