10-Q

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
Or
o	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 SERVICES, 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.)
55 Nod Road, Avon, Connecticut (Address of principal executive offices)	06001 (Zip code)

(860) 507-1900
(Registrant's telephone number, including area code)

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 ý    No o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý Accelerated filer o Non-accelerated filer o
(Do not check if a
smaller reporting company) Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The number of shares of the registrant's Ordinary Common Stock outstanding as of March 31, 2013 was 27,091,948.

FORM 10-Q

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

INDEX

		Page No.
PART I—Financial Information:
Item 1:	Financial Statements		3
	Consolidated Balance Sheets—December 31, 2012 and March 31, 2013		3
	Consolidated Statements of Comprehensive Income—For the Three Months Ended March 31, 2012 and 2013		4
	Consolidated Statements of Cash Flows—For the Three Months Ended March 31, 2012 and 2013		5
	Notes to Consolidated Financial Statements		6
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		35
Item 4:	Controls and Procedures		35
PART II—Other Information:
Item 1:	Legal Proceedings		36
Item 1A:	Risk Factors		36
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3:	Defaults Upon Senior Securities		37
Item 4:	Mine Safety Disclosures		37
Item 5:	Other Information		37
Item 6:	Exhibits		37
Signatures			38

2

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31, 2012			March 31, 2013 (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	189,464		$	188,421
Restricted cash		226,554			221,790
Accounts receivable, less allowance for doubtful accounts of $4,612 and $5,566 at December 31, 2012 and March 31, 2013, respectively		138,253			146,376
Short-term investments (restricted investments of $88,332 and $100,780 at December 31, 2012 and March 31, 2013, respectively)		201,127			224,871
Deferred income taxes		31,698			31,636
Pharmaceutical inventory		45,727			47,731
Other current assets (restricted deposits of $20,846 and $24,968 at December 31, 2012 and March 31, 2013, respectively)		38,595			40,403
Total Current Assets		871,418			901,228
Property and equipment, net		136,548			162,611
Restricted long-term investments		32,563			25,131
Other long-term assets		9,730			9,296
Goodwill		426,939			426,939
Other intangible assets, net		34,935			32,622
Total Assets	$	1,512,133		$	1,557,827
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	17,081		$	17,589
Accrued liabilities		100,778			87,252
Medical claims payable		198,429			210,873
Other medical liabilities		76,914			80,222
Current maturities of long-term capital lease obligations		—			3,242
Total Current Liabilities		393,202			399,178
Long-term capital lease obligations		—			25,180
Deferred income taxes		34,086			32,988
Tax contingencies		60,697			61,657
Deferred credits and other long-term liabilities		6,815			7,038
Total Liabilities		494,800			526,041
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2012 and March 31, 2013—Issued and outstanding—none		—			—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2012 and March 31, 2013—Issued and outstanding—45,928 and 27,353 shares at December 31, 2012, respectively, and 46,206 and 27,092 shares at March 31, 2013, respectively		459			462
Multi-Vote common stock, par value $.01 per share
Authorized—40,000 shares—Issued and outstanding—none		—			—
Other Stockholders' Equity:
Additional paid-in capital		848,238			861,804
Retained earnings		975,232			1,003,290
Accumulated other comprehensive loss		(35	)		(112	)
Ordinary common stock in treasury, at cost, 18,575 and 19,114 shares at December 31, 2012 and March 31, 2013, respectively		(806,561	)		(833,658	)
Total Stockholders' Equity		1,017,333			1,031,786
Total Liabilities and Stockholders' Equity	$	1,512,133		$	1,557,827

See accompanying notes to consolidated financial statements.

3

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)

(In thousands, except per share amounts)

	2012			2013
Net revenue:
Managed care and other	$	686,059		$	727,640
Dispensing		87,154			94,121
Total net revenue		773,213			821,761
Cost and expenses:
Cost of care		505,293			529,931
Cost of goods sold		81,038			88,608
Direct service costs and other operating expenses(1)		136,589			139,627
Depreciation and amortization		14,781			16,170
Interest expense		600			610
Interest income		(412	)		(353	)
		737,889			774,593
Income before income taxes		35,324			47,168
Provision for income taxes		14,534			19,110
Net income		20,790			28,058
Net income per common share—basic (See Note B)	$	0.76		$	1.03
Net income per common share—diluted (See Note B)	$	0.75		$	1.01
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities(2)		173			(77	)
Comprehensive income	$	20,963		$	27,981

(1)

Includes stock compensation expense of $5,102 and $5,638 for the three months ended March 31, 2012 and 2013, respectively.

(2)

Net of income tax provision (benefit) of $111 and $(52) for the three months ended March 31, 2012 and 2013, respectively.

See accompanying notes to consolidated financial statements.

4

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31,

(Unaudited)

(In thousands)

	2012			2013
Cash flows from operating activities:
Net income	$	20,790		$	28,058
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,781			16,170
Non-cash interest expense		177			184
Non-cash stock compensation expense		5,102			5,638
Non-cash income tax expense		2,696			(630	)
Non-cash amortization on investments		1,760			2,508
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash		852			4,764
Accounts receivable, net		(12,106	)		(8,359	)
Pharmaceutical inventory		(3,502	)		(2,004	)
Other assets		6,068			(2,039	)
Accounts payable and accrued liabilities		(26,724	)		(15,285	)
Medical claims payable and other medical liabilities		19,201			15,752
Tax contingencies		690			601
Other		(216	)		521
Net cash provided by operating activities		29,569			45,879
Cash flows from investing activities:
Capital expenditures		(14,505	)		(11,382	)
Purchase of investments		(61,977	)		(66,596	)
Maturity of investments		97,168			47,647
Net cash provided by (used in) investing activities		20,686			(30,331	)
Cash flows from financing activities:
Payments to acquire treasury stock		—			(24,830	)
Proceeds from exercise of stock options and warrants		2,197			9,675
Payments on capital lease obligations		—			(414	)
Other		(743	)		(1,022	)
Net cash provided by (used in) financing activities		1,454			(16,591	)
Net increase (decrease) in cash and cash equivalents		51,709			(1,043	)
Cash and cash equivalents at beginning of period		119,862			189,464
Cash and cash equivalents at end of period	$	171,571		$	188,421
Supplemental cash flow data:
Non-cash investing activites:
Property and equipment acquired under capital leases	$	—		$	28,836

See accompanying notes to consolidated financial statements.

5

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

NOTE A—General

Basis of Presentation

        The accompanying unaudited consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation ("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (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, 2013 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.

        The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on this Form 10-Q and no events have occurred that require disclosure.

        These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2012 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2013.

Business Overview

        The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed behavioral healthcare business. As a result of certain acquisitions, the Company expanded into radiology benefits management and specialty pharmaceutical management during 2006, and into Medicaid administration during 2009. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Managed Behavioral Healthcare

        Two of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists, other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services,

6

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

        The Company provides its management services primarily through: (i) risk-based products, 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 fee, (ii) administrative services only ("ASO") products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services, and (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.

        The managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

        Commercial.    The Managed Behavioral Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements.

        Public Sector.    The Managed Behavioral Healthcare Public Sector segment ("Public Sector") generally reflects the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies. Public Sector contracts also include management services for the integrated physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements.

Radiology Benefits Management

        The Radiology Benefits Management segment ("Radiology Benefits Management") generally reflects the management of the delivery of diagnostic imaging and other therapeutic services to ensure that such services are clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its radiology benefits management services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services.

Pharmacy Solutions

        The Pharmacy Solutions segment ("Pharmacy Solutions") comprises products and solutions that provide clinical and financial management of drugs paid under medical and pharmacy benefit programs.

7

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

The Company's Pharmacy Solutions services include (i) pharmacy benefit management ("PBM") programs; (ii) specialty contracting and formulary optimization programs; (iii) specialty pharmaceutical dispensing operations; (iv) medical pharmacy management programs; and (v) programs for the integrated management of drugs that treat complex conditions, regardless of site of service or benefit reimbursement. The Company's pharmacy solutions are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and fee-for-service ("FFS") arrangements.

        Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result of these changes, the Company concluded that changes to its reportable segments were warranted. This segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

Corporate

        This segment of the Company is comprised primarily of operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

        In October 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-04, "Technical Corrections and Improvements" ("ASC 2012-04"). The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this guidance that will not have transition guidance are effective upon issuance. The amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012 and were adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under generally accepted accounting principles ("GAAP") to be reclassified in its entirety to net income. Entities are required to provide information about significant reclassifications by component, and to present those reclassifications either on the face of the statement where net income is presented or in the notes. For other amounts that are not required to be reclassified in their entirety to net income, entities are required to cross-reference other disclosures that provide additional details about those amounts. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2012 and were

8

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

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 include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates

Managed Care and Other Revenue

        Managed Care Revenue.    Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $601.8 million and $629.7 million for the three months ended March 31, 2012 and 2013, respectively.

        Fee-For-Service and Cost-Plus Contracts.    The Company has certain fee-for-service contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. Revenues from these contracts approximated $36.0 million and $49.3 million for the three months ended March 31, 2012 and 2013, respectively.

        Block Grant Revenues.    Public Sector has a contract that is partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $28.9 million and $33.2 million for the three months ended March 31, 2012 and 2013, respectively.

        Performance-Based Revenue.    The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the

9

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

rights and obligations of each party upon termination of the contracts. Performance-based revenues were $8.0 million and $1.9 million for the three months ended March 31, 2012 and 2013, respectively.

        Rebate Revenue.    The Company administers a rebate program 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. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues were $9.7 million and $8.7 million for the three months ended March 31, 2012 and 2013, respectively.

Dispensing Revenue

        The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. 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. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $87.2 million and $94.1 million for the three months ended March 31, 2012 and 2013, respectively.

Significant Customers

Consolidated Company

        The Company provides behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona, (the "Maricopa Contract").

        Under the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance Program) of the Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental illness ("SMI"), and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through September 30, 2013 unless sooner terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately upon notice from the State. The Maricopa Contract generated net revenues of $193.1 million and $182.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The contract is for the management of the publicly funded behavioral health system that delivers mental health, substance abuse and crisis services for adults, youth, and children, and includes an integrated behavioral and physical health care system for individuals with a SMI. On March 25, 2013, the Company was notified that Magellan Complete Care of Arizona, a joint venture owned 80% by the Company and 20% by Vanguard/Phoenix Health Plan, was not selected as the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County). On April 3, 2013, the Company announced

10

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

that it filed a formal protest regarding the State's decision to award the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County) to another vendor. On April 17, 2013, the Arizona Department of Health Services denied the Company's protest. The Company intends to file an appeal of the denial of its protest to the Arizona Department of Administration, the agency responsible for considering appeals of procurement protest denials.

By Segment

        In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2012 and 2013 (in thousands):

Segment	Term Date	2012		2013
Commercial
Customer A	December 31, 2013(1)	$	49,743	$	51,641
Customer B	December 31, 2019		33,727		35,811
Customer C	December 31, 2012 to December 14, 2013(2)(3)		29,326		16,782	*
Public Sector
Customer D	June 30, 2013(4)		55,236		64,312
Radiology Benefits Management
Customer E	December 31, 2015		26,556		31,361
Customer F	June 30, 2014		14,378		15,235
Customer G	July 31, 2015		12,253		16,083
Customer H	January 31, 2014		9,104		9,759
Pharmacy Solutions
Customer I	November 30, 2013 to December 31, 2013(2)		31,044		33,311
Customer J	September 1, 2013 to April 29, 2014(2)		15,626		15,297
Customer K	September 27, 2013 to December 31, 2013(2)		14,647		21,641
Customer L	September 30, 2013(5)		21,108		15,245

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.

(2)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(3)

Revenues for the three months ended March 31, 2012 of $13.2 million relate to a contract that terminated as of December 31, 2012.

(4)

Contract has options for the customer to extend the term for two additional one-year periods.

(5)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

11

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

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, and with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $92.3 million and $86.7 million for the three months ended March 31, 2012 and 2013, respectively. Net revenues from the Florida Areas in the aggregate totaled $34.1 million and $33.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The Company's contracts with customers typically have 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 60 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.

Fair Value Measurements

        The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

        Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

        Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

        Level 3—Unobservable inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company's data.

12

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

        In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured at fair value as of December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(1)	$	—	$	102,137	$	—	$	102,137
Restricted cash(2)		—		82,839		—		82,839
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		6,128		—		6,128
Corporate debt securities		—		214,547		—		214,547
Taxable municipal bonds		—		11,800		—		11,800
Certificates of deposit		—		150		—		150
December 31, 2012	$	1,065	$	417,601	$	—	$	418,666

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(4)	$	—	$	72,282	$	—	$	72,282
Restricted cash(5)		—		117,120		—		117,120
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		8,449		—		8,449
Corporate debt securities		—		236,472		—		236,472
Taxable municipal bonds		—		3,866		—		3,866
Certificates of deposit		—		150		—		150
March 31, 2013	$	1,065	$	438,339	$	—	$	439,404

(1)

Excludes $87.3 million of cash held in bank accounts by the Company.

(2)

Excludes $143.7 million of restricted cash held in bank accounts by the Company.

(3)

Includes investments in notes issued by the Federal Home Loan Bank.

(4)

Excludes $116.1 million of cash held in bank accounts by the Company.

(5)

Excludes $104.7 million of restricted cash held in bank accounts by the Company.

        For the three months ended March 31, 2013, the Company has not transferred any assets between fair value measurement levels.

        All of the Company's investments are classified as "available-for-sale" and are carried at fair value.

13

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

        If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2012 and March 31, 2013, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the three months ended March 31, 2012 or 2013. The following is a summary of short-term and long-term investments at December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		6,126		4		(2	)		6,128
Corporate debt securities		214,603		66		(122	)		214,547
Taxable municipal bonds		11,805		—		(5	)		11,800
Certificates of deposit		150		—		—			150
Total investments at December 31, 2012	$	233,749	$	70	$	(129	)	$	233,690

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		8,449		4		(4	)		8,449
Corporate debt securities		236,655		49		(232	)		236,472
Taxable municipal bonds		3,871		—		(5	)		3,866
Certificates of deposit		150		—		—			150
Total investments at March 31, 2013	$	250,190	$	53	$	(241	)	$	250,002

(1)

Includes investments in notes issued by the Federal Home Loan Bank.

