10-Q

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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 September 30, 2015
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, 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.)
4800 Scottsdale Rd, Suite 4400 Scottsdale, Arizona (Address of principal executive offices)	85251 (Zip code)

(602) 572-6050
(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 September 30, 2015 was 25,574,724.

FORM 10-Q

MAGELLAN HEALTH, INC. AND SUBSIDIARIES
INDEX

		Page No.
	PART I—Financial Information:
Item 1:	Financial Statements		2
	Consolidated Balance Sheets—December 31, 2014 and September 30, 2015		2
	Consolidated Statements of Income (Loss)—For the Three and Nine Months Ended September 30, 2014 and 2015		3
	Consolidated Statements of Comprehensive Income (Loss)—For the Three and Nine Months Ended September 30, 2014 and 2015		4
	Consolidated Statements of Cash Flows—For the Three and Nine Months Ended September 30, 2014 and 2015		5
	Notes to Consolidated Financial Statements		6
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		46
Item 4:	Controls and Procedures		46
	PART II—Other Information:
Item 1:	Legal Proceedings		47
Item 1A:	Risk Factors		47
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3:	Defaults Upon Senior Securities		48
Item 4:	Mine Safety Disclosures		48
Item 5:	Other Information		48
Item 6:	Exhibits		50
Signatures			51

1

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31, 2014			September 30, 2015 (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	255,303		$	96,849
Restricted cash		215,325			135,366
Accounts receivable, less allowance for doubtful accounts of $4,047 and $3,775 at December 31, 2014 and September 30, 2015, respectively		353,713			417,141
Short-term investments (restricted investments of $132,808 and $260,224 at December 31, 2014 and September 30, 2015, respectively)		224,361			361,143
Deferred income taxes		27,226			24,627
Pharmaceutical inventory		39,375			44,652
Other current assets (restricted deposits of $30,620 and $31,267 at December 31, 2014 and September 30, 2015, respectively)		52,246			99,528
Total Current Assets		1,167,549			1,179,306
Property and equipment, net		171,916			177,056
Restricted long-term investments		43,293			9,662
Other long-term assets		11,575			12,729
Goodwill		566,106			623,907
Other intangible assets, net		133,718			141,046
Total Assets	$	2,094,157		$	2,143,706
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	63,929		$	100,526
Accrued liabilities		154,931			227,915
Medical claims payable		278,482			263,936
Other medical liabilities		72,719			147,084
Current maturities of long-term debt and capital lease obligations		15,779			16,257
Total Current Liabilities		585,840			755,718
Long-term debt and capital lease obligations		255,742			246,040
Deferred income taxes		30,950			28,548
Tax contingencies		12,320			8,809
Contingent consideration		49,839			1,609
Deferred credits and other long-term liabilities		19,951			19,528
Total Liabilities		954,642			1,060,252
Redeemable non-controlling interest		5,957			8,246
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2014 and September 30, 2015—Issued and outstanding—none		—			—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2014 and September 30, 2015—Issued and outstanding—50,085 shares and 26,935 shares at December 31, 2014, respectively, and 51,262 and 25,575 shares at September 30, 2015, respectively		501			513
Multi-Vote common stock, par value $.01 per share
Authorized—40,000 shares at December 31, 2014 and September 30, 2015—Issued and outstanding—none		—			—
Other Stockholders' Equity:
Additional paid-in capital		1,018,266			1,110,523
Retained earnings		1,179,897			1,184,020
Accumulated other comprehensive loss		(143	)		(114	)
Ordinary common stock in treasury, at cost, 23,150 shares and 25,687 shares at December 31, 2014 and September 30, 2015, respectively		(1,064,963	)		(1,219,734	)
Total Stockholders' Equity		1,133,558			1,075,208
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity	$	2,094,157		$	2,143,706

See accompanying notes to consolidated financial statements.

2

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Net revenue:
Managed care and other	$	703,020		$	809,249		$	2,214,885		$	2,334,139
PBM and dispensing		220,150			380,833			562,774			994,518
Total net revenue		923,170			1,190,082			2,777,659			3,328,657
Cost and expenses:
Cost of care		495,180			596,323			1,582,505			1,686,939
Cost of goods sold		202,180			360,444			520,044			940,060
Direct service costs and other operating expenses(1)(2)		176,928			220,586			520,684			616,491
Depreciation and amortization		23,956			26,721			66,665			75,239
Interest expense		2,879			1,654			5,719			4,933
Interest income		(241	)		(631	)		(827	)		(1,597	)
Total costs and expenses		900,882			1,205,097			2,694,790			3,322,065
Income (loss) before income taxes		22,288			(15,015	)		82,869			6,592
(Benefit) provision for income taxes		(3,490	)		(7,254	)		28,384			2,866
Net income (loss)		25,778			(7,761	)		54,485			3,726
Less: net income (loss) attributable to non-controlling interest		(1,355	)		47			(3,354	)		(397	)
Net income (loss) attributable to Magellan Health, Inc.	$	27,133		$	(7,808	)	$	57,839		$	4,123
Net income (loss) per common share attributable to Magellan Health, Inc.:
Basic (See Note B)	$	1.02		$	(0.31	)	$	2.14		$	0.16
Diluted (See Note B)	$	1.00		$	(0.31	)	$	2.09		$	0.16

(1)

Includes stock compensation expense of $11,961 and $12,897 for the three months ended September 30, 2014 and 2015, respectively, and $25,983 and $40,593 for the nine months ended September 30, 2014 and 2015, respectively.

(2)

Includes changes in fair value of contingent consideration of $29,738 and $47,274 for the three and nine months ended September 30, 2015, respectively.

See accompanying notes to consolidated financial statements.

3

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Net income (loss)	$	25,778		$	(7,761	)	$	54,485		$	3,726
Other comprehensive income (loss):
Unrealized (losses) gains on available-for-sale securities(1)		(111	)		53			2			29
Comprehensive income (loss)		25,667			(7,708	)		54,487			3,755
Less: comprehensive income (loss) attributable to non-controlling interest		(1,355	)		47			(3,354	)		(397	)
Comprehensive income (loss) attributable to Magellan Health, Inc.	$	27,022		$	(7,755	)	$	57,841		$	4,152

(1)

Net of income tax (benefit) provision of $(74) and $27 for the three months ended September 30, 2014 and 2015, respectively, and $1 and $25 for the nine months ended September 30, 2014 and 2015, respectively.

See accompanying notes to consolidated financial statements.

4

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands)

	2014			2015
Cash flows from operating activities:
Net income	$	54,485		$	3,726
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		66,665			75,239
Non-cash interest expense		3,888			297
Non-cash stock compensation expense		25,983			40,593
Non-cash income tax expense (benefit)		813			(1,018	)
Non-cash amortization on investments		3,620			5,106
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash		71,530			79,959
Accounts receivable, net		(19,492	)		(41,428	)
Pharmaceutical inventory		8,710			(5,277	)
Other assets		(22,378	)		(48,653	)
Accounts payable and accrued liabilities		(28,461	)		1,230
Medical claims payable and other medical liabilities		39,940			59,819
Tax contingencies		(15,179	)		(2,290	)
Deferred credits and other long-term liabilities		3,940			10,848
Other		178			(26	)
Net cash provided by operating activities		194,242			178,125
Cash flows from investing activities:
Capital expenditures		(50,597	)		(54,604	)
Acquisitions and investments in businesses, net of cash acquired		(132,210	)		(55,818	)
Purchase of investments		(216,958	)		(391,785	)
Maturity of investments		220,191			283,619
Net cash used in investing activities		(179,574	)		(218,588	)
Cash flows from financing activities:
Proceeds from issuance of debt		250,000			—
Payments to acquire treasury stock		(139,316	)		(150,763	)
Proceeds from exercise of stock options and warrants		41,685			50,074
Payments on long-term debt and capital lease obligations		(2,606	)		(12,665	)
Payments on contingent consideration		—			(8,932	)
Tax benefit from exercise of stock options and vesting of stock awards		2,805			3,887
Other		(2,150	)		408
Net cash provided by (used in) financing activities		150,418			(117,991	)
Net increase (decrease) in cash and cash equivalents		165,086			(158,454	)
Cash and cash equivalents at beginning of period		203,187			255,303
Cash and cash equivalents at end of period	$	368,273		$	96,849
Supplemental cash flow data:
Non-cash investing activites:
Property and equipment acquired under capital leases	$	216		$	3,415

See accompanying notes to consolidated financial statements.

5

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General

Basis of Presentation

        The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation ("Magellan"), include Magellan and its subsidiaries (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 and nine months ended September 30, 2015 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. Other than as described in Note F—"Subsequent Events," the Company did not have any material events during the period.

        These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2014 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2015.

Business Overview

        The Company is engaged in the healthcare management business, and is focused on managing the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits and other specialty areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact health outcomes and optimize the cost of care for the members we serve. The Company provides services to health plans and other managed care organizations ("MCOs"), employers, labor unions, various military and governmental agencies, and third party administrators.

        Effective as of July 1, 2015, the Company reorganized into two business units—Magellan Healthcare and Magellan Rx Management, which are supported by corporate. As a result of this business reorganization, the Company concluded that changes to its reportable segments were warranted, with the Healthcare segment ("Healthcare") comprised of the operating segments previously defined as the Commercial, Public Sector and the Specialty Solutions segments. Prior period balances have been reclassified to reflect this change. The Company's business is divided into the following segments, which are differentiated based on the services it provides, as described below.

Healthcare

        Healthcare includes the Company's: (i) management of behavioral healthcare services and employee assistance program ("EAP") services, (ii) management of other specialty areas including

6

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

diagnostic imaging and musculoskeletal management, and (iii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care ("MCC"). These special populations include individuals with serious mental illness, dual eligibles, long-term care eligibles and other populations with unique and often complex healthcare needs.

        The Company's coordination and management of these healthcare services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals and ancillary service providers. This network of credentialed and privileged providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. 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 Healthcare segment's commercial division serves a variety of customers, with services, inclusive of special population management, provided under contracts with health plans and accountable care organizations for some or all of their commercial, Medicaid and Medicare members, as well as with employers. The government division contracts with local, state and federal governmental agencies to provide services to recipients under Medicaid, Medicare and other government programs.

        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 and (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.

7

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

        The following tables summarize, for the periods indicated, revenues and covered lives for Healthcare by product classification and customer type (in thousands):

	Revenue for nine months ended September 30, 2015
	Risk-based		ASO		Total
Commercial
Behavioral(1)	$	245,493	$	93,193	$	338,686
Specialty		353,896		42,162		396,058
Government(2)		1,383,627		51,990		1,435,617
Total	$	1,983,016	$	187,345	$	2,170,361

	Covered lives as of September 30, 2015
	Risk-based		ASO
Commercial
Behavioral(1)		12,815		12,518
Specialty		7,704		16,538
Government(2)		5,059		1,946

(1)

Includes revenues of $36.9 million from EAP services provided on a risk basis to health plans and employers with 10.2 million covered lives.

(2)

Includes revenues of $115.1 million from EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.

Pharmacy Management

        The Pharmacy Management segment ("Pharmacy Management") comprises products and solutions that provide clinical and financial management of drugs paid under medical and pharmacy benefit programs. Pharmacy Management's services include: (i) traditional pharmacy benefit management ("PBM") services; (ii) pharmacy benefit administration ("PBA") for state Medicaid and other government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contracting and formulary optimization programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In addition, Pharmacy Management has subcontract arrangements to provide PBM services for certain Healthcare customers.

        The Company's Pharmacy Management programs 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. During the nine months ended September 30, 2015, Pharmacy Management paid 13.2 million adjusted commercial network claims in the Company's PBM business. As of September 30, 2015, the Company had a generic dispensing rate of 84.2 percent within its commercial PBM business. In addition, during the nine months ended September 30, 2015,

8

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

the Company paid 44.2 million adjusted PBA claims and 0.1 million specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90-day and traditional mail claim. In addition, as of September 30, 2015, Pharmacy Management served 1.6 million commercial PBM members, 9.8 million members in its medical pharmacy management programs, and 25 states and the District of Columbia in its PBA business.