14

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

        The maturity dates of the Company's investments as of March 31, 2013 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2013	$	202,180	$	202,047
2014		44,253		44,205
2015		3,757		3,750
Total investments at March 31, 2013	$	250,190	$	250,002

Income Taxes

        The Company's effective income tax rates were 41.1 percent and 40.5 percent for the three months ended March 31, 2012 and 2013, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the three months ended March 31, 2013 is lower than the effective rate for the three months ended March 31, 2012 mainly due to differences in the Company's effective state tax rate.

        The Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax assessments by tax authorities for years ended prior to 2009.

Stock Compensation

        At December 31, 2012 and March 31, 2013, the Company had equity-based employee incentive plans, which are described more fully in Note 6 in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Company recorded stock compensation expense of $5.1 million and $5.6 million for the three months ended March 31, 2012 and 2013, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2013 has been reduced for estimated forfeitures, estimated at four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the three months ended March 31, 2013 was $12.06 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 27.86 percent based on the historical volatility of the Company's stock price.

        The benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the three months ended March 31, 2012 and 2013, $0.4 million and $0.3 million, respectively, of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows. For the three

15

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

months ended March 31, 2012 the net change to additional paid in capital related to tax benefits (deficiencies) was $0.3 million which includes the $0.4 million of excess tax benefits offset by $(0.1) million of tax deficiencies. For the three months ended March 31, 2013, the net change to additional paid in capital related to tax benefits (deficiencies) was $(0.2) million which includes $(0.5) million of excess tax deficiencies offset by the $0.3 million of excess tax benefits.

        Summarized information related to the Company's stock options for the three months ended March 31, 2013 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		4,268,240		$	44.35
Granted		951,133			52.55
Forfeited		(21,122	)		47.13
Exercised		(205,755	)		45.88
Outstanding, end of period		4,992,496		$	45.83
Vested and expected to vest at end of period		4,923,356		$	45.77
Exercisable, end of period		2,813,512		$	42.61

        With the exception of options granted to the Company's CEO, all of the Company's options granted during the three months ended March 31, 2013 vest ratably on each anniversary date over the three years subsequent to grant. During the three months ended March 31, 2013, the Company granted options to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively. All options granted during the three months ended March 31, 2013 have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards for the three months ended March 31, 2013 is as follows:

	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		23,672	$	42.25
Awarded		—		—
Vested		—		—
Forfeited		—		—
Outstanding, ending of period		23,672	$	42.25

16

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

        Summarized information related to the Company's nonvested restricted stock units for the three months ended March 31, 2013 is as follows:

	Shares			Weighted Grant Date Fair Value
Outstanding, beginning of period		202,690		$	47.38
Awarded		98,580			52.62
Vested		(93,804	)		46.70
Forfeited		(1,310	)		47.95
Outstanding, ending of period		206,156		$	50.19

        Grants of restricted stock awards vest on the anniversary of the grant. With the exception of restricted stock units awarded to the CEO during the three months ended March 31, 2013, restricted stock units vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting year are met. During the three months ended March 31, 2013, the Company granted restricted stock units to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively, assuming the associated performance hurdle(s) for that vesting year are met.

Long Term Debt and Capital Lease Obligations

        On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company (the "2011 Credit Facility"). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to The Bank of Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility will mature on December 9, 2014.

        Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.

        There were no capital lease obligations at December 31, 2012 and $28.4 million of capital lease obligations at March 31, 2013. At March 31, 2013, aggregate amounts of future minimum payments

17

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE A—General (Continued)

under capital leases were as follows: 2013—$0.8 million; 2014—$0.4 million; 2015—$1.3 million; 2016—$2.2 million; 2017—$2.4 million; 2018 and beyond—$21.3 million. The Company had $32.0 million and $32.4 million of letters of credit outstanding at December 31, 2012 and March 31, 2013, respectively, and no Revolving Loan borrowings at December 31, 2012 or March 31, 2013.

Reclassifications

        Certain prior year amounts have been reclassified to conform with the current year presentation.

NOTE B—Net Income per Common Share

        The following tables reconcile income (numerator) and shares (denominator) used in the computations of net income per common share (in thousands, except per share data):

	Three Months Ended March 31,
	2012		2013
Numerator:
Net income	$	20,790	$	28,058
Denominator:
Weighted average number of common shares outstanding—basic		27,199		27,110
Common stock equivalents—stock options		432		467
Common stock equivalents—restricted stock		13		17
Common stock equivalents—restricted stock units		102		52
Common stock equivalents—employee stock purchase plan		1		2
Weighted average number of common shares outstanding—diluted		27,747		27,648
Net income per common share—basic	$	0.76	$	1.03
Net income per common share—diluted	$	0.75	$	1.01

        The weighted average number of common shares outstanding for the three months ended March 31, 2012 and 2013 were calculated using outstanding shares of the Company's common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2012 and 2013 represent stock options to purchase shares of the Company's common stock, restricted stock awards and restricted stock units, and stock purchased under the Employee Stock Purchase Plan.

        The Company had additional potential dilutive securities outstanding representing 1.6 million and 1.7 million options for the three months ended March 31, 2012 and 2013, respectively, that were not included in the computation of dilutive securities because they were anti-dilutive for the period. Had these shares not been anti-dilutive, all of these shares would not have been included in the net income

18

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE B—Net Income per Common Share (Continued)

per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

NOTE C—Business Segment Information

        The accounting policies of the Company's segments are the same as those described in Note A—"General." The Company evaluates performance of its segments based on income before income taxes, before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, and special charges or benefits ("Segment Profit"). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Effective September 1, 2010, Public Sector has subcontracted with Pharmacy Solutions to provide pharmacy benefits management services on a risk basis for one of Public Sector's customers. As such, revenue and cost of care related to this intersegment arrangement are eliminated. The Company's segments are defined above. The Pharmacy Solutions segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

        The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2012
Managed care and other revenue	$	180,524		$	388,888		$	76,857		$	60,898		$	(21,108	)	$	686,059
Dispensing revenue		—			—			—			87,154			—			87,154
Cost of care		(112,172	)		(344,312	)		(50,410	)		(19,507	)		21,108			(505,293	)
Cost of goods sold		—			—			—			(81,038	)		—			(81,038	)
Direct service costs and other		(42,362	)		(20,597	)		(13,486	)		(29,019	)		(31,125	)		(136,589	)
Stock compensation expense(1)		267			287			400			230			3,918			5,102
Segment profit (loss)	$	26,257		$	24,266		$	13,361		$	18,718		$	(27,207	)	$	55,395

19

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE C—Business Segment Information (Continued)

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2013
Managed care and other revenue	$	187,837		$	406,620		$	90,278		$	58,150		$	(15,245	)	$	727,640
Dispensing revenue		—			—			—			94,121			—			94,121
Cost of care		(113,271	)		(355,379	)		(58,067	)		(18,459	)		15,245			(529,931	)
Cost of goods sold		—			—			—			(88,608	)		—			(88,608	)
Direct service costs and other		(41,392	)		(25,643	)		(13,371	)		(29,561	)		(29,660	)		(139,627	)
Stock compensation expense(1)		133			307			434			320			4,444			5,638
Segment profit (loss)	$	33,307		$	25,905		$	19,274		$	15,963		$	(25,216	)	$	69,233

(1)

Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

        The following table reconciles Segment Profit to income before income taxes (in thousands):

	Three Months Ended March 31,
	2012			2013
Segment profit	$	55,395		$	69,233
Stock compensation expense		(5,102	)		(5,638	)
Depreciation and amortization		(14,781	)		(16,170	)
Interest expense		(600	)		(610	)
Interest income		412			353
Income before income taxes	$	35,324		$	47,168

NOTE D—Commitments and Contingencies

Legal

        The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations or business practices. In the opinion of management, the Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the

20

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

NOTE D—Commitments and Contingencies (Continued)

Company's financial condition or results of operations; however, there can be no assurance in this regard.

Stock Repurchases

        On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013.

        Stock repurchases under the program may be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of 671,776 shares of the Company's common stock at an average price of $48.72 per share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open market purchases of 459,252 shares of the Company's common stock at an average price of $50.27 per share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to this program, the Company made open market purchases of 539,790 shares of the Company's common stock at an average price of $50.17 per share for an aggregate cost of $27.1 million (excluding broker commissions) during the three months ended March 31, 2013. As of March 31, 2013, the total dollar value remaining under the current authorization was $117.1 million.

        During the period from April 1, 2013 through April 25, 2013, the Company made additional open market purchases of 239,712 shares of the Company's common stock at an aggregate cost of $11.9 million (excluding broker commissions).

21

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion and analysis of the financial condition and results of operations of Magellan and its majority-owned subsidiaries and all VIEs for which Magellan is the primary beneficiary should be read together with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on February 28, 2013.

Forward-Looking Statements

        This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that its plans, intentions and expectations as reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include:

•

the Company's inability to renegotiate or extend expiring customer contracts, or the termination of customer contracts;

•

the Company's inability to integrate acquisitions in a timely and effective manner;

•

changes in business practices of the industry, including the possibility that certain of the Company's managed care customers could seek to provide managed healthcare services directly to their subscribers, instead of contracting with the Company for such services, particularly as a result of further consolidation in the managed care industry and especially regarding managed healthcare customers that have already done so with a portion of their membership;

•

the impact of changes in the contracting model for Medicaid contracts, including certain changes in the contracting model used by states for managed healthcare services contracts relating to Medicaid lives;

•

the Company's ability to accurately predict and control healthcare costs, and to properly price the Company's services;

•

the Company's ability to accurately underwrite and control healthcare costs associated with its expansion into clinically integrated management of special populations eligible for Medicaid and Medicare, including individuals with SMI and other unique high-cost populations;

•

the Company's ability to maintain or secure cost-effective healthcare provider contracts;

•

fluctuation in quarterly operating results due to seasonal and other factors;

•

the Company's dependence on government spending for managed healthcare, including changes in federal, state and local healthcare policies;

•

restrictive covenants in the Company's debt instruments;

•

present or future state regulations and contractual requirements that the Company provide financial assurance of its ability to meet its obligations;

•

the impact of the competitive environment in the managed healthcare services industry which may limit the Company's ability to maintain or obtain contracts, as well as its ability to maintain or increase its rates;

22

•

the impact of healthcare reform legislation;

•

the Mental Health and Substance Abuse Benefit Parity Law and Regulations;

•

government regulation;

•

the unauthorized disclosure of sensitive or confidential member or other information;

•

the possible impact of additional regulatory scrutiny and liability associated with the Company's Pharmacy Solutions segment;

•

the inability to realize the value of goodwill and intangible assets;

•

pending or future actions or claims for professional liability;

•

claims brought against the Company that either exceed the scope of the Company's liability coverage or result in denial of coverage;

•

class action suits and other legal proceedings;

•

negative publicity;

•

the impact of governmental investigations;

•

the impact of varying economic and market conditions on the Company's investment portfolio; and

•

the state of the national economy and adverse changes in economic conditions.

        Further discussion of factors currently known to management that could cause actual results to differ materially from those in forward-looking statements is set forth under the heading "Risk Factors" in Item 1A of Magellan's Annual Report on Form 10-K for the year ended December 31, 2012. When used in this Quarterly Report on Form 10-Q, the words "estimate," "anticipate," "expect," "believe," "should," and similar expressions are intended to be forward-looking statements. Magellan undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law.

Business Overview

        The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed behavioral healthcare business. As a result of certain acquisitions, the Company expanded into radiology benefits management and specialty pharmaceutical management during 2006, and into Medicaid administration during 2009. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Managed Behavioral Healthcare

        Two of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists, other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient treatment and crisis intervention

23

services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

        The Company provides its management services primarily through: (i) risk-based products, 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 fee, (ii) ASO products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services, and (iii) EAPs where the Company provides short-term outpatient behavioral counseling services.

        The managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

        Commercial.    Commercial generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements. As of March 31, 2013, Commercial's covered lives were 4.9 million, 13.6 million and 12.4 million for risk-based, ASO and EAP products, respectively. For the three months ended March 31, 2013, Commercial's revenue was $125.6 million, $27.5 million and $34.7 million for risk-based, ASO and EAP products, respectively.

        Public Sector.    Public Sector generally reflects the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies. Public Sector contracts also include management services for the integrated physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements. As of March 31, 2013, Public Sector's covered lives were 1.9 million and 1.1 million for risk-based and ASO products, respectively. For the three months ended March 31, 2013, Public Sector's revenue was $398.6 million and $8.0 million for risk-based and ASO products, respectively.

Radiology Benefits Management

        Radiology Benefits Management generally reflects the management of the delivery of diagnostic imaging and other therapeutic services to ensure that such services are clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its radiology benefits management services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services. As of March 31, 2013, covered lives for Radiology Benefits Management were 4.9 million and 12.2 million for risk-based and ASO products, respectively. For the three months ended March 31, 2013, revenue for Radiology Benefits Management was $80.1 million and $10.2 million for risk-based and ASO products, respectively.

Pharmacy Solutions

        Pharmacy Solutions comprises products and solutions that provide clinical and financial management of drugs paid under medical and pharmacy benefit programs. The Company's Pharmacy Solutions services include (i) pharmacy benefit management programs; (ii) specialty contracting and formulary optimization programs; (iii) specialty pharmaceutical dispensing operations; (iv) medical

24

pharmacy management programs; and (v) programs for the integrated management of drugs that treat complex conditions, regardless of site of service or benefit reimbursement. The Company's pharmacy solutions are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and FFS arrangements. The Company's Pharmacy Solutions segment served 41 health plans and employers, 24 states and the District of Columbia, and several pharmaceutical manufacturers as of March 31, 2013.

        Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result of these changes, the Company concluded that changes to its reportable segments were warranted. This segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

Corporate

        This segment of the Company is comprised primarily of operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.

Significant Customers

Consolidated Company

        The Company provides behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona, (the "Maricopa Contract").

        Under the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance Program) of the Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental illness ("SMI"), and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through September 30, 2013 unless sooner terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately upon notice from the State. The Maricopa Contract generated net revenues of $193.1 million and $182.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The contract is for the management of the publicly funded behavioral health system that delivers mental health, substance abuse and crisis services for adults, youth, and children, and includes an integrated behavioral and physical health care system for individuals with a SMI. On March 25, 2013, the Company was notified that Magellan Complete Care of Arizona, a joint venture owned 80% by the Company and 20% by Vanguard/Phoenix Health Plan, was not selected as the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County). On April 3, 2013, the Company announced that it filed a formal protest regarding the State's decision to award the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County) to another vendor. On April 17, 2013, the Arizona Department of Health Services denied the Company's protest. The Company intends to file an appeal of the denial of its protest to the Arizona Department of Administration, the agency responsible for considering appeals of procurement protest denials.

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By Segment

        In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2012 and 2013 (in thousands):

Segment	Term Date	2012		2013
Commercial
Customer A	December 31, 2013(1)	$	49,743	$	51,641
Customer B	December 31, 2019		33,727		35,811
Customer C	December 31, 2012 to December 14, 2013(2)(3)		29,326		16,782	*
Public Sector
Customer D	June 30, 2013(4)		55,236		64,312
Radiology Benefits Management
Customer E	December 31, 2015		26,556		31,361
Customer F	June 30, 2014		14,378		15,235
Customer G	July 31, 2015		12,253		16,083
Customer H	January 31, 2014		9,104		9,759
Pharmacy Solutions
Customer I	November 30, 2013 to December 31, 2013(2)		31,044		33,311
Customer J	September 1, 2013 to April 29, 2014(2)		15,626		15,297
Customer K	September 27, 2013 to December 31, 2013(2)		14,647		21,641
Customer L	September 30, 2013(5)		21,108		15,245

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.

(2)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(3)

Revenues for the three months ended March 31, 2012 of $13.2 million relate to a contract that terminated as of December 31, 2012.

(4)

Contract has options for the customer to extend the term for two additional one-year periods.

(5)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

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, and with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $92.3 million and $86.7 million for the three months ended March 31, 2012 and 2013, respectively. Net revenues from the Florida Areas in the aggregate totaled $34.1 million and $33.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The Company's contracts with customers typically have 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

26

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 60 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.

Critical Accounting Policies and 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 include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates. Except as noted below, the Company's critical accounting policies are summarized in the Company's Annual Report on Form 10-K, filed with the SEC on February 28, 2013.

Income Taxes

        The Company's effective income tax rates were 41.1 percent and 40.5 percent for the three months ended March 31, 2012 and 2013, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the three months ended March 31, 2013 is lower than the effective rate for the three months ended March 31, 2012 mainly due to differences in the Company's effective state tax rate.

        The Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax assessments by tax authorities for years ended prior to 2009.

Results of Operations

        The accounting policies of the Company's segments are the same as those described in Note A—"General." The Company evaluates performance of its segments based on Segment Profit. Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Effective September 1, 2010, Public Sector has subcontracted with Pharmacy Solutions to provide pharmacy benefits management services on a risk basis for one of Public Sector's customers. As such, revenue and cost of care related to this intersegment arrangement are eliminated. The Company's segments are defined above. The Pharmacy Solutions segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

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        The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2012
Managed care and other revenue	$	180,524		$	388,888		$	76,857		$	60,898		$	(21,108	)	$	686,059
Dispensing revenue		—			—			—			87,154			—			87,154
Cost of care		(112,172	)		(344,312	)		(50,410	)		(19,507	)		21,108			(505,293	)
Cost of goods sold		—			—			—			(81,038	)		—			(81,038	)
Direct service costs and other		(42,362	)		(20,597	)		(13,486	)		(29,019	)		(31,125	)		(136,589	)
Stock compensation expense(1)		267			287			400			230			3,918			5,102
Segment profit (loss)	$	26,257		$	24,266		$	13,361		$	18,718		$	(27,207	)	$	55,395

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2013
Managed care and other revenue	$	187,837		$	406,620		$	90,278		$	58,150		$	(15,245	)	$	727,640
Dispensing revenue		—			—			—			94,121			—			94,121
Cost of care		(113,271	)		(355,379	)		(58,067	)		(18,459	)		15,245			(529,931	)
Cost of goods sold		—			—			—			(88,608	)		—			(88,608	)
Direct service costs and other		(41,392	)		(25,643	)		(13,371	)		(29,561	)		(29,660	)		(139,627	)
Stock compensation expense(1)		133			307			434			320			4,444			5,638
Segment profit (loss)	$	33,307		$	25,905		$	19,274		$	15,963		$	(25,216	)	$	69,233

(1)

Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

        The following table reconciles Segment Profit to income before income taxes (in thousands):

	Three Months Ended March 31,
	2012			2013
Segment profit	$	55,395		$	69,233
Stock compensation expense		(5,102	)		(5,638	)
Depreciation and amortization		(14,781	)		(16,170	)
Interest expense		(600	)		(610	)
Interest income		412			353
Income before income taxes	$	35,324		$	47,168

Quarter ended March 31, 2013 ("Current Year Quarter"), compared to the quarter ended March 31, 2012 ("Prior Year Quarter")

Commercial

Net Revenue

        Net revenue related to Commercial increased by 4.1 percent or $7.3 million from the Prior Year Quarter to the Current Year Quarter. The increase in revenue is mainly due to new contracts implemented after (or during) the Prior Year Quarter of $15.6 million, favorable rate changes of

28

$11.7 million and increased membership from existing customers of $1.8 million, which increases were partially offset by terminated contracts of $14.5 million, recognition in the prior year quarter of performance-based revenue relating to the prior year of $6.6 million, and other net decreases of $0.7 million.

Cost of Care

        Cost of care increased by 1.0 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter. The increase in cost of care is primarily due to new contracts of $10.9 million, favorable prior period medical claims development recorded in the Prior Year Quarter of $2.0 million, increased membership from existing customers of $0.8 million and unfavorable care trends and other net variances of $1.8 million, which increases were partially offset by terminated contracts of $11.6 million, favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $2.0 million and favorable prior period medical claims development recorded in the Current Year Quarter of $0.8 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from 82.9 percent in the Prior Year Quarter to76.4 percent in the Current Year Quarter, mainly due to new business and favorable rate changes partially offset by terminated contracts.

Direct Service Costs

        Direct service costs decreased by 2.3 percent or $1.0 million from the Prior Year Quarter to the Current Year Quarter mainly due to cost containment efforts. Direct service costs decreased as a percentage of revenue from 23.5 percent in the Prior Year Quarter to 22.0 percent in the Current Year Quarter, mainly due to changes in business mix.

Public Sector

Net Revenue

        Net revenue related to Public Sector increased by 4.6 percent or $17.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $33.4 million, which was partially offset by decreased membership from existing customers of $8.5 million, unfavorable rate changes of $6.4 million and other net unfavorable variances of $0.8 million.

Cost of Care

        Cost of care increased by 3.2 percent or $11.1 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts of $25.3 million, which was partially offset by decreased membership from existing customers of $8.3 million, care associated with rate changes for contracts with minimum care requirements of $5.2 million, and other net unfavorable variances of $0.7 million. Cost of care decreased as a percentage of risk revenue from 89.4 percent in the Prior Year Quarter to 89.2 percent in the Current Year Quarter mainly due to changes in business mix.

Direct Service Costs

        Direct service costs increased by 24.5 percent or $5.0 million from the Prior Year Quarter to the Current Year Quarter, mainly due to costs to support new business and development costs for the Magellan Complete Care product. Direct service costs increased as a percentage of revenue from 5.3 percent for the Prior Year Quarter to 6.3 percent in the Current Year Quarter mainly due to development cost for the Magellan Complete Care product.

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Radiology Benefits Management

Net Revenue

        Net revenue related to Radiology Benefits Management increased by 17.5 percent or $13.4 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $13.8 million, increased membership from existing customers of $1.9 million and other net favorable variances of $0.6 million, which increases were partially offset by the revenue impact of favorable prior period care development recorded in the Current Year Quarter of $2.0 million and unfavorable rate changes of $0.9 million.

Cost of Care

        Cost of care increased by 15.2 percent or $7.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily attributed to new contracts of $11.8 million, increased membership from existing customers of $1.0 million, favorable prior period medical claims development recorded in the Prior Year Quarter of $0.7 million, and care trends and other net unfavorable variances of $0.3 million, which increases were partially offset by favorable prior period medical claims development recorded in the Current Year Quarter of $4.1 million and favorable medical claims development for the Prior Year Quarter recorded after the Prior Year Quarter of $2.0 million. Cost of care decreased as a percentage of risk revenue from 75.9 percent in the Prior Year Quarter to 72.5 percent in the Current Year Quarter mainly due to favorable medical claims development, partially offset by changes in business mix.

Direct Service Costs

        Direct service costs decreased by 0.9 percent or $0.1 million from the Prior Year Quarter to the Current Year Quarter. As a percentage of revenue, direct service costs decreased from 17.5 percent in the Prior Year Quarter to 14.8 percent in the Current Year Quarter, mainly due to changes in business mix.

Pharmacy Solutions

Net Revenue

        Net revenue related to Pharmacy Solutions increased by 2.8 percent or $4.2 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to net increased dispensing activity of $7.0 million and revenue from new PBM business of $5.0 million, which increases are partially offset by reduction to revenue associated with profit share recorded due to favorable cost of care trends of $5.9 million, and other net decreases of $1.9 million.

Cost of Care

        Cost of care decreased by 5.4 percent or $1.0 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to favorable care trends of $5.9 million, which decrease was partially offset by new PBM business of $4.9 million. Cost of care decreased as a percentage of risk revenue from 92.4 percent in the Prior Year Quarter to 91.0 percent in the Current Year Quarter, mainly due to favorable care trends.

Cost of Goods Sold

        Cost of goods sold increased by 9.3 percent or $7.6 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to increased dispensing activity. As a percentage of the portion of net revenue that relates to dispensing activity, cost of goods sold increased from 93.0 percent in the Prior Year Quarter to 94.1 percent in the Current Year Quarter, mainly due to business mix.

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Direct Service Costs

        Direct service costs increased by 1.9 percent or $0.5 million from the Prior Year Quarter to the Current Year Quarter. As a percentage of revenue, direct service costs decreased from 19.6 percent in the Prior Year Quarter to 19.4 percent in the Current Year Quarter, mainly due to increased dispensing revenue and new business.

Corporate and Other

Other Operating Expenses

        Other operating expenses related to the Corporate and Other Segment decreased by 4.7 percent or $1.5 million from the Prior Year Quarter to the Current Year Quarter. The decrease results primary from expenses recorded in the prior year for growth initiatives. As a percentage of total net revenue, other operating expenses decreased from 4.0 percent for the Prior Year Quarter to 3.6 percent for the Current Year Quarter, primarily due to increased revenue from new business.

Depreciation and Amortization

        Depreciation and amortization expense increased by 9.4 percent or $1.4 million for the Prior Year Quarter to the Current Year Quarter, primarily due to asset additions after the Prior Year Quarter.

Interest Expense

        Interest expense was $0.6 million in the Current Year Quarter which is consistent with the Prior Year Quarter.

Interest Income

        Interest income was $0.4 million in the Current Year Quarter which is consistent with the Prior Year Quarter.

Income Taxes

        The Company's effective income tax rates were 41.1 percent and 40.5 percent for the Prior Year Quarter and Current Year Quarter, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the Current Year Quarter is lower than the Prior Year Quarter effective rate mainly due to differences in the Company's effective state tax rate.

Outlook—Results of Operations

        The Company's Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 2—"Forward-Looking Statements" as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company's risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); and (vi) changes in estimates regarding medical costs and IBNR.

        A portion of the Company's business is subject to rising care costs due to an increase in the number and frequency of covered members seeking behavioral healthcare or radiology services, higher costs per inpatient day or outpatient visit for behavioral services, and higher costs per scan for radiology services. Many of these factors are beyond the Company's control. Future results of

31

operations will be heavily dependent on management's ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.

        In relation to the managed behavioral healthcare business, the Company is a market leader in a mature market with many viable competitors. The Company is continuing its attempts to grow its business in the managed behavioral healthcare industry through aggressive marketing and development of new products; however, due to the maturity of the market, the Company believes that the ability to grow its current business lines may be limited. In addition, as previously discussed, substantially all of the Company's Commercial segment revenues are derived from Blue Cross Blue Shield health plans and other managed care companies, health insurers and health plans. In the past, certain of the managed care customers of the Company have decided not to renew all or part of their contracts with the Company, and to instead manage the behavioral healthcare services directly for their subscribers.

        Care Trends.    The Company expects that same-store normalized cost of care trend for the 12-month forward outlook to be 6 to 8 percent for Commercial, 0 to 2 percent for Public Sector and 3 to 5 percent for Radiology Benefits Management. These trend ranges are one point lower than previous outlook.

        Interest Rate Risk.    Changes in interest rates affect interest income earned on the Company's cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the Company's 2011 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2011 Credit Facility as of March 31, 2013, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company's future earnings and cash outflows.

Historical—Liquidity and Capital Resources

        Operating Activities.    The Company reported net cash provided by operating activities of $29.6 million and $45.9 million for the Prior Year Quarter and Current Year Quarter, respectively. The $16.3 million increase in operating cash flows from the Prior Year Quarter to the Current Year Quarter is primarily attributable to the increase in Segment Profit between periods, the impact of the net shift of restricted funds between cash and investments that results in an operating cash flow change that is directly offset by an investing cash flow change, and a reduction in tax payments between periods. Partially offsetting these items is net unfavorable working capital changes between periods.

        Segment Profit for the Current Year Quarter increased $13.8 million from the Prior Year Quarter. During the Prior Year Quarter, restricted investments of $4.4 million were shifted to restricted cash that reduced operating cash flows, with restricted cash of $5.0 million shifted to restricted investments during the Current Year Quarter that increased operating cash flows. The net impact of the shift in restricted funds between periods is an increase in operating cash flows of $9.4 million. Tax payments for the Prior Year Quarter and Current Year Quarter totaled $4.3 million and $3.3 million, respectively. Operating cash flows for the Prior Year Quarter and Current Year Quarter were impacted by net unfavorable working capital changes of $17.1 million and $25.0 million, respectively, largely attributable to discretionary bonus payments.

        During the Current Year Quarter, the Company's restricted cash decreased $4.8 million. The change in restricted cash is mainly attributable to the net shift of restricted cash to restricted investments of $5.0 million.

        Investing Activities.    The Company utilized $14.5 million and $11.4 million during the Prior Year Quarter and Current Year Quarter, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, leaseholds) and capitalized software for the Prior Year Quarter were $6.9 million and $7.6 million, respectively, as compared to additions for the Current Year Quarter related to hard assets and capitalized software of $2.8 million and $8.6 million, respectively. In addition, during the Prior Year Quarter the Company received net cash of $35.2 million for the net maturity of

32

"available for sale" securities, with the Company using net cash of $18.9 million during the Current Year Quarter for the net purchase of "available-for-sale" securities.

        Financing Activities.    During the Prior Year Quarter, the Company received $2.2 million from the exercise of stock options and had other net unfavorable items of $0.7 million.

        During the Current Year Quarter, the Company paid $24.8 million for the repurchase of treasury stock under the Company's share repurchase program and had other net unfavorable items of $1.5 million. In addition, the Company received $9.7 million from the exercise of stock options.

Outlook—Liquidity and Capital Resources

        Liquidity.    During the remainder of 2013, the Company expects to fund its estimated capital expenditures of $41 million to $51 million with cash from operations. The Company does not anticipate that it will need to draw on amounts available under the 2011 Credit Facility for cash flow needs related to its operations, capital needs or debt service in 2013. The Company also currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. The Company plans to maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the situation in the financial markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance that the Company will not experience any such losses in the future.

        Stock Repurchases.    On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013.

        Stock repurchases under the program may be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of 671,776 shares of the Company's common stock at an average price of $48.72 per share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open market purchases of 459,252 shares of the Company's common stock at an average price of $50.27 per share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to this program, the Company made open market purchases of 539,790 shares of the Company's common stock at an average price of $50.17 per share for an aggregate cost of $27.1 million (excluding broker commissions) during the three months ended March 31, 2013.

        During the period from April 1, 2013 through April 25, 2013, the Company made additional open market purchases of 239,712 shares of the Company's common stock at an aggregate cost of $11.9 million (excluding broker commissions).

        Off-Balance Sheet Arrangements.    As of March 31, 2013, the Company has no material off-balance sheet arrangements.

        2011 Credit Facility.    On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company (the "2011 Credit Facility"). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to The Bank of Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility will mature on December 9, 2014.

33

        Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.

        Restrictive Covenants in Debt Agreements.    The 2011 Credit Facility contains covenants that limit management's discretion in operating the Company's business by restricting or limiting the Company's ability, among other things, to:

•

incur or guarantee additional indebtedness or issue preferred or redeemable stock;

•

pay dividends and make other distributions;

•

repurchase equity interests;

•

make certain advances, investments and loans;

•

enter into sale and leaseback transactions;

•

create liens;

•

sell and otherwise dispose of assets;

•

acquire or merge or consolidate with another company; and

•

enter into some types of transactions with affiliates.

        These restrictions could adversely affect the Company's ability to finance future operations or capital needs or engage in other business activities that may be in the Company's interest.

        The 2011 Credit Facility also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2011 Credit Facility pursuant to its terms, would result in an event of default under the 2011 Credit Facility. As of March 31, 2013, the Company was in compliance with all covenants, including financial covenants, under the 2011 Credit Facility.

        Although the 2011 Credit Facility expires on December 9, 2014, the Company believes it will be able to obtain a new facility or, if not, to use cash on hand to fund letters of credit and other liquidity needs.

        Net Operating Loss Carryforwards.    The Company had federal net operating loss carryforwards ("NOLs") as of December 31, 2012 of approximately $4.2 million available to reduce future federal taxable income. These NOLs, if not used, expire in 2017 through 2019 and are subject to examination and adjustment by the IRS. Utilization of these NOLs is also subject to certain timing limitations, although the Company does not believe these limitations will restrict its ability to use any federal NOLs before they expire.

        As of December 31, 2012, the Company's valuation allowances against deferred tax assets were $3.1 million, mostly relating to uncertainties regarding the eventual realization of certain state NOLs. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Future changes in the estimated

34

realizable portion of deferred taxes could materially affect the Company's financial condition and results of operations.

Recent Accounting Pronouncements

        In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements" ("ASC 2012-04"). The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this guidance that will not have transition guidance are effective upon issuance. The amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012 and were adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. Entities are required to provide information about significant reclassifications by component, and to present those reclassifications either on the face of the statement where net income is presented or in the notes. For other amounts that are not required to be reclassified in their entirety to net income, entities are required to cross-reference other disclosures that provide additional details about those amounts. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2012 and were adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

        Changes in interest rates affect interest income earned on the Company's cash equivalents and investments, as well as interest expense on variable interest rate borrowings under the Company's 2011 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2011 Credit Facility as of March 31, 2013, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company's future earnings and cash outflows.

Item 4.    Controls and Procedures.

        a)    The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act), as of March 31, 2013. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2013.

        b)    Under the supervision and with the participation of management, including the Company's principal executive and principal financial officers, the Company has determined that there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

35

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

        The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations or business practices. In the opinion of management, the Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there can be no assurance in this regard.

Item 1A.    Risk Factors.

        There has been no material change in our risk factors as disclosed in Part I—Item 1A—"Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2012 which was filed with the SEC on February 28, 2013.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

        The Company's board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.

        On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013. Pursuant to this program, the Company made open market purchases of 671,776 shares of the Company's common stock at an average price of $48.72 per share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open market purchases of 459,252 shares of the Company's common stock at an average price of $50.27 per share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012.

36

        Following is a summary of stock repurchases made during the three months ended March 31, 2013:

Period	Total number of Shares Purchased		Average Price Paid per Share(2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands)(1)(2)
January 1 - 31, 2013		247,243	$	49.96		247,243	$	131,834
February 1 - 28, 2013		155,307	$	51.71		155,307		123,802
March 1 - 31, 2013		137,240	$	48.80		137,240		117,104
		539,790				539,790	$	117,104

(1)

Excludes amounts that could be used to repurchase shares acquired under the Company's equity incentive plans to satisfy withholding tax obligations of employees and non-employee directors upon the vesting of restricted stock units.

(2)

Excludes broker commissions.

        During the period from April 1, 2013 through April 25, 2013, the Company made additional open market purchases of 239,712 shares of the Company's common stock at an aggregate cost of $11.9 million (excluding broker commissions).

Item 3.    Defaults Upon Senior Securities.

        None.

Item 4.    Mine Safety Disclosures.

        None.

Item 5.    Other Information.

        None.

Item 6.    Exhibits.

Exhibit No.		Description
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).
	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished).
	101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Comprehensive Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows and (iv) related notes.

37

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 30, 2013	MAGELLAN HEALTH SERVICES, INC. (Registrant)
	By:	/s/ JONATHAN N. RUBIN Jonathan N. Rubin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

38

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Barry M. Smith, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Magellan Health Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ BARRY M. SMITH
	Barry M. Smith
Date: April 30, 2013	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Jonathan N. Rubin, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Magellan Health Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ JONATHAN N. RUBIN
	Jonathan N. Rubin
Date: April 30, 2013	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Required by Rule 13a-14(b) and 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, Barry M. Smith, as Chief Executive Officer of Magellan Health Services, Inc (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge:

(1)the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2013 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ BARRY M. SMITH
	Barry M. Smith
Date: April 30, 2013	Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Required by Rule 13a-14(b) and 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, Jonathan N. Rubin, as Chief Financial Officer of Magellan Health Services, Inc (the “Company”), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge:

(1)the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2013 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ JONATHAN N. RUBIN
	Jonathan N. Rubin
Date: April 30, 2013	Chief Financial Officer

XML

Net Income per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Numerator:
Net income	$ 28,058	$ 20,790
Denominator:
Weighted average number of common shares outstanding-basic	27,110,000	27,199,000
Common stock equivalents-stock options (in shares)	467,000	432,000
Common stock equivalents-restricted stock (in shares)	17,000	13,000
Common stock equivalents-restricted stock units (in shares)	52,000	102,000
Common stock equivalents-employee stock purchase plan (in shares)	2,000	1,000
Weighted average number of common shares outstanding-diluted	27,648,000	27,747,000
Net income per common share-basic (in dollars per share)	$ 1.03	$ 0.76
Net income per common share-diluted (in dollars per share)	$ 1.01	$ 0.75
Potential dilutive securities excluded from computation of dilutive securities (in shares)	1,700,000	1,600,000

XML

Business Segment Information

3 Months Ended

Mar. 31, 2013

Business Segment Information

Business Segment Information

NOTE C—Business Segment Information

        The accounting policies of the Company's segments are the same as those described in Note A—"General." The Company evaluates performance of its segments based on income before income taxes, before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, and special charges or benefits ("Segment Profit"). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Effective September 1, 2010, Public Sector has subcontracted with Pharmacy Solutions to provide pharmacy benefits management services on a risk basis for one of Public Sector's customers. As such, revenue and cost of care related to this intersegment arrangement are eliminated. The Company's segments are defined above. The Pharmacy Solutions segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

        The following tables summarize, for the periods indicated, operating results by business segment (in thousands):

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2012
Managed care and other revenue	$	180,524		$	388,888		$	76,857		$	60,898		$	(21,108	)	$	686,059
Dispensing revenue		—			—			—			87,154			—			87,154
Cost of care		(112,172	)		(344,312	)		(50,410	)		(19,507	)		21,108			(505,293	)
Cost of goods sold		—			—			—			(81,038	)		—			(81,038	)
Direct service costs and other		(42,362	)		(20,597	)		(13,486	)		(29,019	)		(31,125	)		(136,589	)
Stock compensation expense(1)		267			287			400			230			3,918			5,102
Segment profit (loss)	$	26,257		$	24,266		$	13,361		$	18,718		$	(27,207	)	$	55,395

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2013
Managed care and other revenue	$	187,837		$	406,620		$	90,278		$	58,150		$	(15,245	)	$	727,640
Dispensing revenue		—			—			—			94,121			—			94,121
Cost of care		(113,271	)		(355,379	)		(58,067	)		(18,459	)		15,245			(529,931	)
Cost of goods sold		—			—			—			(88,608	)		—			(88,608	)
Direct service costs and other		(41,392	)		(25,643	)		(13,371	)		(29,561	)		(29,660	)		(139,627	)
Stock compensation expense(1)		133			307			434			320			4,444			5,638
Segment profit (loss)	$	33,307		$	25,905		$	19,274		$	15,963		$	(25,216	)	$	69,233

(1)

Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

        The following table reconciles Segment Profit to income before income taxes (in thousands):

	Three Months Ended March 31,
	2012			2013
Segment profit	$	55,395		$	69,233
Stock compensation expense		(5,102	)		(5,638	)
Depreciation and amortization		(14,781	)		(16,170	)
Interest expense		(600	)		(610	)
Interest income		412			353
Income before income taxes	$	35,324		$	47,168

XML

Commitments and Contingencies (Details) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended		2 Months Ended	3 Months Ended	12 Months Ended
	Apr. 25, 2013	Oct. 31, 2011	Dec. 31, 2011	Mar. 31, 2013	Dec. 31, 2012
Stock Repurchases
Amount authorized under stock repurchase plan		$ 200
Share repurchases made in open market (in shares)	239,712		671,776	539,790	459,252
Average price of shares repurchased (in dollars per share)			$ 48.72	$ 50.17	$ 50.27
Aggregate cost of shares repurchased, excluding broker commissions	11.9		32.7	27.1	23.1
Remaining authorized repurchase amount				$ 117.1

XML

Net Income per Common Share

3 Months Ended

Mar. 31, 2013

Net Income per Common Share

Net Income per Common Share

NOTE B—Net Income per Common Share

        The following tables reconcile income (numerator) and shares (denominator) used in the computations of net income per common share (in thousands, except per share data):

	Three Months Ended March 31,
	2012		2013
Numerator:
Net income	$	20,790	$	28,058
Denominator:
Weighted average number of common shares outstanding—basic		27,199		27,110
Common stock equivalents—stock options		432		467
Common stock equivalents—restricted stock		13		17
Common stock equivalents—restricted stock units		102		52
Common stock equivalents—employee stock purchase plan		1		2
Weighted average number of common shares outstanding—diluted		27,747		27,648
Net income per common share—basic	$	0.76	$	1.03
Net income per common share—diluted	$	0.75	$	1.01

        The weighted average number of common shares outstanding for the three months ended March 31, 2012 and 2013 were calculated using outstanding shares of the Company's common stock. Common stock equivalents included in the calculation of diluted weighted average common shares outstanding for the three months ended March 31, 2012 and 2013 represent stock options to purchase shares of the Company's common stock, restricted stock awards and restricted stock units, and stock purchased under the Employee Stock Purchase Plan.