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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. In July 2015, the FASB approved to defer the effective date of ASU 2014-09. This ASU is now effective for calendar years beginning after December 15, 2017. The Company is currently assessing the potential impact this ASU will have on the Company's consolidated results of operations, financial position, and cash flows.

        In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12"), which revises the accounting treatment for stock compensation tied to performance targets. This ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40)" ("ASU 2014- 15"), which provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASU is effective for the annual period beginning after December 15, 2016 and for annual and interim reporting periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for annual and interim reporting periods of public entities beginning after December 31, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

9

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

        In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In April 2015, the FASB issued ASU No. 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance to clarify the customer's accounting for fees paid in a cloud computing arrangement. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments" ("ASU 2015-16"). The amendment under this ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially 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, contingent consideration, 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

10

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

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 $611.4 million and $1,935.0 million for the three and nine months ended September 30, 2014, respectively, and $689.5 million and $2,004.4 million for the three and nine months ended September 30, 2015, 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. This includes revenues received in relation to the Patient Protection and Affordable Care Act health insurer fee ("HIF fee") billed on a cost reimbursement basis. Revenues from these contracts approximated $72.9 million and $205.6 million for the three and nine months ended September 30, 2014, respectively, and $85.1 million and $248.7 million for the three and nine months ended September 30, 2015, respectively.

        Block Grant Revenues.    The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represented annual appropriations. The Company recognized revenue from block grant activity ratably over the period to which the block grant funding applied. Block grant revenues were approximately $0.0 million and $33.3 million for the three and nine months ended September 30, 2014, respectively. The Maricopa Contract terminated on March 31, 2014.

        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 approximated $1.6 million and $7.0 million, respectively, for the three and nine months ended September 30, 2014, respectively, and $4.4 million and $10.1 million for the three and nine months ended September 30, 2015, 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 approximated $14.3 million and $27.6 million for

11

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

the three and nine months ended September 30, 2014, respectively, and $23.5 million and $56.3 million for the three and nine months ended September 30, 2015, respectively.

        In relation to the Company's PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

        Pharmacy Benefit Management Revenue.    The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client's members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated $155.7 million and $383.2 million for the three and nine months ended September 30, 2014, respectively, and $327.1 million and $842.9 million for the three and nine months ended September 30, 2015, 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 $64.5 million and $179.6 million for the three and nine months ended September 30, 2014, respectively, and $53.7 million and $151.6 million for the three and nine months ended September 30, 2015, respectively.

Significant Customers

        Customers exceeding ten percent of the consolidated Company's net revenues

        The Company provides behavioral healthcare management and other related services to members in the state of Iowa pursuant to contracts with the State of Iowa (the "Iowa Contracts"). The Company currently has two contracts; the Iowa Medicaid Contract and Iowa Medicaid Integrated Health Home Provider Agreement ("IHH Agreement"). Under the Iowa Medicaid Contract, the Company is responsible for providing managed mental health and substance abuse treatment to enrollees under a Medicaid 1915(b) waiver, as well as substance abuse treatment services plan funded by federal block

12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

grant and state appropriations under the authority of the Iowa Department of Public Health. The Iowa Health and Wellness Plan for members who qualify as an "exempt individual", as defined in 441 of the Iowa Administrative Code, were also added to the contract on January 1, 2014. The latest Iowa Medicaid Contract began on January 1, 2010 and extended through June 30, 2015. The Iowa Department of Human Services and the Iowa Department of Public Health has the right to terminate the Iowa Medicaid Contract upon 30 days notice for any reason or no reason at all. In June 2015, the Company received a notice of intent to extend the Iowa Medicaid Contract through December 31, 2015, to coincide with the start date of the new Iowa High Quality Healthcare Initiative, as discussed below. Under the IHH Agreement, the Company establishes a health home for individuals identified with serious and persistent mental illness through enrolled provider organizations capable of providing enhanced care. The IHH Agreement began on July 1, 2013 and extends through June 30, 2016 unless sooner terminated by either party with 60 days notice for any reason or no reason at all. The IHH program is part of the new Iowa High Quality Healthcare Initiative and we expect that the end of the IHH agreement will coincide with the start date of the new initiative. The Iowa Contracts generated net revenues of $337.9 million and $394.8 million for the nine months ended September 30, 2014 and 2015, respectively.

        On February 16, 2015 the Iowa Department of Human Services (the "Agency") released the Iowa High Quality Healthcare Initiative Request for Proposal ("RFP"). The RFP includes the services provided by the Company's current Iowa Contracts. On August 17, 2015, the Company was notified that it was not selected as a winning bidder by the Agency for the RFP.

        The Company provides behavioral healthcare management and other related services to members in the state of Florida pursuant to contracts with the State of Florida (the "Florida Contracts"). The Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees receive integrated healthcare services, and in 2014 phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program ("the Florida Medicaid Contract"). The Florida Medicaid Contract began on February 4, 2014 and extends through December 31, 2018, unless sooner terminated by the parties. The State of Florida has the right to terminate the Florida Medicaid Contract with cause, as defined, upon 24 hour notice and upon 30 days notice for any reason or no reason at all. The Florida Contracts generated net revenues of $143.9 million and $324.1 million for the nine months ended September 30, 2014 and 2015, respectively.

        Through March 31, 2014, the Company provided behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona as the Regional Behavioral Health Authority ("RBHA") for GSA6 ("Maricopa County") pursuant to a contract with the State of Arizona (the "Maricopa Contract"). The Maricopa Contract was for the management of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth, and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $213.3 million for the nine months ended September 30, 2014.

13

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

Customers exceeding ten percent of segment net revenues

        In addition to the Iowa Contracts, the Florida Contracts, and the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the nine months ended September 30, 2014 and 2015 (in thousands):

Segment	Term Date	2014		2015
Healthcare
None
Pharmacy Management
Customer A	November 30, 2015 to April 4, 2016(1)		92,793		93,908	*
Customer B	December 16, 2016		105,079		241,556

*

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

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. Net revenues from the Pennsylvania Counties in the aggregate totaled $272.0 million and $294.9 million for the nine months ended September 30, 2014 and 2015, 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 has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

        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 assets and liabilities that are required to be measured at fair value as of December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	139,280	$	—	$	139,280
Restricted cash(2)		—		65,992		—		65,992
Investments:
U.S. government and agency securities		4,303		—		—		4,303
Obligations of government-sponsored enterprises(3)		—		15,315		—		15,315
Corporate debt securities		—		246,886		—		246,886
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,303	$	468,623	$	—	$	472,926
Liabilities
Contingent consideration	$	—	$	—	$	58,153	$	58,153
Total liabilities held at fair value	$	—	$	—	$	58,153	$	58,153

15

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	45,091	$	—	$	45,091
Restricted cash(5)		—		61,220		—		61,220
Investments:
U.S. government and agency securities		4,982		—		—		4,982
Obligations of government-sponsored enterprises(6)		—		43,067		—		43,067
Corporate debt securities		—		321,606		—		321,606
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,982	$	472,134	$	—	$	477,116
Liabilities
Contingent consideration	$	—	$	—	$	108,443	$	108,443
Total liabilities held at fair value	$	—	$	—	$	108,443	$	108,443

(1)

Excludes $116.0 million of cash held in bank accounts by the Company.

(2)

Excludes $149.3 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 $51.8 million of cash held in bank accounts by the Company.

(5)

Excludes $74.1 million of restricted cash held in bank accounts by the Company.

(6)

Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        For the nine months ended September 30, 2015, the Company has not transferred any assets between fair value measurement levels.

        The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company's term loan of $237.5 million as of September 30, 2015 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

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

        The contingent consideration liability reflects the fair value of potential future payments related to the CDMI, LLC ("CDMI"), Cobalt Therapeutics, LLC ("Cobalt"), and 4D Pharmacy Management Systems, Inc. ("4D") acquisitions. The CDMI purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones

16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

through December 31, 2016. The Cobalt purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The 4D purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $30.0 million. The potential future payments are contingent upon the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and retention of certain business through 2018.

        As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, client base, member engagement, and new contract execution. The projected revenues, gross profits, client base, member engagement, and new contract execution are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in a change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income (loss). As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement guidance.

        For CDMI, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 0.33 percent to 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 100 percent; and (iii) projected payment dates of 2016 to 2017. For CDMI, the Company estimated undiscounted future contingent payments of $65.7 million and $90.4 million as of December 31, 2014 and September 30, 2015, respectively. The net increase is due to changes in operational forecasts and probabilities of payment of $34.6 million, partially offset by a decrease of $9.9 million due to payments. As of September 30, 2015, the fair value of the short term and long term contingent consideration for CDMI was $89.8 million and $0.3 million, respectively.

        For Cobalt, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 50 percent; and (iii) projected payment dates of 2016 to 2017. For Cobalt, the Company estimated undiscounted future contingent payments of $4.2 million and $2.7 million as of December 31, 2014 and September 30, 2015, respectively. The decrease is due to changes in operational forecasts and probabilities of payment of $1.2 million and payments of $0.3 million. As of September 30, 2015, the fair value of the short term and long term contingent consideration for Cobalt was $1.0 million and $1.3 million, respectively.

        For 4D, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 11.0 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately 5 to 100 percent; and (iii) projected payment dates of 2015 to 2016. For 4D, the Company estimated undiscounted future

17

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

contingent payments of $20.6 million and $16.4 million as of the acquisition date and September 30, 2015, respectively. The net $4.2 million decrease is due to payments of $6.0 million, partially offset by a net increase of $1.8 million, mainly due to changes in operational forecasts and probabilities of payment. As of September 30, 2015, the fair value of the short term contingent consideration for 4D was $16.0 million.

        As of September 30, 2015, the fair value of the short term and long term contingent consideration was $106.8 million and $1.6 million, respectively, and is included in accrued liabilities and contingent consideration, respectively, in the consolidated balance sheets. The change in the fair value of the contingent consideration was $29.7 million and $47.3 million for the three and nine months ended September 30, 2015, respectively, which was recorded as direct service costs and other operating expenses in the consolidated statements of income (loss). The increase was mainly a result of changes in the present value and estimated undiscounted liability, as noted above.

        The following table summarizes the Company's liability for contingent consideration for the nine months ended (in thousands):

	September 30, 2015
Balance as of beginning of period	$	58,153
Acquistion of 4D		19,290
Change in fair value		47,274
Payments		(16,274	)
Balance as of end of period	$	108,443

Cash and Cash Equivalents

        Cash and cash equivalents include cash on hand and at banks, short-term deposits with an original maturity of three months or less with financial institutions. Bank overdrafts are reflected within accounts payable on the balance sheets. Bank overdrafts for the nine months ended September 30, 2014 and 2015 are $0.0 million and $28.5 million, respectively.

Investments

        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 income (loss). 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 income (loss) and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

18

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

        As of December 31, 2014 and September 30, 2015, there were no unrealized losses that the Company determined to be other-than-temporary. No realized gains or losses were recorded for the nine months ended September 30, 2014 or 2015. The following is a summary of short-term and long-term investments at December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,305	$	—	$	(2	)	$	4,303
Obligations of government-sponsored enterprises(1)		15,318		1		(4	)		15,315
Corporate debt securities		247,118		8		(240	)		246,886
Certificates of deposit		1,150		—		—			1,150
Total investments at December 31, 2014	$	267,891	$	9	$	(246	)	$	267,654

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,976	$	6	$	—		$	4,982
Obligations of government-sponsored enterprises(2)		43,045		25		(3	)		43,067
Corporate debt securities		321,817		24		(235	)		321,606
Certificates of deposit		1,150		—		—			1,150
Total investments at September 30, 2015	$	370,988	$	55	$	(238	)	$	370,805

(1)

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

(2)

Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        The maturity dates of the Company's investments as of September 30, 2015 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2015	$	110,723	$	110,679
2016		258,579		258,439
2017		1,686		1,687
Total investments at September 30, 2015	$	370,988	$	370,805

19

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

Income Taxes

        The Company's effective income tax rates were 34.3 percent and 43.5 percent for the nine months ended September 30, 2014 and 2015, 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 and valuation allowances. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The effective income tax rate for the nine months ended September 30, 2015 is higher than the effective rate for the nine months ended September 30, 2014 mainly due to fewer reversals of tax contingencies in the current year from the closure of statutes of limitation, and a more significant relative impact in the current year from the non-deductible HIF fees due to lower overall income.