        The Company had additional potential dilutive securities outstanding representing 1.6 million and 1.7 million options for the three months ended March 31, 2012 and 2013, respectively, that were not included in the computation of dilutive securities because they were anti-dilutive for the period. Had these shares not been anti-dilutive, all of these shares would not have been included in the net income per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

XML

CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Current Assets:
Cash and cash equivalents	$ 188,421	$ 189,464
Restricted cash	221,790	226,554
Accounts receivable, less allowance for doubtful accounts of $4,612 and $5,566 at December 31, 2012 and March 31, 2013, respectively	146,376	138,253
Short-term investments (restricted investments of $88,332 and $100,780 at December 31, 2012 and March 31, 2013, respectively)	224,871	201,127
Deferred income taxes	31,636	31,698
Pharmaceutical inventory	47,731	45,727
Other current assets (restricted deposits of $20,846 and $24,968 at December 31, 2012 and March 31, 2013, respectively)	40,403	38,595
Total Current Assets	901,228	871,418
Property and equipment, net	162,611	136,548
Restricted long-term investments	25,131	32,563
Other long-term assets	9,296	9,730
Goodwill	426,939	426,939
Other intangible assets, net	32,622	34,935
Total Assets	1,557,827	1,512,133
Current Liabilities:
Accounts payable	17,589	17,081
Accrued liabilities	87,252	100,778
Medical claims payable	210,873	198,429
Other medical liabilities	80,222	76,914
Current maturities of long-term capital lease obligations	3,242
Total Current Liabilities	399,178	393,202
Long-term capital lease obligations	25,180
Deferred income taxes	32,988	34,086
Tax contingencies	61,657	60,697
Deferred credits and other long-term liabilities	7,038	6,815
Total Liabilities	526,041	494,800
Preferred stock, par value $. 01 per share Authorized-10,000 shares at December 31, 2012 and March 31, 2013-Issued and outstanding-none
Other Stockholders' Equity:
Additional paid-in capital	861,804	848,238
Retained earnings	1,003,290	975,232
Accumulated other comprehensive loss	(112)	(35)
Ordinary common stock in treasury, at cost, 18,575 and 19,114 shares at December 31, 2012 and March 31, 2013, respectively	(833,658)	(806,561)
Total Stockholders' Equity	1,031,786	1,017,333
Total Liabilities and Stockholders' Equity	1,557,827	1,512,133
Ordinary common stock
Current Liabilities:
Common stock	462	459
Multi-Vote common stock
Current Liabilities:
Common stock

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Cash flows from operating activities:
Net income	$ 28,058	$ 20,790
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,170	14,781
Non-cash interest expense	184	177
Non-cash stock compensation expense	5,638	5,102
Non-cash income tax expense	(630)	2,696
Non-cash amortization on investments	2,508	1,760
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash	4,764	852
Accounts receivable, net	(8,359)	(12,106)
Pharmaceutical inventory	(2,004)	(3,502)
Other assets	(2,039)	6,068
Accounts payable and accrued liabilities	(15,285)	(26,724)
Medical claims payable and other medical liabilities	15,752	19,201
Tax contingencies	601	690
Other	521	(216)
Net cash provided by operating activities	45,879	29,569
Cash flows from investing activities:
Capital expenditures	(11,382)	(14,505)
Purchase of investments	(66,596)	(61,977)
Maturity of investments	47,647	97,168
Net cash provided by (used in) investing activities	(30,331)	20,686
Cash flows from financing activities:
Payments to acquire treasury stock	(24,830)
Proceeds from exercise of stock options and warrants	9,675	2,197
Payments on capital lease obligations	(414)
Other	(1,022)	(743)
Net cash provided by (used in) financing activities	(16,591)	1,454
Net increase (decrease) in cash and cash equivalents	(1,043)	51,709
Cash and cash equivalents at beginning of period	189,464	119,862
Cash and cash equivalents at end of period	188,421	171,571
Non-cash investing activities:
Property and equipment acquired under capital leases	$ 28,836

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General (Details 8) (USD $)	3 Months Ended							3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Mar. 31, 2013 Stock options	Mar. 31, 2013 Stock options Individuals other than the CEO	Mar. 31, 2013 Stock options CEO	Mar. 31, 2013 Nonvested restricted stock awards	Dec. 31, 2012 Nonvested restricted stock awards	Mar. 31, 2013 Nonvested restricted stock units	Mar. 31, 2013 Nonvested restricted stock units Individuals other than the CEO	Mar. 31, 2013 Nonvested restricted stock units CEO
Share-based compensation
Stock compensation expense	$ 5,638,000	$ 5,102,000
Estimated forfeitures (as a percent)	4.00%	4.00%
Benefits of tax deductions in excess of recognized stock compensation expenses	300,000	400,000
Change to additional paid in capital related to tax net benefits (deficiencies)	(200,000)	300,000
Benefit of tax deductions offset by tax deficiency in recognized stock compensation expenses	(500,000)	400,000
Deficiency of tax deductions offset by tax benefits in recognized stock compensation expenses	$ 300,000	$ (100,000)
Stock options, nonvested restricted stock awards and nonvested restricted stock units
Grants in period, weighted average grant date fair value (in dollars per share)			$ 12.06
Expected volatility (as a percent)			27.86%
Stock option activity
Outstanding, beginning of period (in shares)			4,268,240
Granted (in shares)			951,133
Forfeited (in shares)			(21,122)
Exercised (in shares)			(205,755)
Outstanding, end of period (in shares)			4,992,496
Vested and expected to vest end of period (in shares)			4,923,356
Exercisable, end of period (in shares)			2,813,512
Weighted average exercise price of stock options
Outstanding, beginning of period (in dollars per share)			$ 44.35
Granted (in dollars per share)			$ 52.55
Forfeited (in dollars per share)			$ 47.13
Exercised (in dollars per share)			$ 45.88
Outstanding, end of period (in dollars per share)			$ 45.83
Vested and expected to vest end of period (in dollars per share)			$ 45.77
Exercisable, end of period (in dollars per share)			$ 42.61
Vesting period			10 years	3 years	4 years				3 years	4 years
Percentage of awards vesting in 2014					16.70%					16.70%
Percentage of awards vesting in 2015					33.30%					33.30%
Percentage of awards vesting in 2016					33.30%					33.30%
Percentage of awards vesting in 2017					16.70%					16.70%
Nonvested restricted stock awards and units
Outstanding, beginning of period (in shares)						23,672	23,672	202,690
Awarded (in shares)								98,580
Vested (in shares)								(93,804)
Forfeited (in shares)								(1,310)
Outstanding, ending of period (in shares)						23,672	23,672	206,156
Weighted average exercise price of nonvested restricted stock award and units
Outstanding, beginning of period (in dollars per share)						$ 42.25	$ 42.25	$ 47.38
Awarded (in dollars per share)								$ 52.62
Vested (in dollars per share)								$ 46.70
Forfeited (in dollars per share)								$ 47.95
Outstanding, ending of period (in dollars per share)						$ 42.25	$ 42.25	$ 50.19

XML

General (Details 9A) (USD $) In Millions, unless otherwise specified	Mar. 31, 2013
Future minimum payments under capital leases
2013	$ 0.8
2014	0.4
2015	1.3
2016	2.2
2017	2.4
2018 and beyond	$ 21.3

XML

General

3 Months Ended

Mar. 31, 2013

General

General

NOTE A—General

Basis of Presentation

        The accompanying unaudited consolidated financial statements of Magellan Health Services, Inc., a Delaware corporation ("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (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, 2013 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.

        The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on this Form 10-Q and no events have occurred that require disclosure.

        These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2012 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2013.

Business Overview

        The Company is engaged in the specialty managed healthcare business. Through 2005, the Company predominantly operated in the managed behavioral healthcare business. As a result of certain acquisitions, the Company expanded into radiology benefits management and specialty pharmaceutical management during 2006, and into Medicaid administration during 2009. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Managed Behavioral Healthcare

        Two of the Company's segments are in the managed behavioral healthcare business. This line of business generally reflects the Company's coordination and management of the delivery of behavioral healthcare treatment services that are provided through its contracted network of third-party treatment providers, which includes psychiatrists, psychologists, other behavioral health professionals, psychiatric hospitals, general medical facilities with psychiatric beds, residential treatment centers and other treatment facilities. The treatment services provided through the Company's provider network include outpatient programs (such as counseling or therapy), intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

        The Company provides its management services primarily through: (i) risk-based products, 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 fee, (ii) administrative services only ("ASO") products, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume responsibility for the cost of the treatment services, and (iii) employee assistance programs ("EAPs") where the Company provides short-term outpatient behavioral counseling services.

        The managed behavioral healthcare business is managed based on the services provided and/or the customers served, through the following two segments:

        Commercial.    The Managed Behavioral Healthcare Commercial segment ("Commercial") generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, and labor unions. Commercial's contracts encompass risk-based, ASO and EAP arrangements.

        Public Sector.    The Managed Behavioral Healthcare Public Sector segment ("Public Sector") generally reflects the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies. Public Sector contracts also include management services for the integrated physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements.

Radiology Benefits Management

        The Radiology Benefits Management segment ("Radiology Benefits Management") generally reflects the management of the delivery of diagnostic imaging and other therapeutic services to ensure that such services are clinically appropriate and cost effective. The Company's radiology benefits management services currently are provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its radiology benefits management services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing diagnostic imaging services, and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the imaging services.

Pharmacy Solutions

        The Pharmacy Solutions segment ("Pharmacy Solutions") comprises products and solutions that provide clinical and financial management of drugs paid under medical and pharmacy benefit programs. The Company's Pharmacy Solutions services include (i) pharmacy benefit management ("PBM") programs; (ii) specialty contracting and formulary optimization programs; (iii) specialty pharmaceutical dispensing operations; (iv) medical pharmacy management programs; and (v) programs for the integrated management of drugs that treat complex conditions, regardless of site of service or benefit reimbursement. The Company's pharmacy solutions are provided under contracts with health plans, employers, Medicaid MCOs, state Medicaid programs, and other government agencies, and encompass risk-based and fee-for-service ("FFS") arrangements.

        Beginning in the first quarter of 2013, the Company underwent organizational changes. As a result of these changes, the Company concluded that changes to its reportable segments were warranted. This segment contains the operating segments previously defined as the Specialty Pharmaceutical Management segment and the Medicaid Administration segment. Prior period balances have been reclassified to reflect this change.

Corporate

        This segment of the Company is comprised primarily of operational support functions such as sales and marketing and information technology, as well as corporate support functions such as executive, finance, human resources and legal.

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

        In October 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-04, "Technical Corrections and Improvements" ("ASC 2012-04"). The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this guidance that will not have transition guidance are effective upon issuance. The amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012 and were adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under generally accepted accounting principles ("GAAP") to be reclassified in its entirety to net income. Entities are required to provide information about significant reclassifications by component, and to present those reclassifications either on the face of the statement where net income is presented or in the notes. For other amounts that are not required to be reclassified in their entirety to net income, entities are required to cross-reference other disclosures that provide additional details about those amounts. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2012 and were adopted by the Company during the quarter ended March 31, 2013. The guidance did not impact the Company's consolidated results of operations, financial position, or cash flows.

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 include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates

Managed Care and Other Revenue

        Managed Care Revenue.    Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $601.8 million and $629.7 million for the three months ended March 31, 2012 and 2013, respectively.

        Fee-For-Service and Cost-Plus Contracts.    The Company has certain fee-for-service contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. Revenues from these contracts approximated $36.0 million and $49.3 million for the three months ended March 31, 2012 and 2013, respectively.

        Block Grant Revenues.    Public Sector has a contract that is partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $28.9 million and $33.2 million for the three months ended March 31, 2012 and 2013, respectively.

        Performance-Based Revenue.    The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $8.0 million and $1.9 million for the three months ended March 31, 2012 and 2013, respectively.

        Rebate Revenue.    The Company administers a rebate program 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. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues were $9.7 million and $8.7 million for the three months ended March 31, 2012 and 2013, respectively.

Dispensing Revenue

        The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. 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. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $87.2 million and $94.1 million for the three months ended March 31, 2012 and 2013, respectively.

Significant Customers

• Consolidated Company

        The Company provides behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona, (the "Maricopa Contract").

        Under the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance Program) of the Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental illness ("SMI"), and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through September 30, 2013 unless sooner terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately upon notice from the State. The Maricopa Contract generated net revenues of $193.1 million and $182.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The contract is for the management of the publicly funded behavioral health system that delivers mental health, substance abuse and crisis services for adults, youth, and children, and includes an integrated behavioral and physical health care system for individuals with a SMI. On March 25, 2013, the Company was notified that Magellan Complete Care of Arizona, a joint venture owned 80% by the Company and 20% by Vanguard/Phoenix Health Plan, was not selected as the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County). On April 3, 2013, the Company announced that it filed a formal protest regarding the State's decision to award the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County) to another vendor. On April 17, 2013, the Arizona Department of Health Services denied the Company's protest. The Company intends to file an appeal of the denial of its protest to the Arizona Department of Administration, the agency responsible for considering appeals of procurement protest denials.

• By Segment

        In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2012 and 2013 (in thousands):

Segment	Term Date	2012		2013
Commercial
Customer A	December 31, 2013(1)	$	49,743	$	51,641
Customer B	December 31, 2019		33,727		35,811
Customer C	December 31, 2012 to December 14, 2013(2)(3)		29,326		16,782	*
Public Sector
Customer D	June 30, 2013(4)		55,236		64,312
Radiology Benefits Management
Customer E	December 31, 2015		26,556		31,361
Customer F	June 30, 2014		14,378		15,235
Customer G	July 31, 2015		12,253		16,083
Customer H	January 31, 2014		9,104		9,759
Pharmacy Solutions
Customer I	November 30, 2013 to December 31, 2013(2)		31,044		33,311
Customer J	September 1, 2013 to April 29, 2014(2)		15,626		15,297
Customer K	September 27, 2013 to December 31, 2013(2)		14,647		21,641
Customer L	September 30, 2013(5)		21,108		15,245

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.

(2)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(3)

Revenues for the three months ended March 31, 2012 of $13.2 million relate to a contract that terminated as of December 31, 2012.

(4)

Contract has options for the customer to extend the term for two additional one-year periods.

(5)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

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, and with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $92.3 million and $86.7 million for the three months ended March 31, 2012 and 2013, respectively. Net revenues from the Florida Areas in the aggregate totaled $34.1 million and $33.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The Company's contracts with customers typically have 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 60 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.

Fair Value Measurements

        The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

•         Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

          Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

          Level 3—Unobservable inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company's data.

        In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured at fair value as of December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(1)	$	—	$	102,137	$	—	$	102,137
Restricted cash(2)		—		82,839		—		82,839
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		6,128		—		6,128
Corporate debt securities		—		214,547		—		214,547
Taxable municipal bonds		—		11,800		—		11,800
Certificates of deposit		—		150		—		150
December 31, 2012	$	1,065	$	417,601	$	—	$	418,666

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(4)	$	—	$	72,282	$	—	$	72,282
Restricted cash(5)		—		117,120		—		117,120
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		8,449		—		8,449
Corporate debt securities		—		236,472		—		236,472
Taxable municipal bonds		—		3,866		—		3,866
Certificates of deposit		—		150		—		150
March 31, 2013	$	1,065	$	438,339	$	—	$	439,404

(1)

Excludes $87.3 million of cash held in bank accounts by the Company.

(2)

Excludes $143.7 million of restricted cash held in bank accounts by the Company.

(3)

Includes investments in notes issued by the Federal Home Loan Bank.

(4)

Excludes $116.1 million of cash held in bank accounts by the Company.

(5)

Excludes $104.7 million of restricted cash held in bank accounts by the Company.

        For the three months ended March 31, 2013, the Company has not transferred any assets between fair value measurement levels.

        All of the Company's investments are classified as "available-for-sale" and are carried at fair value.

        If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2012 and March 31, 2013, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the three months ended March 31, 2012 or 2013. The following is a summary of short-term and long-term investments at December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		6,126		4		(2	)		6,128
Corporate debt securities		214,603		66		(122	)		214,547
Taxable municipal bonds		11,805		—		(5	)		11,800
Certificates of deposit		150		—		—			150
Total investments at December 31, 2012	$	233,749	$	70	$	(129	)	$	233,690

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		8,449		4		(4	)		8,449
Corporate debt securities		236,655		49		(232	)		236,472
Taxable municipal bonds		3,871		—		(5	)		3,866
Certificates of deposit		150		—		—			150
Total investments at March 31, 2013	$	250,190	$	53	$	(241	)	$	250,002

(1)

Includes investments in notes issued by the Federal Home Loan Bank.

        The maturity dates of the Company's investments as of March 31, 2013 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2013	$	202,180	$	202,047
2014		44,253		44,205
2015		3,757		3,750
Total investments at March 31, 2013	$	250,190	$	250,002

Income Taxes

        The Company's effective income tax rates were 41.1 percent and 40.5 percent for the three months ended March 31, 2012 and 2013, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the three months ended March 31, 2013 is lower than the effective rate for the three months ended March 31, 2012 mainly due to differences in the Company's effective state tax rate.

        The Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax assessments by tax authorities for years ended prior to 2009.

Stock Compensation

        At December 31, 2012 and March 31, 2013, the Company had equity-based employee incentive plans, which are described more fully in Note 6 in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Company recorded stock compensation expense of $5.1 million and $5.6 million for the three months ended March 31, 2012 and 2013, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2013 has been reduced for estimated forfeitures, estimated at four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the three months ended March 31, 2013 was $12.06 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 27.86 percent based on the historical volatility of the Company's stock price.

        The benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the three months ended March 31, 2012 and 2013, $0.4 million and $0.3 million, respectively, of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows. For the three months ended March 31, 2012 the net change to additional paid in capital related to tax benefits (deficiencies) was $0.3 million which includes the $0.4 million of excess tax benefits offset by $(0.1) million of tax deficiencies. For the three months ended March 31, 2013, the net change to additional paid in capital related to tax benefits (deficiencies) was $(0.2) million which includes $(0.5) million of excess tax deficiencies offset by the $0.3 million of excess tax benefits.

        Summarized information related to the Company's stock options for the three months ended March 31, 2013 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		4,268,240		$	44.35
Granted		951,133			52.55
Forfeited		(21,122	)		47.13
Exercised		(205,755	)		45.88
Outstanding, end of period		4,992,496		$	45.83
Vested and expected to vest at end of period		4,923,356		$	45.77
Exercisable, end of period		2,813,512		$	42.61

        With the exception of options granted to the Company's CEO, all of the Company's options granted during the three months ended March 31, 2013 vest ratably on each anniversary date over the three years subsequent to grant. During the three months ended March 31, 2013, the Company granted options to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively. All options granted during the three months ended March 31, 2013 have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards for the three months ended March 31, 2013 is as follows:

	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		23,672	$	42.25
Awarded		—		—
Vested		—		—
Forfeited		—		—
Outstanding, ending of period		23,672	$	42.25

        Summarized information related to the Company's nonvested restricted stock units for the three months ended March 31, 2013 is as follows:

	Shares			Weighted Grant Date Fair Value
Outstanding, beginning of period		202,690		$	47.38
Awarded		98,580			52.62
Vested		(93,804	)		46.70
Forfeited		(1,310	)		47.95
Outstanding, ending of period		206,156		$	50.19

        Grants of restricted stock awards vest on the anniversary of the grant. With the exception of restricted stock units awarded to the CEO during the three months ended March 31, 2013, restricted stock units vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting year are met. During the three months ended March 31, 2013, the Company granted restricted stock units to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively, assuming the associated performance hurdle(s) for that vesting year are met.

Long Term Debt and Capital Lease Obligations

        On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company (the "2011 Credit Facility"). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to The Bank of Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility will mature on December 9, 2014.

        Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.

        There were no capital lease obligations at December 31, 2012 and $28.4 million of capital lease obligations at March 31, 2013. At March 31, 2013, aggregate amounts of future minimum payments under capital leases were as follows: 2013—$0.8 million; 2014—$0.4 million; 2015—$1.3 million; 2016—$2.2 million; 2017—$2.4 million; 2018 and beyond—$21.3 million. The Company had $32.0 million and $32.4 million of letters of credit outstanding at December 31, 2012 and March 31, 2013, respectively, and no Revolving Loan borrowings at December 31, 2012 or March 31, 2013.

Reclassifications

        Certain prior year amounts have been reclassified to conform with the current year presentation.

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 5,566	$ 4,612
Short-term restricted investments (in dollars)	100,780	88,332
Other current assets, restricted deposits (in dollars)	$ 24,968	$ 20,846
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, Authorized shares	10,000	10,000
Preferred stock, Issued shares	0	0
Preferred stock, outstanding shares	0	0
Ordinary common stock in treasury, shares	19,114	18,575
Ordinary common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, Authorized shares	100,000	100,000
Common stock, Issued shares	46,206	45,928
Common stock, outstanding shares	27,092	27,353
Multi-Vote common stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, Authorized shares	40,000	40,000
Common stock, Issued shares	0	0
Common stock, outstanding shares	0	0

XML

General (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Concentration of Business
Net revenue	$ 821,761	$ 773,213
Minimum
Concentration of Business
Term of Contract	1 year
Term of renewed contract	1 year
Notice period for termination of contract	60 days
Maximum
Concentration of Business
Term of Contract	3 years
Term of renewed contract	2 years
Notice period for termination of contract	180 days
Pennsylvania Counties
Concentration of Business
Net revenue	86,700	92,300
Florida Areas
Concentration of Business
Net revenue	$ 33,300	$ 34,100

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2013
Document and Entity Information
Entity Registrant Name	MAGELLAN HEALTH SERVICES INC
Entity Central Index Key	0000019411
Document Type	10-Q
Document Period End Date	Mar. 31, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding	27,091,948
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1

XML

General (Details 4) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Restricted cash	$ 221,790,000	$ 226,554,000
Investments	250,002,000	233,690,000
Cash held in bank accounts by the Company, unrestricted	116,100,000	87,300,000
Cash held in bank accounts by the Company, restricted	104,700,000	143,700,000
Fair value measured on recurring basis | Level 1
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Total assets measured at fair value on a recurring basis	1,065,000	1,065,000
Fair value measured on recurring basis | Level 1 | U.S. Government and agency securities
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	1,065,000	1,065,000
Fair value measured on recurring basis | Level 2
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Total assets measured at fair value on a recurring basis	438,339,000	417,601,000
Fair value measured on recurring basis | Level 2 | Other than cash held in bank accounts by Company
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Cash and cash equivalents	72,282,000	102,137,000
Restricted cash	117,120,000	82,839,000
Fair value measured on recurring basis | Level 2 | Obligations of government-sponsored enterprises
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	8,449,000	6,128,000
Fair value measured on recurring basis | Level 2 | Corporate debt securities
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	236,472,000	214,547,000
Fair value measured on recurring basis | Level 2 | Taxable municipal bonds
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	3,866,000	11,800,000
Fair value measured on recurring basis | Level 2 | Certificates of deposit
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	150,000	150,000
Fair value measured on recurring basis | Total
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Total assets measured at fair value on a recurring basis	439,404,000	418,666,000
Fair value measured on recurring basis | Total | Other than cash held in bank accounts by Company
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Cash and cash equivalents	72,282,000	102,137,000
Restricted cash	117,120,000	82,839,000
Fair value measured on recurring basis | Total | U.S. Government and agency securities
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	1,065,000	1,065,000
Fair value measured on recurring basis | Total | Obligations of government-sponsored enterprises
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	8,449,000	6,128,000
Fair value measured on recurring basis | Total | Corporate debt securities
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	236,472,000	214,547,000
Fair value measured on recurring basis | Total | Taxable municipal bonds
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	3,866,000	11,800,000
Fair value measured on recurring basis | Total | Certificates of deposit
Fair value of financial assets and liabilities required to be measured at fair value on a recurring basis
Investments	$ 150,000	$ 150,000

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013		Mar. 31, 2012
Net revenue:
Managed care and other	$ 727,640		$ 686,059
Dispensing	94,121		87,154
Total net revenue	821,761		773,213
Cost and expenses:
Cost of care	529,931		505,293
Cost of goods sold	88,608		81,038
Direct service costs and other operating expenses	139,627	[1]	136,589	[1]
Depreciation and amortization	16,170		14,781
Interest expense	610		600
Interest income	(353)		(412)
Total cost and expenses	774,593		737,889
Income before income taxes	47,168		35,324
Provision for income taxes	19,110		14,534
Net income	28,058		20,790
Net income per common share -basic (See Note B) (in dollars per share)	$ 1.03		$ 0.76
Net income per common share-diluted (See Note B) (in dollars per share)	$ 1.01		$ 0.75
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities	(77)	[2]	173	[2]
Comprehensive income	$ 27,981		$ 20,963

[1] Includes stock compensation expense of $5,102 and $5,638 for the three months ended March 31, 2012 and 2013, respectively.

[2] Net of income tax provision (benefit) of $111 and $(52) for the three months ended March 31, 2012 and 2013, respectively.

XML

General (Tables)

3 Months Ended

Mar. 31, 2013

General

Schedule of customers generating in excess of ten percent of net revenues for respective segment

Segment	Term Date	2012		2013
Commercial
Customer A	December 31, 2013(1)	$	49,743	$	51,641
Customer B	December 31, 2019		33,727		35,811
Customer C	December 31, 2012 to December 14, 2013(2)(3)		29,326		16,782	*
Public Sector
Customer D	June 30, 2013(4)		55,236		64,312
Radiology Benefits Management
Customer E	December 31, 2015		26,556		31,361
Customer F	June 30, 2014		14,378		15,235
Customer G	July 31, 2015		12,253		16,083
Customer H	January 31, 2014		9,104		9,759
Pharmacy Solutions
Customer I	November 30, 2013 to December 31, 2013(2)		31,044		33,311
Customer J	September 1, 2013 to April 29, 2014(2)		15,626		15,297
Customer K	September 27, 2013 to December 31, 2013(2)		14,647		21,641
Customer L	September 30, 2013(5)		21,108		15,245

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.

(2)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(3)

Revenues for the three months ended March 31, 2012 of $13.2 million relate to a contract that terminated as of December 31, 2012.

(4)

Contract has options for the customer to extend the term for two additional one-year periods.

(5)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

Schedule of fair value of financial assets and liabilities

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(1)	$	—	$	102,137	$	—	$	102,137
Restricted cash(2)		—		82,839		—		82,839
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		6,128		—		6,128
Corporate debt securities		—		214,547		—		214,547
Taxable municipal bonds		—		11,800		—		11,800
Certificates of deposit		—		150		—		150
December 31, 2012	$	1,065	$	417,601	$	—	$	418,666

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(4)	$	—	$	72,282	$	—	$	72,282
Restricted cash(5)		—		117,120		—		117,120
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		8,449		—		8,449
Corporate debt securities		—		236,472		—		236,472
Taxable municipal bonds		—		3,866		—		3,866
Certificates of deposit		—		150		—		150
March 31, 2013	$	1,065	$	438,339	$	—	$	439,404

(1)

Excludes $87.3 million of cash held in bank accounts by the Company.

(2)

Excludes $143.7 million of restricted cash held in bank accounts by the Company.

(3)

Includes investments in notes issued by the Federal Home Loan Bank.

(4)

Excludes $116.1 million of cash held in bank accounts by the Company.

(5)

Excludes $104.7 million of restricted cash held in bank accounts by the Company.

Summary of short-term and long-term "available-for-sale" investments

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		6,126		4		(2	)		6,128
Corporate debt securities		214,603		66		(122	)		214,547
Taxable municipal bonds		11,805		—		(5	)		11,800
Certificates of deposit		150		—		—			150
Total investments at December 31, 2012	$	233,749	$	70	$	(129	)	$	233,690

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		8,449		4		(4	)		8,449
Corporate debt securities		236,655		49		(232	)		236,472
Taxable municipal bonds		3,871		—		(5	)		3,866
Certificates of deposit		150		—		—			150
Total investments at March 31, 2013	$	250,190	$	53	$	(241	)	$	250,002

(1)

Includes investments in notes issued by the Federal Home Loan Bank.