        The Company files a consolidated federal income tax return with most of its eighty-percent or more controlled subsidiaries. The Company files a separate consolidated federal income tax return for AlphaCare of New York, Inc. ("AlphaCare") and its parent, AlphaCare Holdings, Inc. ("AlphaCare Holdings"). The Company and its subsidiaries also file income tax returns in various state and local jurisdictions. The Company is no longer subject to federal income tax assessments for years ended prior to 2012 or, with few exceptions, to state or local income tax assessments for years ended prior to 2010. Further, the statutes of limitation regarding the assessment of 2011 federal and certain state and local income taxes expired during the current quarter. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2014 were reversed in the current quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the current quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

Net Operating Loss Carryforwards

        The Company has $3.0 million of federal net operating loss carryforwards ("NOLs") available to reduce its federal consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2018 and 2019 if not used and are subject to examination and adjustment by the Internal Revenue Service ("IRS"). AlphaCare has $26.2 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2033 and 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $144.7 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these state NOLs will expire in 2017 through 2034 if not used and are subject to examination and adjustment by the respective state tax authorities.

        Deferred tax assets as of December 31, 2014 and September 30, 2015 are shown net of valuation allowances of $12.4 million and $12.9 million, respectively. These valuation allowances mostly relate to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and 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. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of

20

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

deferred tax assets, none were identified which were both prudent and reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company's financial condition and results of operations.

Health Care Reform

        The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. For 2014 and 2015, the HIF fees were $21.4 million and $26.5 million, respectively, which have been paid. Of these amounts, $5.4 million and $16.1 million was expensed in the three and nine months ended September 30, 2014, respectively, and $6.7 million and $19.9 million was expensed in the three and nine months ended September 30, 2015, respectively, which was included in direct service costs and other operating expenses in the consolidated statements of income (loss). The Company recorded revenues of $8.8 million and $22.9 million in the three and nine months ended September 30, 2014, respectively, and $11.6 million and $34.0 million in the three and nine months ended September 30, 2015, respectively, associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers.

Stock Compensation

        At December 31, 2014 and September 30, 2015, 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, 2014, with the exception of the Performance-Based Restricted Stock Units ("PSUs") issued during the nine months ended September 30, 2015, which are described below. The Company recorded stock compensation expense of $11.9 million and $26.0 million for the three and nine months ended September 30, 2014 and $12.9 million and $40.6 million for the three and nine months ended September 30, 2015, respectively. Stock compensation expense recognized in the consolidated statements of income (loss) for the nine months ended September 30, 2014 and 2015 has been reduced for forfeitures, estimated at between zero and four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the nine months ended September 30, 2015 was $13.91 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 25.03 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 nine months ended September 30,

21

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

2014 and 2015, $2.8 million and $3.9 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 nine months ended September 30, 2014, the net change to additional paid in capital related to tax benefits (deficiencies) was $2.5 million, which includes $2.8 million of excess tax benefits offset by $(0.3) million of excess tax deficiencies. For the nine months ended September 30, 2015, the net change to additional paid in capital related to tax benefits (deficiencies) was $3.8 million, which includes $3.9 million of excess tax benefits offset by $(0.1) million of excess tax deficiencies.

        Summarized information related to the Company's stock options for the nine months ended September 30, 2015 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		3,321,063		$	50.58
Granted		902,928			63.61
Forfeited		(140,940	)		60.21
Exercised		(1,062,878	)		47.17
Outstanding, end of period		3,020,173		$	55.23
Vested and expected to vest at end of period		2,983,943		$	55.15
Exercisable, end of period		1,417,576		$	49.46

        All of the Company's options granted during the nine months ended September 30, 2015 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards ("RSAs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		1,626,827		$	57.66
Awarded		20,115			67.12
Vested		(94,547	)		57.48
Forfeited		—			—
Outstanding, end of period		1,552,395		$	57.79

        Summarized information related to the Company's nonvested restricted stock units ("RSUs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		156,695		$	54.88
Awarded		172,810			63.95
Vested		(79,036	)		52.82
Forfeited		(21,144	)		61.65
Outstanding, end of period		229,325		$	61.80

22

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

        The vesting period for RSAs ranges from 12 months to 42 months. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant. In addition, the RSUs outstanding at the beginning of the period contain associated performance hurdle(s) that must be met in order for the awards to vest. The RSUs granted during the nine months ended September 30, 2015 do not contain associated performance hurdles.

        During the nine months ended September 30, 2015, the Company granted 43,900 PSUs to members of management. During the nine months ended September 30, 2015, 3,906 of the PSUs awarded were forfeited. The PSUs are subject to market-based conditions. The estimated fair value of the PSUs granted was $85.00, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 15% to 52% (average of 28%). The PSUs will entitle the grantee to receive a number of shares of the Company's Common Stock determined over a three-year performance period ending on December 31, 2017 and vesting on March 4, 2018, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company's Total Shareholder Return (as defined below), expressed as a percentile ranking of the Company's Total Shareholder Return as compared to the Company's Peer Group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total Shareholder Return is determined by dividing the average share value of the Company's Common Stock over the 30 trading days preceding January 1, 2018 by the average share value of the Company's Common Stock over the 30 trading days beginning on January 1, 2015, with a deemed reinvestment of any dividends declared during the performance period. The Company's Peer Group includes 54 companies which comprise the S&P Health Care Services Industry Index, which was selected by the Compensation Committee of the Company's Board of Directors and includes a range of healthcare companies operating in several business segments.

Long Term Debt and Capital Lease Obligations

        On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.) to borrow up to $250.0 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, and a term loan in an original aggregate principal amount of $250.0 million (the "2014 Credit Facility"). The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on July 23, 2019, but the Company holds an option to extend the 2014 Credit Facility for an additional one year period.

        Under the 2014 Credit Facility, the annual interest rate on revolving and term loan borrowings is equal to (i) in the case of base rate loans, the sum of a borrowing margin of 0.50 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 rate loans, the sum of a borrowing margin of 1.50 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from time to time based on the Company's total leverage ratio. The Company

23

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the 2014 Credit Facility is 0.20 percent of the unused Revolving Loan Commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.

        On September 30, 2014, the Company completed a draw-down of the $250.0 million term loan. The borrowings will initially be maintained as a Eurodollar loan. The term loan is subject to certain quarterly amortization payments. As of September 30, 2015 the remaining balance on the term loan was $237.5 million. The term loan will mature on July 23, 2019. As of September 30, 2015, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"), which was equivalent to a total interest rate of 1.6936 percent. For the nine months ended September 30, 2015, the weighted average interest rate was 1.6813 percent. As of September 30, 2015, the contractual maturities of the term loan were as follows: 2015—$3.1 million; 2016—$15.6 million; 2017—$25.0 million; 2018—$25.0 million; and 2019—$168.8 million.

        There were $24.6 million and $24.8 million of capital lease obligations at December 31, 2014 and September 30, 2015, respectively. The Company had $32.9 million and $33.4 million of letters of credit outstanding at December 31, 2014 and September 30, 2015, respectively, and no revolving loan borrowings at December 31, 2014 or September 30, 2015.

Redeemable Non-Controlling Interest

        As of September 30, 2015 the Company held an 82% equity interest in AlphaCare Holdings. The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to 50% of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings have the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase all remaining shares. Non-controlling interests with redemption features, such as put options, that are not solely within the Company's control are considered redeemable non-controlling interests. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders' equity on the Company's consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income or loss or its redemption value. The carrying value of the non-controlling interest as of December 31, 2014 and September 30, 2015 was $5.9 million and $8.2 million, respectively. The $2.3 million increase in carrying value is a result of the impact of additional capital provided by the Company, partially offset by operating losses. The Company recognizes changes in the redemption value on a quarterly basis and adjusts the carrying amount of the non-controlling interest to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of September 30, 2015, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

24

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE A—General (Continued)

Reclassifications

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

NOTE B—Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2015			2014		2015
Numerator:
Net income (loss) attributable to Magellan Health, Inc.	$	27,133	$	(7,808	)	$	57,839	$	4,123
Denominator:
Weighted average number of common shares outstanding—basic		26,703		24,892			27,070		25,297
Common stock equivalents—stock options		404		—			517		360
Common stock equivalents—RSAs		133		—			77		640
Common stock equivalents—RSUs		—		—			18		34
Common stock equivalents—PSUs		—		—			—		39
Common stock equivalents—employee stock purchase plan		2		—			2		2
Weighted average number of common shares outstanding—diluted		27,242		24,892			27,684		26,372
Net income (loss) attributable to Magellan Health, Inc. per common share—basic	$	1.02	$	(0.31	)	$	2.14	$	0.16
Net income (loss) attributable to Magellan Health, Inc. per common share—diluted	$	1.00	$	(0.31	)	$	2.09	$	0.16

        The weighted average number of common shares outstanding for the three and nine months ended September 30, 2014 and 2015 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 and nine months ended September 30, 2014 and 2015 represent stock options to purchase shares of the Company's common stock, RSAs, RSUs, PSUs and stock purchased under the Employee Stock Purchase Plan.

        The Company had additional potential dilutive securities outstanding representing 0.7 million and 0.6 million options for the three and nine months ended September 30, 2014, respectively, and 1.4 million and 1.1 million options for the three and nine months ended September 30, 2015, 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

25

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE B—Net Income (Loss) per Common Share Attributable to Magellan Health, Inc. (Continued)

been included in the net income attributable to common shareholder 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 1—"General." The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes ("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. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare's customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company's employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company's segments are defined above.

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

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2014
Managed care and other revenue	$	653,747		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			241,226			(21,076	)		220,150
Cost of care		(495,179	)		(1	)		—			(495,180	)
Cost of goods sold		—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(101,145	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		658			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		(1,323	)		—			—			(1,323	)
Segment profit (loss)	$	59,404		$	29,834		$	(27,072	)	$	62,166

26

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE C—Business Segment Information (Continued)

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2015
Managed care and other revenue	$	748,297		$	60,978		$	(26	)	$	809,249
PBM and dispensing revenue		—			409,371			(28,538	)		380,833
Cost of care		(596,323	)		—			—			(596,323	)
Cost of goods sold		—			(387,834	)		27,390			(360,444	)
Direct service costs and other		(106,675	)		(87,252	)		(26,659	)		(220,586	)
Stock compensation expense(1)		469			9,410			3,018			12,897
Changes in fair value of contingent consideration(1)		(809	)		30,547			—			29,738
Less: non-controlling interest segment profit (loss)(2)		75			—			(28	)		47
Segment profit (loss)	$	44,884		$	35,220		$	(24,787	)	$	55,317

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2014
Managed care and other revenue	$	2,083,320		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			590,115			(27,341	)		562,774
Cost of care		(1,584,264	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(305,338	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		2,242			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		(3,301	)		—			—			(3,301	)
Segment profit (loss)	$	199,261		$	67,367		$	(82,918	)	$	183,710

27

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE C—Business Segment Information (Continued)

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2015
Managed care and other revenue	$	2,170,361		$	163,828		$	(50	)	$	2,334,139
PBM and dispensing revenue		—			1,077,088			(82,570	)		994,518
Cost of care		(1,686,944	)		5			—			(1,686,939	)
Cost of goods sold		—			(1,019,200	)		79,140			(940,060	)
Direct service costs and other		(324,695	)		(207,230	)		(84,566	)		(616,491	)
Stock compensation expense(1)		1,952			28,282			10,359			40,593
Changes in fair value of contingent consideration(1)		(638	)		47,912			—			47,274
Less: non-controlling interest segment profit (loss)(2)		(318	)		—			(79	)		(397	)
Segment profit (loss)	$	160,354		$	90,685		$	(77,608	)	$	173,431

(1)

Stock compensation expense, as well as changes in the fair value of contingent consideration recorded in relation to the acquisitions, are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.