Summary of maturity dates of investments

	Amortized Cost		Estimated Fair Value
2013	$	202,180	$	202,047
2014		44,253		44,205
2015		3,757		3,750
Total investments at March 31, 2013	$	250,190	$	250,002

Schedule of stock option activity

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		4,268,240		$	44.35
Granted		951,133			52.55
Forfeited		(21,122	)		47.13
Exercised		(205,755	)		45.88
Outstanding, end of period		4,992,496		$	45.83
Vested and expected to vest at end of period		4,923,356		$	45.77
Exercisable, end of period		2,813,512		$	42.61

Schedule of nonvested restricted stock award activity

	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		23,672	$	42.25
Awarded		—		—
Vested		—		—
Forfeited		—		—
Outstanding, ending of period		23,672	$	42.25

Schedule of nonvested restricted stock units

	Shares			Weighted Grant Date Fair Value
Outstanding, beginning of period		202,690		$	47.38
Awarded		98,580			52.62
Vested		(93,804	)		46.70
Forfeited		(1,310	)		47.95
Outstanding, ending of period		206,156		$	50.19

XML

General (Policies)

3 Months Ended

Mar. 31, 2013

General

Use of Estimates

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 include, among other things, accounts receivable realization, valuation allowances for deferred tax assets, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates

Revenue recognition

Managed Care and Other Revenue

        Managed Care Revenue.    Managed care revenue, inclusive of revenue from the Company's risk, EAP and ASO contracts, is recognized over the applicable coverage period on a per member basis for covered members. The Company is paid a per member fee for all enrolled members, and this fee is recorded as revenue in the month in which members are entitled to service. The Company adjusts its revenue for retroactive membership terminations, additions and other changes, when such adjustments are identified, with the exception of retroactivity that can be reasonably estimated. The impact of retroactive rate amendments is generally recorded in the accounting period that terms to the amendment are finalized, and that the amendment is executed. Any fees paid prior to the month of service are recorded as deferred revenue. Managed care revenues approximated $601.8 million and $629.7 million for the three months ended March 31, 2012 and 2013, respectively.

        Fee-For-Service and Cost-Plus Contracts.    The Company has certain fee-for-service contracts, including cost-plus contracts, with customers under which the Company recognizes revenue as services are performed and as costs are incurred. Revenues from these contracts approximated $36.0 million and $49.3 million for the three months ended March 31, 2012 and 2013, respectively.

        Block Grant Revenues.    Public Sector has a contract that is partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately $28.9 million and $33.2 million for the three months ended March 31, 2012 and 2013, respectively.

        Performance-Based Revenue.    The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were $8.0 million and $1.9 million for the three months ended March 31, 2012 and 2013, respectively.

        Rebate Revenue.    The Company administers a rebate program 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. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues were $9.7 million and $8.7 million for the three months ended March 31, 2012 and 2013, respectively.

Dispensing Revenue

        The Company recognizes dispensing revenue, which includes the co-payments received from members of the health plans the Company serves, when the specialty pharmaceutical drugs are shipped. 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. Revenues from the dispensing of specialty pharmaceutical drugs on behalf of health plans were $87.2 million and $94.1 million for the three months ended March 31, 2012 and 2013, respectively.

Significant Customers

• Consolidated Company

        The Company provides behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona, (the "Maricopa Contract").

        Under the Maricopa Contract, the Company is responsible for providing covered behavioral health services to persons eligible under Title XIX (Medicaid) and Title XXI (State Children's Health Insurance Program) of the Social Security Act, non-Title XIX and non-Title XXI eligible children and adults with a serious mental illness ("SMI"), and to certain non-Title XIX and non-Title XXI adults with behavioral health or substance abuse disorders. The Maricopa Contract began on September 1, 2007 and extends through September 30, 2013 unless sooner terminated by the parties. The State of Arizona has the right to terminate the Maricopa Contract for cause, as defined, upon ten days' notice with an opportunity to cure, and without cause immediately upon notice from the State. The Maricopa Contract generated net revenues of $193.1 million and $182.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The contract is for the management of the publicly funded behavioral health system that delivers mental health, substance abuse and crisis services for adults, youth, and children, and includes an integrated behavioral and physical health care system for individuals with a SMI. On March 25, 2013, the Company was notified that Magellan Complete Care of Arizona, a joint venture owned 80% by the Company and 20% by Vanguard/Phoenix Health Plan, was not selected as the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County). On April 3, 2013, the Company announced that it filed a formal protest regarding the State's decision to award the Regional Behavioral Health Authority (RBHA) in GSA6 (Maricopa County) to another vendor. On April 17, 2013, the Arizona Department of Health Services denied the Company's protest. The Company intends to file an appeal of the denial of its protest to the Arizona Department of Administration, the agency responsible for considering appeals of procurement protest denials.

• By Segment

        In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the three months ended March 31, 2012 and 2013 (in thousands):

Segment	Term Date	2012		2013
Commercial
Customer A	December 31, 2013(1)	$	49,743	$	51,641
Customer B	December 31, 2019		33,727		35,811
Customer C	December 31, 2012 to December 14, 2013(2)(3)		29,326		16,782	*
Public Sector
Customer D	June 30, 2013(4)		55,236		64,312
Radiology Benefits Management
Customer E	December 31, 2015		26,556		31,361
Customer F	June 30, 2014		14,378		15,235
Customer G	July 31, 2015		12,253		16,083
Customer H	January 31, 2014		9,104		9,759
Pharmacy Solutions
Customer I	November 30, 2013 to December 31, 2013(2)		31,044		33,311
Customer J	September 1, 2013 to April 29, 2014(2)		15,626		15,297
Customer K	September 27, 2013 to December 31, 2013(2)		14,647		21,641
Customer L	September 30, 2013(5)		21,108		15,245

*

Revenue amount did not exceed ten percent of net revenues for the respective segment for the period presented. Amount is shown for comparative purposes only.

(1)

The customer has informed the Company that, after a competitive evaluation process, it has decided not to renew its contract after the contract expires on December 31, 2013.

(2)

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

(3)

Revenues for the three months ended March 31, 2012 of $13.2 million relate to a contract that terminated as of December 31, 2012.

(4)

Contract has options for the customer to extend the term for two additional one-year periods.

(5)

This customer represents a subcontract with a Public Sector customer and is eliminated in consolidation.

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, and with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. Net revenues from the Pennsylvania Counties in the aggregate totaled $92.3 million and $86.7 million for the three months ended March 31, 2012 and 2013, respectively. Net revenues from the Florida Areas in the aggregate totaled $34.1 million and $33.3 million for the three months ended March 31, 2012 and 2013, respectively.

        The Company's contracts with customers typically have 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 60 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.

Fair Value Measurements

Fair Value Measurements

        The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

•         Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

          Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

          Level 3—Unobservable inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company's data.

        In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured at fair value as of December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(1)	$	—	$	102,137	$	—	$	102,137
Restricted cash(2)		—		82,839		—		82,839
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		6,128		—		6,128
Corporate debt securities		—		214,547		—		214,547
Taxable municipal bonds		—		11,800		—		11,800
Certificates of deposit		—		150		—		150
December 31, 2012	$	1,065	$	417,601	$	—	$	418,666

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents(4)	$	—	$	72,282	$	—	$	72,282
Restricted cash(5)		—		117,120		—		117,120
Investments:
U.S. government and agency securities		1,065		—		—		1,065
Obligations of government-sponsored enterprises(3)		—		8,449		—		8,449
Corporate debt securities		—		236,472		—		236,472
Taxable municipal bonds		—		3,866		—		3,866
Certificates of deposit		—		150		—		150
March 31, 2013	$	1,065	$	438,339	$	—	$	439,404

(1)

Excludes $87.3 million of cash held in bank accounts by the Company.

(2)

Excludes $143.7 million of restricted cash held in bank accounts by the Company.

(3)

Includes investments in notes issued by the Federal Home Loan Bank.

(4)

Excludes $116.1 million of cash held in bank accounts by the Company.

(5)

Excludes $104.7 million of restricted cash held in bank accounts by the Company.

        For the three months ended March 31, 2013, the Company has not transferred any assets between fair value measurement levels.

        All of the Company's investments are classified as "available-for-sale" and are carried at fair value.

        If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2012 and March 31, 2013, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the three months ended March 31, 2012 or 2013. The following is a summary of short-term and long-term investments at December 31, 2012 and March 31, 2013 (in thousands):

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		6,126		4		(2	)		6,128
Corporate debt securities		214,603		66		(122	)		214,547
Taxable municipal bonds		11,805		—		(5	)		11,800
Certificates of deposit		150		—		—			150
Total investments at December 31, 2012	$	233,749	$	70	$	(129	)	$	233,690

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	1,065	$	—	$	—		$	1,065
Obligations of government-sponsored enterprises(1)		8,449		4		(4	)		8,449
Corporate debt securities		236,655		49		(232	)		236,472
Taxable municipal bonds		3,871		—		(5	)		3,866
Certificates of deposit		150		—		—			150
Total investments at March 31, 2013	$	250,190	$	53	$	(241	)	$	250,002

(1)

Includes investments in notes issued by the Federal Home Loan Bank.

        The maturity dates of the Company's investments as of March 31, 2013 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2013	$	202,180	$	202,047
2014		44,253		44,205
2015		3,757		3,750
Total investments at March 31, 2013	$	250,190	$	250,002

Income Taxes

Income Taxes

        The Company's effective income tax rates were 41.1 percent and 40.5 percent for the three months ended March 31, 2012 and 2013, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and changes to recorded tax contingencies. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the three months ended March 31, 2013 is lower than the effective rate for the three months ended March 31, 2012 mainly due to differences in the Company's effective state tax rate.

        The Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various states and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax assessments by tax authorities for years ended prior to 2009.

Stock Compensation

Stock Compensation

        At December 31, 2012 and March 31, 2013, the Company had equity-based employee incentive plans, which are described more fully in Note 6 in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Company recorded stock compensation expense of $5.1 million and $5.6 million for the three months ended March 31, 2012 and 2013, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2013 has been reduced for estimated forfeitures, estimated at four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the three months ended March 31, 2013 was $12.06 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 27.86 percent based on the historical volatility of the Company's stock price.

        The benefits of tax deductions in excess of recognized stock compensation expense are reported as a financing cash flow, rather than as an operating cash flow. In the three months ended March 31, 2012 and 2013, $0.4 million and $0.3 million, respectively, of benefits of such tax deductions related to stock compensation expense were realized and as such were reported as financing cash flows. For the three months ended March 31, 2012 the net change to additional paid in capital related to tax benefits (deficiencies) was $0.3 million which includes the $0.4 million of excess tax benefits offset by $(0.1) million of tax deficiencies. For the three months ended March 31, 2013, the net change to additional paid in capital related to tax benefits (deficiencies) was $(0.2) million which includes $(0.5) million of excess tax deficiencies offset by the $0.3 million of excess tax benefits.

        Summarized information related to the Company's stock options for the three months ended March 31, 2013 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		4,268,240		$	44.35
Granted		951,133			52.55
Forfeited		(21,122	)		47.13
Exercised		(205,755	)		45.88
Outstanding, end of period		4,992,496		$	45.83
Vested and expected to vest at end of period		4,923,356		$	45.77
Exercisable, end of period		2,813,512		$	42.61

        With the exception of options granted to the Company's CEO, all of the Company's options granted during the three months ended March 31, 2013 vest ratably on each anniversary date over the three years subsequent to grant. During the three months ended March 31, 2013, the Company granted options to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively. All options granted during the three months ended March 31, 2013 have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards for the three months ended March 31, 2013 is as follows:

	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		23,672	$	42.25
Awarded		—		—
Vested		—		—
Forfeited		—		—
Outstanding, ending of period		23,672	$	42.25

        Summarized information related to the Company's nonvested restricted stock units for the three months ended March 31, 2013 is as follows:

	Shares			Weighted Grant Date Fair Value
Outstanding, beginning of period		202,690		$	47.38
Awarded		98,580			52.62
Vested		(93,804	)		46.70
Forfeited		(1,310	)		47.95
Outstanding, ending of period		206,156		$	50.19

        Grants of restricted stock awards vest on the anniversary of the grant. With the exception of restricted stock units awarded to the CEO during the three months ended March 31, 2013, restricted stock units vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting year are met. During the three months ended March 31, 2013, the Company granted restricted stock units to the Company's CEO which vest over four year annual installments, with 16.7 percent, 33.3 percent, 33.3 percent, and 16.7 percent vesting in 2014, 2015, 2016, and 2017, respectively, assuming the associated performance hurdle(s) for that vesting year are met.

Long Term Debt and Capital Lease Obligations

Long Term Debt and Capital Lease Obligations

        On December 9, 2011, the Company entered into a Senior Secured Revolving Credit Facility Credit Agreement with Citibank, N.A., Wells Fargo Bank, N.A., Bank of America, N.A., and U.S. Bank, N.A. that provides for up to $230.0 million of revolving loans with a sublimit of up to $70.0 million for the issuance of letters of credit for the account of the Company (the "2011 Credit Facility"). Citibank, N.A., has assigned a portion of its interest in the 2011 Credit Facility to The Bank of Tokyo. The 2011 Credit Facility is guaranteed by substantially all of the subsidiaries of the Company and is secured by substantially all of the assets of the Company and the subsidiary guarantors. The 2011 Credit Facility will mature on December 9, 2014.

        Under the 2011 Credit Facility, the annual interest rate on Revolving Loan borrowings is equal to (i) in the case of U.S. dollar denominated loans, the sum of a borrowing margin of 0.75 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight "federal funds" rate, or the Eurodollar rate for one month plus 1.00 percent, or (ii) in the case of Eurodollar denominated loans, the sum of a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. The Company has the option to borrow in U.S. dollar denominated loans or Eurodollar denominated loans at its discretion. Letters of Credit issued under the Revolving Loan Commitment bear interest at the rate of 1.875 percent. The commitment commission on the 2011 Credit Facility is 0.375 percent of the unused Revolving Loan Commitment.