(2)

The non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Segment profit	$	62,166		$	55,317		$	183,710		$	173,431
Stock compensation expense		(11,961	)		(12,897	)		(25,983	)		(40,593	)
Changes in fair value of contingent consideration		—			(29,738	)		—			(47,274	)
Non-controlling interest segment profit (loss)		(1,323	)		47			(3,301	)		(397	)
Depreciation and amortization		(23,956	)		(26,721	)		(66,665	)		(75,239	)
Interest expense		(2,879	)		(1,654	)		(5,719	)		(4,933	)
Interest income		241			631			827			1,597
Income (loss) before income taxes	$	22,288		$	(15,015	)	$	82,869		$	6,592

NOTE D—Commitments and Contingencies

Legal

        The Company's operating activities entail 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

28

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE D—Commitments and Contingencies (Continued)

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 and other 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 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. Stock repurchases under the program may be purchased from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any time.

        Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period	Total Number of Shares Purchased		Average Price Paid per Share		Aggregate Cost
November 24, 2014 - December 31, 2014		232,170	$	60.65	$	14.1
January 1, 2015 - September 30, 2015		2,537,081		60.98		154.7
		2,769,251			$	168.8

        The Company made additional open market purchases of 616,075 shares of the Company's common stock at an aggregate cost of $31.2 million (excluding broker commissions) during the period from October 1, 2015 through October 21, 2015, which was the date the repurchase program was completed.

29

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE E—Acquisitions

Acquisition of 4D Pharmacy Management Systems, Inc.

        Pursuant to the March 17, 2015 Purchase Agreement (the "4D Agreement") with 4D Pharmacy Management Systems, Inc. ("4D"), on April 1, 2015 the Company acquired (the "4D Acquisition") all of the outstanding equity interests of 4D. 4D is a privately held, full-service PBM serving managed care organizations, employers and government-sponsored benefit programs, such as Medicare Part D plans.

        As consideration for the 4D Acquisition, the Company paid $55 million in cash, subject to working capital adjustments. There are additional potential contingent payments up to an aggregate amount of $30 million. The contingent payment provisions provide for (i) cash payments of up to $10 million based on the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and (ii) cash payments of up to $20 million for retention of certain business through 2018. The Company funded the 4D Acquisition with cash on hand.

        The Company reports the results of operations of 4D within its Pharmacy Management segment.

        The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has been allocated to identified intangible assets totaling $24.6 million, consisting of customer contracts in the amount of $21.1 million, which is being amortized over 10 years, non-compete agreements in the amount of $2.2 million, which is being amortized over 5 years and tradename in the amount of $1.3 million, which is being amortized over 18 months. The entire excess purchase price over tangible net assets acquired is amortizable for tax purposes, although the Company's effective rate will not be impacted by the tax amortization.

        The estimated fair values of 4D assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):

Assets acquired:
Current assets (includes $14,178 of cash and $21,417 of accounts receivable)	$	35,638
Property and equipment, net		238
Other identified intangible assets		24,600
Goodwill		49,136
Total assets acquired		109,612
Liabilities assumed:
Current liabilities		33,882
Contingent consideration		19,291
Total liabilities assumed		53,173
Net assets acquired	$	56,439

        As of September 30, 2015, the Company established a working capital payable of $0.2 million that was reflected as an increase to goodwill.

30

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE E—Acquisitions (Continued)

        The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, projected membership, and projected client base. The projected membership and client base are derived from the Company's latest internal operational forecasts and assumptions. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income (loss). The Company estimated undiscounted future contingent payments of $20.6 million and $16.4 million as of the acquisition date and September 30, 2015, respectively. The net $4.2 million decrease was due to payments of $6.0 million, partially offset by a net increase of $1.8 million, mainly due to changes in probabilities of payment. As of September 30, 2015, the fair value of the contingent consideration for 4D was $16.0 million, which is entirely short term and is included in accrued liabilities in the consolidated balance sheet.

        The Company's estimated fair values of 4D assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

        As of September 30, 2015, the Company incurred cumulative acquisition related costs of $0.7 million in connection with the 4D acquisition. For the nine months ended September 30, 2015, the Company incurred $0.2 million of acquisition related costs, which are included within direct service costs and other operating expenses in the accompanying statements of income.

        Pro Forma disclosures related to the 4D acquisition have been excluded as immaterial.

Acquisition of AlphaCare Holdings, Inc.

        Pursuant to the August 13, 2013 stock purchase agreement (the "AlphaCare Agreement"), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, the holding company for AlphaCare, a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long- Term Care Plan in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

        During the nine months ended September 30, 2015, the Company purchased an additional $23.6 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock. As of September 30, 2015, the Company held an 82% interest and the remaining shareholders held an 18% interest in AlphaCare Holdings.

        Based on the Company's 82% equity interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Healthcare segment.

31

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEPTEMBER 30, 2015

(Unaudited)

NOTE E—Acquisitions (Continued)

Acquisition of CDMI, LLC

        Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, on April 30, 2014 the Company acquired all of the outstanding equity interests of CDMI. CDMI provides a range of clinical consulting programs and negotiates and administers drug rebates for managed care organizations and other customers. As consideration for the transaction, the Company paid a base price of $201.0 million, including net receipts of $4.0 million for working capital adjustments. In addition to the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.

Other Acquisitions

        Pursuant to the January 15, 2015 purchase agreement (the "HSM Agreement") with HSM Physical Health, Inc. ("HSM") and HSM Companies Inc., on January 31, 2015 the Company acquired all of the outstanding equity interests of HSM. HSM provides cost containment and utilization management services focused on physical and musculoskeletal health specialties. As consideration for the transaction, the Company paid a base price of $13.5 million in cash, subject to working capital adjustments. The Company reports the results of operations of HSM within its Healthcare segment. The Company's estimated fair values of HSM's assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

NOTE F—Subsequent Events

        On October 26, 2015 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 26, 2017. Stock repurchases under the program may be made from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any time.

32

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 subsidiaries 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, 2014, which was filed with the SEC on February 26, 2015.

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 serious mental illness and other unique high-cost populations;

•

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

•

the Company's ability to maintain relationships with key pharmacy providers, vendors and manufacturers;

•

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;

33

•

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;

•

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;

•

a breach or failure in the Company's operational security systems or infrastructure, or those of third parties with which we do business;

•

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

•

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

•

the impact to contingent consideration as a result of changes in operational forecasts and probabilities of payment.

        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, 2014. 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 healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, third party administrators, consultants and brokers. The Company's business is divided into three segments, based on the services it provides and/or the customers that it serves. See Note A—"General" for more information on the Company's business segments.

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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 26, 2015.

Stock Compensation

        The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of substantially all stock options granted to employees. The fair value of all RSUs and RSAs is determined as the fair market value of the underlying shares on the date of the grant. The fair value of PSUs issued with market-based conditions is calculated on the date of the grant using a Monte Carlo simulation model. Stock compensation expense recognized in the consolidated statements of income (loss) is based on awards ultimately expected to vest, it has been reduced for annual estimated forfeitures of four percent. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods. If vesting of an award is conditioned upon the achievement of performance goals, compensation expense during the performance period is estimated using the most probable outcome of the performance goals, and adjusted as the expected outcome changes. The Company recognizes compensation costs for awards that do not contain performance or market conditions on a straight- line basis over the requisite service period, which is generally the vesting term of three years. For restricted stock units that include performance conditions, stock compensation is recognized using an accelerated method over the vesting period. For PSUs issued with market-based conditions, stock compensation is recognized using a straight line method over the vesting period.

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. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare's customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company's employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company's segments are defined in Note A—"General".

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

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2014
Managed care and other revenue	$	653,747		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			241,226			(21,076	)		220,150
Cost of care		(495,179	)		(1	)		—			(495,180	)
Cost of goods sold		—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(101,145	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		658			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		(1,323	)		—			—			(1,323	)
Segment profit (loss)	$	59,404		$	29,834		$	(27,072	)	$	62,166

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2015
Managed care and other revenue	$	748,297		$	60,978		$	(26	)	$	809,249
PBM and dispensing revenue		—			409,371			(28,538	)		380,833
Cost of care		(596,323	)		—			—			(596,323	)
Cost of goods sold		—			(387,834	)		27,390			(360,444	)
Direct service costs and other		(106,675	)		(87,252	)		(26,659	)		(220,586	)
Stock compensation expense(1)		469			9,410			3,018			12,897
Changes in fair value of contingent consideration(1)		(809	)		30,547			—			29,738
Less: non-controlling interest segment profit (loss)(2)		75			—			(28	)		47
Segment profit (loss)	$	44,884		$	35,220		$	(24,787	)	$	55,317

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2014
Managed care and other revenue	$	2,083,320		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			590,115			(27,341	)		562,774
Cost of care		(1,584,264	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(305,338	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		2,242			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		(3,301	)		—			—			(3,301	)
Segment profit (loss)	$	199,261		$	67,367		$	(82,918	)	$	183,710

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	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2015
Managed care and other revenue	$	2,170,361		$	163,828		$	(50	)	$	2,334,139
PBM and dispensing revenue		—			1,077,088			(82,570	)		994,518
Cost of care		(1,686,944	)		5			—			(1,686,939	)
Cost of goods sold		—			(1,019,200	)		79,140			(940,060	)
Direct service costs and other		(324,695	)		(207,230	)		(84,566	)		(616,491	)
Stock compensation expense(1)		1,952			28,282			10,359			40,593
Changes in fair value of contingent consideration(1)		(638	)		47,912			—			47,274
Less: non-controlling interest segment profit (loss)(2)		(318	)		—			(79	)		(397	)
Segment profit (loss)	$	160,354		$	90,685		$	(77,608	)	$	173,431

(1)

Stock compensation expense, as well as changes in the fair value of contingent consideration recorded in relation to the acquisitions, are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.

(2)

The non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Segment profit	$	62,166		$	55,317		$	183,710		$	173,431
Stock compensation expense		(11,961	)		(12,897	)		(25,983	)		(40,593	)
Changes in fair value of contingent consideration		—			(29,738	)		—			(47,274	)
Non-controlling interest segment profit (loss)		(1,323	)		47			(3,301	)		(397	)
Depreciation and amortization		(23,956	)		(26,721	)		(66,665	)		(75,239	)
Interest expense		(2,879	)		(1,654	)		(5,719	)		(4,933	)
Interest income		241			631			827			1,597
Income (loss) before income taxes	$	22,288		$	(15,015	)	$	82,869		$	6,592

Non-GAAP Measures

        The Company reports its financial results in accordance with GAAP, however the Company's management also assesses business performance and makes business decisions regarding the Company's operations using certain non-GAAP measures. In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan Health, Inc. ("Adjusted Net Income") and adjusted net income per common share attributable to Magellan Health, Inc. on a diluted basis ("Adjusted EPS"). Adjusted Net Income and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, as well as amortization of identified acquisition intangibles. The Company believes these non-GAAP measures provide a more useful comparison of the Company's underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures we disclose, such as Segment Profit, Adjusted Net Income, and Adjusted EPS, should not be

37

considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

        The following table reconciles Adjusted Net Income to net income (loss) attributable to Magellan Health, Inc. (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Adjusted Net Income	$	36,368		$	18,898		$	75,360		$	58,004
Adjusted for acquisitions starting in 2013
Stock compensation relating to acquisitions		(8,885	)		(8,923	)		(16,196	)		(25,759	)
Changes in fair value of contingent consideration		(1,928	)		(29,738	)		(3,132	)		(47,274	)
Amortization of acquired intangibles		(4,317	)		(5,988	)		(9,376	)		(15,631	)
Tax impact		5,895			17,943			11,183			34,783
Net income (loss) attributable to Magellan Health, Inc.	$	27,133		$	(7,808	)	$	57,839		$	4,123

        The following table reconciles Adjusted EPS to net income (loss) per common share attributable to Magellan Health, Inc.—diluted:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Adjusted EPS	$	1.34		$	0.76		$	2.73		$	2.20
Adjusted for acquisitions starting in 2013
Stock compensation relating to acquisitions		(0.33	)		(0.36	)		(0.59	)		(0.98	)
Changes in fair value of contingent consideration		(0.07	)		(1.19	)		(0.11	)		(1.79	)
Amortization of acquired intangibles		(0.16	)		(0.24	)		(0.34	)		(0.59	)
Tax impact		0.22			0.72			0.40			1.32
Net income (loss) per common share attributable to Magellan Health, Inc.—diluted	$	1.00		$	(0.31	)	$	2.09		$	0.16

Quarter ended September 30, 2015 ("Current Year Quarter"), compared to the quarter ended September 30, 2014 ("Prior Year Quarter")

Healthcare

Net Revenue

        Net revenue related to Healthcare increased by 14.5 percent or $94.6 million from the Prior Year Quarter to the Current Year Quarter. The increase in revenue is mainly due to increased membership from existing customers of $56.0 million, contracts implemented after (or during) the Prior Year Quarter of $36.3 million, favorable rates changes of $4.6 million, revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of $4.4 million, revenue impact of unfavorable prior period medical claims development recorded in the Current Year Quarter of $3.9 million and other net favorable increases of $6.3 million. These increases were partially offset by program changes of $7.0 million, terminated contracts of $5.1 million and the revenue impact of favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $4.8 million.