        There were no capital lease obligations at December 31, 2012 and $28.4 million of capital lease obligations at March 31, 2013. At March 31, 2013, aggregate amounts of future minimum payments under capital leases were as follows: 2013—$0.8 million; 2014—$0.4 million; 2015—$1.3 million; 2016—$2.2 million; 2017—$2.4 million; 2018 and beyond—$21.3 million. The Company had $32.0 million and $32.4 million of letters of credit outstanding at December 31, 2012 and March 31, 2013, respectively, and no Revolving Loan borrowings at December 31, 2012 or March 31, 2013.

Reclassifications

Reclassifications

        Certain prior year amounts have been reclassified to conform with the current year presentation.

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General (Details 9) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Dec. 09, 2011
Long Term Debt and Capital Lease Obligations disclosures
Capital lease obligations	$ 28.4	$ 0
Revolving loan borrowings
Long Term Debt and Capital Lease Obligations disclosures
Maximum borrowing capacity			230.0
Commitment commission (as a percent)	0.375%
Amount of borrowings outstanding	0	0
Revolving loan borrowings | U.S. dollar denominated loans | Prime rate
Long Term Debt and Capital Lease Obligations disclosures
Borrowing margin (as a percent)	0.75%
Description of variable rate basis	Prime Rate
Revolving loan borrowings | U.S. dollar denominated loans | Overnight Federal Funds rate
Long Term Debt and Capital Lease Obligations disclosures
Borrowing margin (as a percent)	0.75%
Description of variable rate basis	Overnight Federal Funds Rate
Basis spread on variable rate(as a percent)	0.50%
Revolving loan borrowings | U.S. dollar denominated loans | Eurodollar rate for one month
Long Term Debt and Capital Lease Obligations disclosures
Borrowing margin (as a percent)	0.75%
Description of variable rate basis	Eurodollar rate for one month
Basis spread on variable rate(as a percent)	1.00%
Revolving loan borrowings | Eurodollar denominated loans | Eurodollar rate for selected interest period
Long Term Debt and Capital Lease Obligations disclosures
Borrowing margin (as a percent)	1.75%
Description of variable rate basis	Eurodollar rate for the selected interest period
Letter of credit
Long Term Debt and Capital Lease Obligations disclosures
Maximum borrowing capacity			70.0
Stated interest rate (as a percent)	1.875%
Letters of credit outstanding	$ 32.4	$ 32.0

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General (Details 5) (USD $)	0 Months Ended	3 Months Ended
	Dec. 31, 2012	Mar. 31, 2013	Mar. 31, 2012
Short-term and long-term investments
Other-than-temporary unrealized losses	$ 0	$ 0
Realized gains or losses		0	0
Amortized Cost	233,749,000	250,190,000
Gross Unrealized Gains	70,000	53,000
Gross Unrealized Losses	(129,000)	(241,000)
Total, Estimated Fair Value	233,690,000	250,002,000
U.S. Government and agency securities
Short-term and long-term investments
Amortized Cost	1,065,000	1,065,000
Total, Estimated Fair Value	1,065,000	1,065,000
Obligations of government-sponsored enterprises
Short-term and long-term investments
Amortized Cost	6,126,000	8,449,000
Gross Unrealized Gains	4,000	4,000
Gross Unrealized Losses	(2,000)	(4,000)
Total, Estimated Fair Value	6,128,000	8,449,000
Corporate debt securities
Short-term and long-term investments
Amortized Cost	214,603,000	236,655,000
Gross Unrealized Gains	66,000	49,000
Gross Unrealized Losses	(122,000)	(232,000)
Total, Estimated Fair Value	214,547,000	236,472,000
Certificates of deposit
Short-term and long-term investments
Amortized Cost	150,000	150,000
Total, Estimated Fair Value	150,000	150,000
Taxable municipal bonds
Short-term and long-term investments
Amortized Cost	11,805,000	3,871,000
Gross Unrealized Losses	(5,000)	(5,000)
Total, Estimated Fair Value	$ 11,800,000	$ 3,866,000

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General (Details)	3 Months Ended
	Mar. 31, 2013 segment Item
Operating results by business segment
Number of subsequent events that require disclosure	0
Number of Business segments	5
Managed Behavioral Healthcare
Operating results by business segment
Number of Business segments	2

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Net Income per Common Share (Tables)

3 Months Ended

Mar. 31, 2013

Net Income per Common Share

Computation of basic and diluted earnings per share

	Three Months Ended March 31,
	2012		2013
Numerator:
Net income	$	20,790	$	28,058
Denominator:
Weighted average number of common shares outstanding—basic		27,199		27,110
Common stock equivalents—stock options		432		467
Common stock equivalents—restricted stock		13		17
Common stock equivalents—restricted stock units		102		52
Common stock equivalents—employee stock purchase plan		1		2
Weighted average number of common shares outstanding—diluted		27,747		27,648
Net income per common share—basic	$	0.76	$	1.03
Net income per common share—diluted	$	0.75	$	1.01

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Business Segment Information (Tables)

3 Months Ended

Mar. 31, 2013

Business Segment Information

Schedule of operating results by business segment

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2012
Managed care and other revenue	$	180,524		$	388,888		$	76,857		$	60,898		$	(21,108	)	$	686,059
Dispensing revenue		—			—			—			87,154			—			87,154
Cost of care		(112,172	)		(344,312	)		(50,410	)		(19,507	)		21,108			(505,293	)
Cost of goods sold		—			—			—			(81,038	)		—			(81,038	)
Direct service costs and other		(42,362	)		(20,597	)		(13,486	)		(29,019	)		(31,125	)		(136,589	)
Stock compensation expense(1)		267			287			400			230			3,918			5,102
Segment profit (loss)	$	26,257		$	24,266		$	13,361		$	18,718		$	(27,207	)	$	55,395

	Commercial			Public Sector			Radiology Benefits Management			Pharmacy Solutions			Corporate and Elimination			Consolidated
Three Months Ended March 31, 2013
Managed care and other revenue	$	187,837		$	406,620		$	90,278		$	58,150		$	(15,245	)	$	727,640
Dispensing revenue		—			—			—			94,121			—			94,121
Cost of care		(113,271	)		(355,379	)		(58,067	)		(18,459	)		15,245			(529,931	)
Cost of goods sold		—			—			—			(88,608	)		—			(88,608	)
Direct service costs and other		(41,392	)		(25,643	)		(13,371	)		(29,561	)		(29,660	)		(139,627	)
Stock compensation expense(1)		133			307			434			320			4,444			5,638
Segment profit (loss)	$	33,307		$	25,905		$	19,274		$	15,963		$	(25,216	)	$	69,233

(1)

Stock compensation expense is included in direct service costs and other operating expenses, however this amount is excluded from the computation of Segment Profit since it is managed on a consolidated basis.

Reconciliation of Segment Profit to income before income taxes

	Three Months Ended March 31,
	2012			2013
Segment profit	$	55,395		$	69,233
Stock compensation expense		(5,102	)		(5,638	)
Depreciation and amortization		(14,781	)		(16,170	)
Interest expense		(600	)		(610	)
Interest income		412			353
Income before income taxes	$	35,324		$	47,168

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General (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Net revenues
Managed Care Revenue	$ 629,700,000	$ 601,800,000
Fee-For-Service and Cost-Plus Contracts Revenue	49,300,000	36,000,000
Block Grant Revenues	33,200,000	28,900,000
Performance-Based Revenue	1,900,000	8,000,000
Rebate revenues	8,700,000	9,700,000
Dispensing Revenue	94,121,000	87,154,000
Significant customers
Revenues generated	821,761,000	773,213,000
Maricopa County Regional Behavioral Health Authority
Significant customers
Number of members receiving behavioral healthcare management and other related services	680,000
Termination notice	10 days
Revenues generated	182,300,000	193,100,000
Magellan Complete Care of Arizona, Inc.
Significant customers
Percentage of investment in joint venture	80.00%
Vanguard/Phoenix Health Plan | Magellan Complete Care of Arizona, Inc.
Significant customers
Percentage of investment in joint venture	20.00%
Commercial | Customer A | Service
Significant customers
Revenues generated	51,641,000	49,743,000
Commercial | Customer B | Service
Significant customers
Revenues generated	35,811,000	33,727,000
Commercial | Customer C | Service
Significant customers
Revenues generated	16,782,000	29,326,000
Minimum number of contracts per customer	1
Revenues related to terminated contract		13,200,000
Public Sector | Customer D | Service
Significant customers
Revenues generated	64,312,000	55,236,000
Number of contract extensions available under option	2
Contract extension period available under option	1 year
Radiology Benefits Management | Customer E | Service
Significant customers
Revenues generated	31,361,000	26,556,000
Radiology Benefits Management | Customer F | Service
Significant customers
Revenues generated	15,235,000	14,378,000
Radiology Benefits Management | Customer G | Service
Significant customers
Revenues generated	16,083,000	12,253,000
Radiology Benefits Management | Customer H | Service
Significant customers
Revenues generated	9,759,000	9,104,000
Pharmacy Solutions
Net revenues
Dispensing Revenue	94,121,000	87,154,000
Pharmacy Solutions | Customer I | Service
Significant customers
Revenues generated	33,311,000	31,044,000
Minimum number of contracts per customer	1
Pharmacy Solutions | Customer J | Service
Significant customers
Revenues generated	15,297,000	15,626,000
Minimum number of contracts per customer	1
Pharmacy Solutions | Customer K | Service
Significant customers
Revenues generated	21,641,000	14,647,000
Minimum number of contracts per customer	1
Pharmacy Solutions | Customer L | Service
Significant customers
Revenues generated	$ 15,245,000	$ 21,108,000

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General (Details 7)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Income Taxes
Effective income tax rates (as a percent)	40.50%	41.10%
The ownership percentage for which the entity files a consolidated federal income tax return, low end of range	80.00%

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Business Segment Information (Details) (USD $) In Thousands, unless otherwise specified	1 Months Ended	3 Months Ended
	Sep. 30, 2010 customer	Mar. 31, 2013	Mar. 31, 2012
Operating results by business segment
Number of customers subcontracted by Public Sector with Medicaid Administration	1
Managed care and other revenue		$ 727,640	$ 686,059
Dispensing revenue		94,121	87,154
Cost of care		(529,931)	(505,293)
Cost of goods sold		(88,608)	(81,038)
Direct service costs and other		(139,627)	(136,589)
Stock compensation expense		5,638	5,102
Segment profit (loss)		69,233	55,395
Commercial
Operating results by business segment
Managed care and other revenue		187,837	180,524
Cost of care		(113,271)	(112,172)
Direct service costs and other		(41,392)	(42,362)
Stock compensation expense		133	267
Segment profit (loss)		33,307	26,257
Public Sector
Operating results by business segment
Managed care and other revenue		406,620	388,888
Cost of care		(355,379)	(344,312)
Direct service costs and other		(25,643)	(20,597)
Stock compensation expense		307	287
Segment profit (loss)		25,905	24,266
Radiology Benefits Management
Operating results by business segment
Managed care and other revenue		90,278	76,857
Cost of care		(58,067)	(50,410)
Direct service costs and other		(13,371)	(13,486)
Stock compensation expense		434	400
Segment profit (loss)		19,274	13,361
Pharmacy Solutions
Operating results by business segment
Managed care and other revenue		58,150	60,898
Dispensing revenue		94,121	87,154
Cost of care		(18,459)	(19,507)
Cost of goods sold		(88,608)	(81,038)
Direct service costs and other		(29,561)	(29,019)
Stock compensation expense		320	230
Segment profit (loss)		15,963	18,718
Corporate and Elimination
Operating results by business segment
Managed care and other revenue		(15,245)	(21,108)
Cost of care		15,245	21,108
Direct service costs and other		(29,660)	(31,125)
Stock compensation expense		4,444	3,918
Segment profit (loss)		$ (25,216)	$ (27,207)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Stock compensation expense	$ 5,638	$ 5,102
Net of income tax provision (benefit)	$ (52)	$ 111

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies

Commitments and Contingencies

NOTE D—Commitments and Contingencies

Legal

        The management and administration of the delivery of specialty managed healthcare entails significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients whose care is being managed by the Company. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and therefore require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions, litigation and claims relating to its operations or business practices. In the opinion of management, the Company has recorded reserves that are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company's financial condition or results of operations; however, there can be no assurance in this regard.

Stock Repurchases

        On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013.

        Stock repurchases under the program may be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deems appropriate. The stock repurchase program may be limited or terminated at any time without prior notice. Pursuant to this program, the Company made open market purchases of 671,776 shares of the Company's common stock at an average price of $48.72 per share for an aggregate cost of $32.7 million (excluding broker commissions) during the period from November 11, 2011 through December 31, 2011. Pursuant to this program, the Company made open market purchases of 459,252 shares of the Company's common stock at an average price of $50.27 per share for an aggregate cost of $23.1 million (excluding broker commissions) during 2012. Pursuant to this program, the Company made open market purchases of 539,790 shares of the Company's common stock at an average price of $50.17 per share for an aggregate cost of $27.1 million (excluding broker commissions) during the three months ended March 31, 2013. As of March 31, 2013, the total dollar value remaining under the current authorization was $117.1 million.

        During the period from April 1, 2013 through April 25, 2013, the Company made additional open market purchases of 239,712 shares of the Company's common stock at an aggregate cost of $11.9 million (excluding broker commissions).

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Business Segment Information (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Reconciliation of segment profit to income before income taxes
Segment profit	$ 69,233	$ 55,395
Stock compensation expense	(5,638)	(5,102)
Depreciation and amortization	(16,170)	(14,781)
Interest expense	(610)	(600)
Interest income	353	412
Income before income taxes	$ 47,168	$ 35,324

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General (Details 6) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Amortized Cost
Maturity dates, investments, 2013	$ 202,180
Maturity dates, investments, 2014	44,253
Maturity dates, investments, 2015	3,757
Total, Amortized Cost	250,190
Estimated Fair Value
Maturity dates, investments, 2013	202,047
Maturity dates, investments, 2014	44,205
Maturity dates, investments, 2015	3,750
Total, Estimated Fair Value	$ 250,002	$ 233,690