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Cost of Care

        Cost of care increased by 20.4 percent or $101.1 million from the Prior Year Quarter to the Current Year Quarter. The increase in cost of care is primarily due to increased membership from existing customers of $48.0 million, new contracts implemented after (or during) the Prior Year Quarter of $24.0 million, favorable prior period medical claims development recorded in the Prior Year Quarter of $20.0 million, unfavorable prior period medical claims development recorded in the Current Year Quarter of $8.6 million, higher care associated with favorable rate changes of $4.5 million and unfavorable care trends and other net variances of $25.7 million. These increases were partially offset by favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $20.2 million, program changes of $5.6 million and terminated contracts of $3.9 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 74.7 percent in the Prior Year Quarter to 82.4 percent in the Current Year Quarter, mainly due to unfavorable care trends and business mix. For our government contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 89.9 percent in the Prior Year Quarter to 93.0 percent in the Current Year Quarter, mainly due to unfavorable care trends, unfavorable care development and business mix.

Direct Service Costs

        Direct service costs increased by 5.5 percent or $5.5 million from the Prior Year Quarter to the Current Year Quarter primarily due to cost to support new business and development for the Magellan Complete Care product and severance and other contract termination costs of $2.3 million, partially offset by terminated contracts. Direct service costs decreased as a percentage of revenue from 15.5 percent in the Prior Year Quarter to 14.3 percent in the Current Year Quarter, mainly due to membership growth and new business.

Pharmacy Management

Managed Care and Other Revenue

        Managed care and other revenue related to Pharmacy Management increased by 23.8 percent or $11.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to increased rebate revenue of $9.5 million and new contracts implemented after (or during) the Prior Year Quarter of $2.2 million.

PBM/Distribution Revenue

        PBM and Distribution revenue related to Pharmacy Management increased by 69.7 percent or $168.1 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to revenue for 4D acquired on April 1, 2015 of $115.3 million, pharmacy MCO revenue of $35.2 million, pharmacy employer revenue of $26.5 million, net increased dispensing activity from existing customers of $10.2 million and other net favorable variances of $0.8 million. These increases were partially offset by terminated contracts of $19.9 million.

Cost of Goods Sold

        Cost of goods sold increased by 73.7 percent or $164.6 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to for 4D acquired April 1, 2015 of $110.0 million, pharmacy MCO of $34.8 million, an increase in pharmacy employer of $24.0 million, net increased dispensing activity from existing customers of $10.0 million and other net unfavorable variances of $3.2 million. These increases were partially offset by terminated contracts of $17.4 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold increased from 92.5 percent in the Prior Year Quarter to 94.7 percent the Current Year Quarter, mainly due to business mix.

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Direct Service Costs

        Direct service costs increased by 91.6 percent or $41.7 million from the Prior Year Quarter to the Current Year Quarter. This increase mainly relates to changes in the fair value of contingent consideration related to the CDMI and 4D acquisitions of $30.5 million, in addition to additional cost from the acquisition of 4D and implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs increased from 15.7 percent in the Prior Year Quarter to 18.6 percent in the Current Year Quarter, mainly due to the fair value of contingent consideration partially offset by the increase in revenue from business growth and acquisition activity.

Corporate and Elimination

        Net expenses related to Corporate, which includes eliminations, decreased by 8.1 percent or $2.4 million, primarily due to lower discretionary benefit costs. As a percentage of revenue, corporate and elimination decreased from 3.3 percent in the Prior Year Quarter to 2.3 percent in the Current Year Quarter, mainly due to the increase in revenue due to acquisitions and new business.

Depreciation and Amortization

        Depreciation and amortization expense increased by 11.5 percent or $2.8 million from the Prior Year Quarter to the Current Year Quarter, primarily due to asset additions after the Prior Year Quarter and acquisition activity.

Interest Expense

        Interest expense decreased by $1.2 million from the Prior Year Quarter to the Current Year Quarter, mainly due to contingent consideration expense for CDMI recorded in the Prior Year Quarter, partially offset by borrowings under the 2014 Credit Facility after the Prior Year Quarter.

Interest Income

        Interest income increased by $0.4 million from the Prior Year Quarter to the Current Year Quarter primarily due to higher yields and an increase in invested balances.

Income Taxes

        The Company's effective income tax rates were (15.7) percent and 48.3 percent for the Prior Year Quarter and Current Year Quarter, respectively. The effective income tax rate for the Current Year Quarter differs from the Prior Year Quarter mainly due to fewer reversals of tax contingencies in the Current Year Quarter from the closure of statutes of limitation, and a more significant impact in the Current Year Quarter from the non-deductible HIF fees due to lower overall income.

        The statutes of limitation regarding the assessment of 2011 federal and certain state and local income taxes expired during the Current Year Quarter. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2014 were reversed in the Current Year Quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the Current Year Quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

        The statutes of limitation regarding the assessment of 2010 federal and certain state and local income taxes expired during the Prior Year Quarter. As a result, $18.7 million of tax contingency reserves recorded as of December 31, 2013 were reversed in the Prior Year Quarter, of which $15.6 million was reflected as a discrete reduction to income tax expense, $2.6 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally,

40

$1.3 million of accrued interest was reversed in the Prior Year Quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

Nine months ended September 30, 2015 ("Current Year Period"), compared to the nine months ended September 30, 2014 ("Prior Year Period")

Healthcare

Net Revenue

        Net revenue related to Healthcare increased by 4.2 percent or $87.0 million from the Prior Year Period to the Current Year Period. The increase in revenue is mainly due to increased membership from existing customers of $339.1 million, contracts implemented after (or during) the Prior Year Period of $90.3 million, favorable rates changes of $59.2 million, an increase in net revenue recorded for HIF fees of $11.1 million, revenue for HSM acquired January 31, 2015 of $7.0 million, increase in performance based revenue of $5.4 million, and other net favorable increases of $11.8 million (mainly related to higher care associated with a cost-plus contract). These increases were partially offset by terminated contracts of $377.8 million, program changes of $48.7 million, the revenue impact of favorable medical claims development for the Prior Year Quarter which was recorded after the Prior Year Quarter of $4.8 million, unfavorable retroactive rate adjustments in the Current Year Period of $3.3 million and favorable prior period, rate, membership and other adjustments of $2.3 million in the Prior Year Period.

Cost of Care

        Cost of care increased by 6.5 percent or $102.7 million from the Prior Year Period to the Current Year Period. The increase in cost of care is primarily due to increased membership from existing customers of $320.6 million, new contracts implemented after (or during) the Prior Year Period of $66.3 million, higher care associated with favorable rate changes of $52.8 million, favorable prior period medical claims development recorded in the Prior Year Period of $7.4 million, HSM acquired January 31, 2015 of $3.1 million, customer settlements in the Prior Year Period of $2.4 million and unfavorable care trends and other net variances of $38.9 million. These increases were partially offset by terminated contracts of $300.3 million, program changes of $40.4 million, favorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $24.9 million and favorable prior period medical claims development recorded in the Current Year Period of $23.2 million. For our commercial contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 78.8 percent in the Prior Year Period to 82.6 percent in the Current Year Period, mainly due to unfavorable care trends and business mix. For our government contracts, cost of care increased as a percentage of risk revenue (excluding EAP business) from 88.8 percent in the Prior Year Period to 89.3 percent in the Current Year Period, mainly due to unfavorable care trends and business mix.

Direct Service Costs

        Direct service costs increased by 6.3 percent or $19.4 million from the Prior Year Period to the Current Year Period primarily due to cost to support new business and development costs for the Magellan Complete Care product and severance and other contract termination cost of $2.3 million, partially offset by terminated contracts. Direct service costs increased as a percentage of revenue from 14.7 percent in the Prior Year Period to 15.0 percent in the Current Year Period, mainly due to the cost to support new business and development for the Magellan Complete Care product and business mix.

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Pharmacy Management

Managed Care and Other Revenue

        Managed care and other revenue related to Pharmacy Management increased by 9.5 percent or $14.2 million from the Prior Year Period to the Current Year Period. This increase is primarily due to increased rebate revenue of $16.7 million, revenue of $12.1 million for CDMI which was acquired on April 30, 2014, new contracts implemented after (or during) the Prior Year Period of $5.1 million and increase in medical pharmacy management revenue of $1.2 million. These increases were partially offset by terminated contracts of $18.1 million, decrease in pharmacy government revenue of $1.5 million and other decreases of $1.3 million.

PBM/Distribution Revenue

        PBM and Distribution revenue related to Pharmacy Management increased by 82.5 percent or $487.0 million from the Prior Year Period to the Current Year Period. This increase is primarily due to revenue for 4D acquired on April 1, 2015 of $237.6 million, new contracts implemented after (or during) the Prior Year Period of $135.0 million, an increase in pharmacy employer revenue of $80.0 million and an increase in pharmacy MCO of $67.8 million. These increases were partially offset by terminated contracts of $33.1 million and other net unfavorable variances of $0.3 million.

Cost of Care

        Cost of care decreased by $16.3 million from the Prior Year Period to the Current Year Period due to a terminated contract.

Cost of Goods Sold

        Cost of goods sold increased by 86.2 percent or $471.8 million from the Prior Year Period to the Current Year Period. This increase is primarily due to 4D acquired April 1, 2015 of $228.1 million, new contracts implemented after the Prior Year Period of $131.3 million, an increase in pharmacy employer of $73.8 million, an increase in pharmacy MCO of $67.7 million and other net increases of $3.5 million. These increases were partially offset by terminated contracts of $32.6 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold increased from 92.8 percent in the Prior Year Period to 94.6 percent the Current Year Period, mainly due to business mix.

Direct Service Costs

        Direct service costs increased by 68.9 percent or $84.5 million from the Prior Year Period to the Current Year Period. This increase mainly relates to increased stock compensation expense of $14.3 million, and changes in the fair value of contingent consideration related to the CDMI and 4D acquisitions of $47.9 million, in addition to additional cost from the acquisition of 4D and implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from 16.6 percent in the Prior Year Period to 16.7 percent in the Current Year Period, mainly due to the increase in revenue from business growth and acquisition activity.

Corporate and Elimination

        Net expenses related to Corporate, which includes eliminations, decreased by 5.1 percent or $4.7 million, primarily due to lower discretionary benefit costs, as well as project cost and legal fees recorded in the Prior Year Period. As a percentage of revenue, corporate and elimination decreased from 3.3 percent in the Prior Year Period to 2.6 percent in the Current Year Period, mainly due to the increase in revenue due to acquisitions and new business.

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Depreciation and Amortization

        Depreciation and amortization expense increased by 12.9 percent or $8.6 million from the Prior Year Period to the Current Year Period, primarily due to asset additions after the Prior Year Period and acquisition activity.

Interest Expense

        Interest expense decreased by $0.8 million from the Prior Year Period to the Current Year Period, mainly due to CDMI contingent consideration recorded in the Prior Year Period, partially offset by borrowings under the 2014 Credit Facility after the Prior Year Period

Interest Income

        Interest income increased by $0.8 million from the Prior Year Period to the Current Year Period, mainly due to higher yields and increase in invested balances.

Income Taxes

        The Company's effective income tax rates were 34.3 percent and 43.5 percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Current Year Period differs from the Prior Year Period mainly due to fewer reversals of tax contingencies in the Current Year Period from the closure of statutes of limitation, and a more significant relative impact in the Current Year Period from the non-deductible HIF fees due to lower overall income.

        The statutes of limitation regarding the assessment of 2011 federal and certain state and local income taxes expired during the Current Year Period. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2014 were reversed in the Current Year Period, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.3 million of accrued interest and $0.7 million of unrecognized state tax benefits were reversed in the Current Year Period and reflected as reductions to income tax expense due to the closing of statutes of limitation on tax assessments and the favorable settlement of state income tax examinations.

        The statutes of limitation regarding the assessment of 2010 federal and certain state and local income taxes expired during the Prior Year Period. As a result, $18.7 million of tax contingency reserves recorded as of December 31, 2013 were reversed in the Prior Year Period, of which $15.6 million was reflected as a discrete reduction to income tax expense, $2.6 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $1.3 million of accrued interest was reversed in the Prior Year Period and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

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); (vi) the timing of acquisitions; (vii) changes in estimates regarding medical costs and IBNR; and (viii) changes in the estimates of contingent consideration.

43

        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 healthcare services and higher costs of such services. Many of these factors are beyond the Company's control. Future results of 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.

        Care Trends.    The Company expects that same-store normalized cost of care trend for the 12 month forward outlook to be 3 to 7 percent for commercial products and 0 to 2 percent for government business.

        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 2014 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2014 Credit Facility as of September 30, 2015, 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 $194.2 million and $178.1 million for the Prior Year Period and Current Year Period, respectively. The $16.1 million decrease in operating cash flows from the Prior Year Period to the Current Year Period is attributable to net unfavorable working capital changes and a decrease in Segment Profit between periods, offset by 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 decrease in tax payments between periods.

        The net unfavorable impact of working capital changes between periods totaled $74.1 million. For the Prior Year Period, operating cash flows were impacted by net favorable working capital changes of $26.7 million, largely attributable to a net decrease in restricted cash requirements associated with the Company's regulated entities and accruals associated with the management incentive plan, partially offset by the payment of HIF fees and management incentive payments. For the Current Year Period, operating cash flows were impacted by net unfavorable working capital changes of $47.4 million, which were largely attributable to timing of management incentive plan activity, an increase in accounts receivable and timing of HIF fee activity. Segment Profit for the Current Year Period decreased $10.3 million from the Prior Year Period.

        Restricted cash of $28.8 million and $93.8 million for the Prior Year Period and Current Year Period, respectively, was shifted to restricted investments that increased operating cash flows. The net impact of the shift in restricted funds between periods is an increase in operating cash flows of $65.0 million. Tax payments for the Current Year Period totaled $41.7 million, which represents a decrease of $3.3 million from the Prior Year Period.

        During the Current Year Period, the Company's restricted cash decreased $80.0 million. The change in restricted cash is attributable to the net shift of restricted cash of $93.8 million to restricted investments, net increase in restricted cash of $14.1 million associated with the Company's regulated entities, and other net decreases of $0.3 million. The net change in restricted cash for the Company's regulated entities is attributable to a net decrease in restricted cash requirements of $5.6 million that resulted in an operating cash flow source, partially offset by a net increase in restricted cash of $19.7 million that is offset by changes in other assets and liabilities, primarily accounts receivable, accrued liabilities and accrued taxes, thus having no impact on operating cash flows.

        Investing Activities.    The Company utilized $50.6 million and $54.6 million during the Prior Year Period and Current Year Period, respectively, for capital expenditures. The additions related to hard

44

assets (equipment, furniture, and leaseholds) and capitalized software for the Prior Year Period were $16.7 million and $33.9 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of $19.1 million and $35.5 million, respectively. During the Prior Year Period the Company received net cash of $3.2 million from the net maturity of "available-for-sale" securities, with the Company using net cash of $108.2 million during the Current Year Period for the net purchase of "available for sale" securities. In addition, during the Prior Year Period, the Company used net cash of $125.0 million and $7.9 million for the acquisitions of CDMI and Cobalt, respectively, and received a working capital settlement of $0.7 million related to the acquisition of Partners Rx. During the Current Year Period, the Company used net cash of $13.6 million and $42.2 million for the acquisitions of HSM and 4D, respectively.

        Financing Activities.    During the Prior Year Period, the Company received $250.0 million from the issuance of debt and $41.7 million from the exercise of stock options and had other net favorable items of $0.6 million. In addition, the Company paid $139.3 million for the repurchase of treasury stock under the Company's share repurchase program and $2.6 million on capital lease obligations.

        During the Current Year Period, the Company paid $150.8 million for the repurchase of treasury stock under the Company's share repurchase program, $9.4 million on debt obligations, and $3.3 million on capital lease obligations. The Company made contingent consideration payments totaling $11.2 million of which $8.9 million was related to financing activities. In addition, the Company received $50.1 million from the exercise of stock options and had other net favorable items of $4.3 million.

Outlook—Liquidity and Capital Resources

        Liquidity.    During the remainder of 2015, the Company expects to fund its estimated capital expenditures of $9.4 million to $19.4 million with cash from operations. The Company does not anticipate that it will need to draw on additional amounts available under the 2014 Credit Facility for cash flow needs related to its operations, capital needs or debt service in 2015. 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 may draw on the 2014 Credit Facility to fund a portion of cash required for its acquisition activities. 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 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. See Note D—"Commitments and Contingencies" for more information on the Company's share repurchase program.

        Off-Balance Sheet Arrangements.    As of September 30, 2015, the Company has no material off-balance sheet arrangements.

        2014 Credit Facility.    On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.) to borrow up to $250.0 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, and a term loan in an original aggregate principal amount of $250.0 million. The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on July 23, 2019, but the Company holds an option to extend the 2014 Credit Facility for an additional one year period. See Note A—"General" for more information on the 2014 Credit Facility.

45

        Restrictive Covenants in Debt Agreements.    The 2014 Credit Facility contains covenants that potentially limit management's discretion in operating the Company's business by, in certain circumstances, 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 2014 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 2014 Credit Facility pursuant to its terms, would result in an event of default under the 2014 Credit Facility.

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 2014 Credit Facility. Based on the amount of cash equivalents and investments and the borrowing levels under the 2014 Credit Facility as of September 30, 2015, 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 September 30, 2015. 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 September 30, 2015.

        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 September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

46

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

        The Company's operating activities entail 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 and other 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, 2014 which was filed with the SEC on February 26, 2015.

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 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. Pursuant to this program, the Company made open market purchases during the three months ended September 30, 2015 as follows (aggregate cost excludes broker commissions and is reflected in millions):

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(1)(2)
July 1 - 31, 2015		257,809	$	64.32		257,809	$	100.9
August 1 - 31, 2015		593,123		57.77		593,123		66.6
September 1 - 30, 2015		623,952		56.72		623,952		31.2
		1,474,884				1,474,884

(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.

47

        The Company made additional open market purchases of 616,075 shares of the Company's common stock at an aggregate cost of $31.2 million (excluding broker commissions) during the period from October 1, 2015 through October 21, 2015, which was the date the repurchase program was completed.

Item 3.    Defaults Upon Senior Securities.

        None.

Item 4.    Mine Safety Disclosures.

        None.

Item 5.    Other Information.

Chief Financial Officer Employment Agreement

        As previously reported, the Company announced on April 29, 2014 Mr. Rubin would be leaving the Company. In order to provide for a successful transition from Mr. Rubin to a successor Chief Financial Officer to be recruited and hired by the Company, the Company and Mr. Rubin entered into an amendment to his employment agreement dated April 28, 2014 the ("2014 Amendment") pursuant to which his employment was extended for one-year through April 30, 2015. On April 28, 2015, the Company and Mr. Rubin entered into a second amendment to Mr. Rubin's employment agreement (the "2015 Amendment") pursuant to which the Company and Mr. Rubin agreed to a further extension to his employment through December 31, 2015.

        The Company and Mr. Rubin have mutually agreed that he will remain the Chief Financial Officer of the Company and the Company has ended its search for a new Chief Financial Officer. As a result, on October 26, 2015, the Company and Mr. Rubin entered into a new amendment to his employment agreement (the "October 2015 Amendment") pursuant to which the 2014 Amendment and the April 2015 Amendment have been terminated in their entirety. The October 2015 Amendment also includes the following terms:

1.

Pursuant to the Company's Equity Award Policy and the Company's 2011 Management Incentive Plan, on November 2. 2015, Mr. Rubin will be granted stock options vesting in equal pro-rata amounts over three years on each anniversary date of such grant at an exercise price equal to the closing price of a share of Company Common Stock ("Common Stock") on the date of grant. The number of options to be awarded shall be equal to $1,252,610 divided by the Black Scholes value of a share of Common Stock on the date of grant as determined by the Company consistent with the methodology for the grants to other Company employees. The term of such options shall be ten years.



2.

Pursuant to the Company's Equity Award Policy and the 2011 Management Incentive Plan, on November 2, 2015, Mr. Rubin will be granted Restricted Stock Units vesting in equal pro-rata amounts over three years on each anniversary date of such grant equal to $390,000 divided by the closing price of the Common Stock on the date of grant.



3.

Upon his retirement from employment with the Company, as defined in Magellan's Equity Retirement Policy (except for the requirement that he be age 65 or older), all of Mr. Rubin's outstanding and unvested stock options, restricted stock units and performance share units shall continue to vest in accordance with their original terms without any requirement of continued employment with the Company.



4.

Except as amended in the October 2015 Amendment, the terms of Mr. Rubin's original employment agreement shall remain in full force and effect.

48

Stock Repurchase

        On October 26, 2015 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 26, 2017. Stock repurchases under the program may be made from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any time.

49

Item 6.    Exhibits.

Exhibit No.		Description
	10.1	Employment Agreement dated October 26, 2015 between the Company and Jonathan N. Rubin.
	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 September 30, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income (Loss), (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

50

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: October 27, 2015	MAGELLAN HEALTH, INC. (Registrant)
	By:	/s/ JONATHAN N. RUBIN Jonathan N. Rubin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

51

EX-10.1

Exhibit 10.1

October 26, 2015

Jon Rubin

108 West Mountain Rd
West Simsbury, CT 06092

Dear Jon:

Reference is hereby made to a certain employment agreement between Jonathan Rubin and Magellan Health Services, Inc. (‘Magellan”), dated August 11, 2008, as amended (the “Employment Agreement”), an amendment to the Employment Agreement dated April 28, 2014 (the “First Amendment”) and an amendment to the Employment Agreement dated April 28, 2015 (the “Second Amendment”). This letter will memorialize a third amendment to the Employment Agreement between you and Magellan as follows:

1.The First Amendment and the Second Amendment are hereby terminated and are null and void.

2.You shall remain employed with Magellan as Chief Financial Officer pursuant to the terms of the Employment Agreement as further amended pursuant to the terms of this letter amendment (the “Third Amendment”).

3.Pursuant to Magellan’s Equity Award Policy and Magellan’s 2011 Management Incentive Plan, you will be granted stock options vesting in equal pro-rata amounts over three years on each anniversary date of such grant at an exercise price equal to the closing price of a share of Magellan Common Stock (“Common Stock”) on the date of grant. The number of options to be awarded shall be equal to $1,252,610 divided by the Black Scholes value of a share of Common Stock on the date of grant as determined by Magellan consistent with the usual methodology for the grants to other Magellan employees. The term of such options shall be ten years.

4.Pursuant to Magellan’s Equity Award Policy and the 2011 Management Incentive Plan, you will be granted Restricted Stock Units vesting in equal pro-rata amounts over three years on each anniversary date of such grant equal to $390,000 divided by the closing price of the Common Stock on the date of grant.

5.Upon your retirement from employment with Magellan as defined in Magellan’s Equity Retirement Policy (except for the requirement that you be age 65 or older), all of your outstanding and unvested stock options, restricted stock units and performance share units

4800 N. Scottsdale Road, Suite 4400, Scottsdale, AZ 85251 Office 602.572.2520 Fax 888.656.6003

shall continue to vest in accordance with their original terms without any requirement of your continued employment with Magellan. You will not be considered retired for this purpose if you become a full- time employee or if you are employed by another employer to serve as Chief Financial Officer or an executive officer. You will have the right to be considered retired for this purpose if you serve on boards of directors and/or become a part-time consultant.

6.Except as amended in this letter, the terms of your Employment Agreement and the First Amendment shall remain in full force and effect.

Please indicate your agreement to the terms of this letter by signing below.

Sincerely,
/s/ Barry Smith
Barry Smith
Chairman and CEO
Agreed and Accepted:
By	/s/ Jonathan Rubin	Date:	October 26, 2015
	Jonathan Rubin
cc: File

EX-31.1

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Exhibit 31.1

CERTIFICATIONS

I, Barry M. Smith, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Magellan Health, 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: October 27, 2015	Chief Executive Officer

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Exhibit 31.1

CERTIFICATIONS

EX-31.2

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Exhibit 31.2

CERTIFICATIONS

I, Jonathan N. Rubin, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Magellan Health, 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: October 27, 2015	Chief Financial Officer

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Exhibit 31.2

CERTIFICATIONS

EX-32.1

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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, 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 September 30, 2015 (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: October 27, 2015	Chief Executive Officer

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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)

EX-32.2

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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, 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 September 30, 2015 (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: October 27, 2015	Chief Financial Officer

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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)

XML

Subsequent Events (Details) $ in Millions	Oct. 26, 2015 USD ($)
Subsequent event | October 2015 Share Repurchase Program
Subsequent events
Stock Repurchase Program, Authorized Amount	$ 200

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Net Income (Loss) per Common Share Attributable to Magellan Helath Services, Inc (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Numerator:
Net income (loss) attributable to Magellan Health, Inc.	$ (7,808)	$ 27,133	$ 4,123	$ 57,839
Denominator:
Weighted average number of common shares outstanding-basic (in shares)	24,892	26,703	25,297	27,070
Common stock equivalents-stock options (in shares)		404	360	517
Common stock equivalents-RSAs (in shares)		133	640	77
Common stock equivalents-RSUs (in shares)			34	18
Common stock equivalents- PSUs( in shares)			39
Common stock equivalents-employee stock purchase plan (in shares)		2	2	2
Weighted average number of common shares outstanding-diluted (in shares)	24,892	27,242	26,372	27,684
Net income (loss) attributable to Magellan Health, Inc. per common share-basic (in dollars per share)	$ (0.31)	$ 1.02	$ 0.16	$ 2.14
Net income (loss) attributable to Magellan Health, Inc. per common share-diluted (in dollars per share)	$ (0.31)	$ 1.00	$ 0.16	$ 2.09
Potential dilutive securities excluded from computation of dilutive securities (in shares)	1,400	700	1,100	600

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General (Details 5) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015	Sep. 30, 2015	Apr. 01, 2015	Dec. 31, 2014	Jul. 01, 2014	Apr. 30, 2014
Fair value measurement of contingent consideration
Fair value of the short term contingent consideration			$ 106,800
Fair value of the long term contingent consideration			1,609		$ 49,839
Fair value of the contingent consideration	$ 108,443	$ 58,153	108,443		58,153
Liability for contingent consideration
Balance as of beginning of period		58,153
Changes in fair value: Increase (Decrease) in contingent consideration		47,274
Payments		(16,274)
Balance as of end of period	108,443	108,443
Direct service costs and other operating expenses
Liability for contingent consideration
Changes in fair value: Increase (Decrease) in contingent consideration	$ 29,700	47,300
CDMI
Contingent consideration disclosures
Maximum potential contingent payments							$ 165,000
Fair value measurement of contingent consideration
Estimated undiscounted future contingent payments			90,400		65,700
Fair value of the short term contingent consideration			89,800
Fair value of the long term contingent consideration			300
Liability for contingent consideration
Changes in fair value: Increase (Decrease) in contingent consideration		34,600
Payments		$ (9,900)
CDMI | Minimum
Fair value measurement of contingent consideration
Fair values inputs - Discount Rate (as a percent)		0.33%
Fair value inputs - Probability Of Payment (as a percent)		0.00%
CDMI | Maximum
Fair value measurement of contingent consideration
Fair values inputs - Discount Rate (as a percent)		14.50%
Fair value inputs - Probability Of Payment (as a percent)		100.00%
Cobalt
Contingent consideration disclosures
Maximum potential contingent payments						$ 6,000
Fair value measurement of contingent consideration
Fair values inputs - Discount Rate (as a percent)		14.50%
Estimated undiscounted future contingent payments			2,700		$ 4,200
Fair value of the short term contingent consideration			1,000
Fair value of the long term contingent consideration			1,300
Liability for contingent consideration
Changes in fair value: Increase (Decrease) in contingent consideration		$ (1,200)
Payments		$ (300)
Cobalt | Minimum
Fair value measurement of contingent consideration
Fair value inputs - Probability Of Payment (as a percent)		0.00%
Cobalt | Maximum
Fair value measurement of contingent consideration
Fair value inputs - Probability Of Payment (as a percent)		50.00%
4D Pharmacy Management Systems, Inc.
Contingent consideration disclosures
Maximum potential contingent payments				$ 30,000
Fair value measurement of contingent consideration
Fair values inputs - Discount Rate (as a percent)		11.00%
Estimated undiscounted future contingent payments			16,400	$ 20,600
Net increase or decrease in contingent consideration liability		$ (4,200)
Fair value of the short term contingent consideration			$ 16,000
Liability for contingent consideration
Acquisition of 4D		19,290
Changes in fair value: Increase (Decrease) in contingent consideration		1,800
Payments		$ (6,000)
4D Pharmacy Management Systems, Inc. | Minimum
Fair value measurement of contingent consideration
Fair value inputs - Probability Of Payment (as a percent)		5.00%
4D Pharmacy Management Systems, Inc. | Maximum
Fair value measurement of contingent consideration
Fair value inputs - Probability Of Payment (as a percent)		100.00%

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Acquisitions (Details) - USD ($) $ in Thousands		9 Months Ended
	Apr. 01, 2015	Sep. 30, 2015	Dec. 31, 2014
Assets acquired:
Goodwill		$ 623,907	$ 566,106
Acquisition disclosures
Changes in fair value: Increase (Decrease) in contingent consideration		47,274
Payments on contingent consideration		(16,274)
Fair value of the short term contingent consideration		106,800
4D Pharmacy Management Systems, Inc.
Acquisitions
Amount of consideration paid in cash	$ 55,000
Assets acquired:
Current assets	35,638
Property and equipment, net	238
Other identified intangible assets	24,600
Goodwill	49,136
Total assets acquired	109,612
Liabilities assumed:
Current liabilities	33,882
Contingent consideration	19,291
Total liabilities assumed	53,173
Net assets acquired	56,439
Acquisition disclosures
Maximum potential contingent payments	30,000
Working capital payable		200
Estimated undiscounted future contingent payments	20,600	16,400
Net increase or decrease in contingent consideration liability		(4,200)
Changes in fair value: Increase (Decrease) in contingent consideration		1,800
Payments on contingent consideration		(6,000)
Fair value of the short term contingent consideration		16,000
Acquisition related costs		200
Cumulative acquisition related costs		$ 700
4D Pharmacy Management Systems, Inc. | Customer contracts
Assets acquired:
Other identified intangible assets	$ 21,100
Acquisition disclosures
Period of amortization of intangible assets acquired	10 years
4D Pharmacy Management Systems, Inc. | Non-compete agreements
Assets acquired:
Other identified intangible assets	$ 2,200
Acquisition disclosures
Period of amortization of intangible assets acquired	5 years
4D Pharmacy Management Systems, Inc. | Tradenames
Assets acquired:
Other identified intangible assets	$ 1,300
Acquisition disclosures
Period of amortization of intangible assets acquired	18 months
4D Pharmacy Management Systems, Inc. | Achievement Of Certain Targets
Acquisition disclosures
Maximum potential contingent payments	$ 10,000
4D Pharmacy Management Systems, Inc. | Retention of Certain Business
Acquisition disclosures
Maximum potential contingent payments	20,000
Cash | 4D Pharmacy Management Systems, Inc.
Assets acquired:
Current assets	14,178
Accounts receivable | 4D Pharmacy Management Systems, Inc.
Assets acquired:
Current assets	$ 21,417

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General

9 Months Ended

Sep. 30, 2015

General

General

NOTE A—General

Basis of Presentation

        The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation ("Magellan"), include Magellan and its subsidiaries (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 and nine months ended September 30, 2015 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. Other than as described in Note F—"Subsequent Events," the Company did not have any material events during the period.

        These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2014 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2015.

Business Overview

        The Company is engaged in the healthcare management business, and is focused on managing the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits and other specialty areas of healthcare. The Company develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact health outcomes and optimize the cost of care for the members we serve. The Company provides services to health plans and other managed care organizations ("MCOs"), employers, labor unions, various military and governmental agencies, and third party administrators.

        Effective as of July 1, 2015, the Company reorganized into two business units—Magellan Healthcare and Magellan Rx Management, which are supported by corporate. As a result of this business reorganization, the Company concluded that changes to its reportable segments were warranted, with the Healthcare segment ("Healthcare") comprised of the operating segments previously defined as the Commercial, Public Sector and the Specialty Solutions segments. Prior period balances have been reclassified to reflect this change. The Company's business is divided into the following segments, which are differentiated based on the services it provides, as described below.

Healthcare

        Healthcare includes the Company's: (i) management of behavioral healthcare services and employee assistance program ("EAP") services, (ii) management of other specialty areas including diagnostic imaging and musculoskeletal management, and (iii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care ("MCC"). These special populations include individuals with serious mental illness, dual eligibles, long-term care eligibles and other populations with unique and often complex healthcare needs.

        The Company's coordination and management of these healthcare services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals and ancillary service providers. This network of credentialed and privileged providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. 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 Healthcare segment's commercial division serves a variety of customers, with services, inclusive of special population management, provided under contracts with health plans and accountable care organizations for some or all of their commercial, Medicaid and Medicare members, as well as with employers. The government division contracts with local, state and federal governmental agencies to provide services to recipients under Medicaid, Medicare and other government programs.

        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 and (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.

        The following tables summarize, for the periods indicated, revenues and covered lives for Healthcare by product classification and customer type (in thousands):

	Revenue for nine months ended September 30, 2015
	Risk-based		ASO		Total
Commercial
Behavioral(1)	$	245,493	$	93,193	$	338,686
Specialty		353,896		42,162		396,058
Government(2)		1,383,627		51,990		1,435,617
Total	$	1,983,016	$	187,345	$	2,170,361

	Covered lives as of September 30, 2015
	Risk-based		ASO
Commercial
Behavioral(1)		12,815		12,518
Specialty		7,704		16,538
Government(2)		5,059		1,946

(1)	Includes revenues of $36.9 million from EAP services provided on a risk basis to health plans and employers with 10.2 million covered lives.
(2)	Includes revenues of $115.1 million from EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.

Pharmacy Management

        The Pharmacy Management segment ("Pharmacy Management") comprises products and solutions that provide clinical and financial management of drugs paid under medical and pharmacy benefit programs. Pharmacy Management's services include: (i) traditional pharmacy benefit management ("PBM") services; (ii) pharmacy benefit administration ("PBA") for state Medicaid and other government sponsored programs; (iii) specialty pharmaceutical dispensing operations, contracting and formulary optimization programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In addition, Pharmacy Management has subcontract arrangements to provide PBM services for certain Healthcare customers.

        The Company's Pharmacy Management programs 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. During the nine months ended September 30, 2015, Pharmacy Management paid 13.2 million adjusted commercial network claims in the Company's PBM business. As of September 30, 2015, the Company had a generic dispensing rate of 84.2 percent within its commercial PBM business. In addition, during the nine months ended September 30, 2015, the Company paid 44.2 million adjusted PBA claims and 0.1 million specialty dispensing claims. Adjusted claim totals apply a multiple of three for each 90-day and traditional mail claim. In addition, as of September 30, 2015, Pharmacy Management served 1.6 million commercial PBM members, 9.8 million members in its medical pharmacy management programs, and 25 states and the District of Columbia in its PBA business.

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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. In July 2015, the FASB approved to defer the effective date of ASU 2014-09. This ASU is now effective for calendar years beginning after December 15, 2017. The Company is currently assessing the potential impact this ASU will have on the Company's consolidated results of operations, financial position, and cash flows.

        In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12"), which revises the accounting treatment for stock compensation tied to performance targets. This ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40)" ("ASU 2014- 15"), which provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASU is effective for the annual period beginning after December 15, 2016 and for annual and interim reporting periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for annual and interim reporting periods of public entities beginning after December 31, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In April 2015, the FASB issued ASU No. 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance to clarify the customer's accounting for fees paid in a cloud computing arrangement. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments" ("ASU 2015-16"). The amendment under this ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially 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, contingent consideration, 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 $611.4 million and $1,935.0 million for the three and nine months ended September 30, 2014, respectively, and $689.5 million and $2,004.4 million for the three and nine months ended September 30, 2015, 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. This includes revenues received in relation to the Patient Protection and Affordable Care Act health insurer fee ("HIF fee") billed on a cost reimbursement basis. Revenues from these contracts approximated $72.9 million and $205.6 million for the three and nine months ended September 30, 2014, respectively, and $85.1 million and $248.7 million for the three and nine months ended September 30, 2015, respectively.

        Block Grant Revenues.    The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represented annual appropriations. The Company recognized revenue from block grant activity ratably over the period to which the block grant funding applied. Block grant revenues were approximately $0.0 million and $33.3 million for the three and nine months ended September 30, 2014, respectively. The Maricopa Contract terminated on March 31, 2014.

        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 approximated $1.6 million and $7.0 million, respectively, for the three and nine months ended September 30, 2014, respectively, and $4.4 million and $10.1 million for the three and nine months ended September 30, 2015, 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 approximated $14.3 million and $27.6 million for the three and nine months ended September 30, 2014, respectively, and $23.5 million and $56.3 million for the three and nine months ended September 30, 2015, respectively.

        In relation to the Company's PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

        Pharmacy Benefit Management Revenue.    The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client's members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated $155.7 million and $383.2 million for the three and nine months ended September 30, 2014, respectively, and $327.1 million and $842.9 million for the three and nine months ended September 30, 2015, 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 $64.5 million and $179.6 million for the three and nine months ended September 30, 2014, respectively, and $53.7 million and $151.6 million for the three and nine months ended September 30, 2015, respectively.

Significant Customers

        Customers exceeding ten percent of the consolidated Company's net revenues

        The Company provides behavioral healthcare management and other related services to members in the state of Iowa pursuant to contracts with the State of Iowa (the "Iowa Contracts"). The Company currently has two contracts; the Iowa Medicaid Contract and Iowa Medicaid Integrated Health Home Provider Agreement ("IHH Agreement"). Under the Iowa Medicaid Contract, the Company is responsible for providing managed mental health and substance abuse treatment to enrollees under a Medicaid 1915(b) waiver, as well as substance abuse treatment services plan funded by federal block grant and state appropriations under the authority of the Iowa Department of Public Health. The Iowa Health and Wellness Plan for members who qualify as an "exempt individual", as defined in 441 of the Iowa Administrative Code, were also added to the contract on January 1, 2014. The latest Iowa Medicaid Contract began on January 1, 2010 and extended through June 30, 2015. The Iowa Department of Human Services and the Iowa Department of Public Health has the right to terminate the Iowa Medicaid Contract upon 30 days notice for any reason or no reason at all. In June 2015, the Company received a notice of intent to extend the Iowa Medicaid Contract through December 31, 2015, to coincide with the start date of the new Iowa High Quality Healthcare Initiative, as discussed below. Under the IHH Agreement, the Company establishes a health home for individuals identified with serious and persistent mental illness through enrolled provider organizations capable of providing enhanced care. The IHH Agreement began on July 1, 2013 and extends through June 30, 2016 unless sooner terminated by either party with 60 days notice for any reason or no reason at all. The IHH program is part of the new Iowa High Quality Healthcare Initiative and we expect that the end of the IHH agreement will coincide with the start date of the new initiative. The Iowa Contracts generated net revenues of $337.9 million and $394.8 million for the nine months ended September 30, 2014 and 2015, respectively.

        On February 16, 2015 the Iowa Department of Human Services (the "Agency") released the Iowa High Quality Healthcare Initiative Request for Proposal ("RFP"). The RFP includes the services provided by the Company's current Iowa Contracts. On August 17, 2015, the Company was notified that it was not selected as a winning bidder by the Agency for the RFP.

        The Company provides behavioral healthcare management and other related services to members in the state of Florida pursuant to contracts with the State of Florida (the "Florida Contracts"). The Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees receive integrated healthcare services, and in 2014 phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program ("the Florida Medicaid Contract"). The Florida Medicaid Contract began on February 4, 2014 and extends through December 31, 2018, unless sooner terminated by the parties. The State of Florida has the right to terminate the Florida Medicaid Contract with cause, as defined, upon 24 hour notice and upon 30 days notice for any reason or no reason at all. The Florida Contracts generated net revenues of $143.9 million and $324.1 million for the nine months ended September 30, 2014 and 2015, respectively.

        Through March 31, 2014, the Company provided behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona as the Regional Behavioral Health Authority ("RBHA") for GSA6 ("Maricopa County") pursuant to a contract with the State of Arizona (the "Maricopa Contract"). The Maricopa Contract was for the management of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth, and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $213.3 million for the nine months ended September 30, 2014.

Customers exceeding ten percent of segment net revenues

        In addition to the Iowa Contracts, the Florida Contracts, and the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the nine months ended September 30, 2014 and 2015 (in thousands):

Segment	Term Date	2014		2015
Healthcare
None
Pharmacy Management
Customer A	November 30, 2015 to April 4, 2016(1)		92,793		93,908	*
Customer B	December 16, 2016		105,079		241,556

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

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. Net revenues from the Pennsylvania Counties in the aggregate totaled $272.0 million and $294.9 million for the nine months ended September 30, 2014 and 2015, 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 has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These 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 assets and liabilities that are required to be measured at fair value as of December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	139,280	$	—	$	139,280
Restricted cash(2)		—		65,992		—		65,992
Investments:
U.S. government and agency securities		4,303		—		—		4,303
Obligations of government-sponsored enterprises(3)		—		15,315		—		15,315
Corporate debt securities		—		246,886		—		246,886
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,303	$	468,623	$	—	$	472,926
Liabilities
Contingent consideration	$	—	$	—	$	58,153	$	58,153
Total liabilities held at fair value	$	—	$	—	$	58,153	$	58,153

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	45,091	$	—	$	45,091
Restricted cash(5)		—		61,220		—		61,220
Investments:
U.S. government and agency securities		4,982		—		—		4,982
Obligations of government-sponsored enterprises(6)		—		43,067		—		43,067
Corporate debt securities		—		321,606		—		321,606
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,982	$	472,134	$	—	$	477,116
Liabilities
Contingent consideration	$	—	$	—	$	108,443	$	108,443
Total liabilities held at fair value	$	—	$	—	$	108,443	$	108,443

(1)	Excludes $116.0 million of cash held in bank accounts by the Company.
(2)	Excludes $149.3 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 $51.8 million of cash held in bank accounts by the Company.
(5)	Excludes $74.1 million of restricted cash held in bank accounts by the Company.
(6)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        For the nine months ended September 30, 2015, the Company has not transferred any assets between fair value measurement levels.

        The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company's term loan of $237.5 million as of September 30, 2015 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

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

        The contingent consideration liability reflects the fair value of potential future payments related to the CDMI, LLC ("CDMI"), Cobalt Therapeutics, LLC ("Cobalt"), and 4D Pharmacy Management Systems, Inc. ("4D") acquisitions. The CDMI purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016. The Cobalt purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The 4D purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $30.0 million. The potential future payments are contingent upon the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and retention of certain business through 2018.

        As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, client base, member engagement, and new contract execution. The projected revenues, gross profits, client base, member engagement, and new contract execution are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in a change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income (loss). As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement guidance.

        For CDMI, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 0.33 percent to 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 100 percent; and (iii) projected payment dates of 2016 to 2017. For CDMI, the Company estimated undiscounted future contingent payments of $65.7 million and $90.4 million as of December 31, 2014 and September 30, 2015, respectively. The net increase is due to changes in operational forecasts and probabilities of payment of $34.6 million, partially offset by a decrease of $9.9 million due to payments. As of September 30, 2015, the fair value of the short term and long term contingent consideration for CDMI was $89.8 million and $0.3 million, respectively.

        For Cobalt, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 50 percent; and (iii) projected payment dates of 2016 to 2017. For Cobalt, the Company estimated undiscounted future contingent payments of $4.2 million and $2.7 million as of December 31, 2014 and September 30, 2015, respectively. The decrease is due to changes in operational forecasts and probabilities of payment of $1.2 million and payments of $0.3 million. As of September 30, 2015, the fair value of the short term and long term contingent consideration for Cobalt was $1.0 million and $1.3 million, respectively.

        For 4D, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 11.0 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately 5 to 100 percent; and (iii) projected payment dates of 2015 to 2016. For 4D, the Company estimated undiscounted future contingent payments of $20.6 million and $16.4 million as of the acquisition date and September 30, 2015, respectively. The net $4.2 million decrease is due to payments of $6.0 million, partially offset by a net increase of $1.8 million, mainly due to changes in operational forecasts and probabilities of payment. As of September 30, 2015, the fair value of the short term contingent consideration for 4D was $16.0 million.

        As of September 30, 2015, the fair value of the short term and long term contingent consideration was $106.8 million and $1.6 million, respectively, and is included in accrued liabilities and contingent consideration, respectively, in the consolidated balance sheets. The change in the fair value of the contingent consideration was $29.7 million and $47.3 million for the three and nine months ended September 30, 2015, respectively, which was recorded as direct service costs and other operating expenses in the consolidated statements of income (loss). The increase was mainly a result of changes in the present value and estimated undiscounted liability, as noted above.

        The following table summarizes the Company's liability for contingent consideration for the nine months ended (in thousands):

	September 30, 2015
Balance as of beginning of period	$	58,153
Acquistion of 4D		19,290
Change in fair value		47,274
Payments		(16,274	)
Balance as of end of period	$	108,443

Cash and Cash Equivalents

        Cash and cash equivalents include cash on hand and at banks, short-term deposits with an original maturity of three months or less with financial institutions. Bank overdrafts are reflected within accounts payable on the balance sheets. Bank overdrafts for the nine months ended September 30, 2014 and 2015 are $0.0 million and $28.5 million, respectively.

Investments

        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 income (loss). 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 income (loss) and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2014 and September 30, 2015, there were no unrealized losses that the Company determined to be other-than-temporary. No realized gains or losses were recorded for the nine months ended September 30, 2014 or 2015. The following is a summary of short-term and long-term investments at December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,305	$	—	$	(2	)	$	4,303
Obligations of government-sponsored enterprises(1)		15,318		1		(4	)		15,315
Corporate debt securities		247,118		8		(240	)		246,886
Certificates of deposit		1,150		—		—			1,150
Total investments at December 31, 2014	$	267,891	$	9	$	(246	)	$	267,654

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,976	$	6	$	—		$	4,982
Obligations of government-sponsored enterprises(2)		43,045		25		(3	)		43,067
Corporate debt securities		321,817		24		(235	)		321,606
Certificates of deposit		1,150		—		—			1,150
Total investments at September 30, 2015	$	370,988	$	55	$	(238	)	$	370,805

(1)	Includes investments in notes issued by the Federal Home Loan Bank.
(2)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        The maturity dates of the Company's investments as of September 30, 2015 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2015	$	110,723	$	110,679
2016		258,579		258,439
2017		1,686		1,687
Total investments at September 30, 2015	$	370,988	$	370,805

Income Taxes

        The Company's effective income tax rates were 34.3 percent and 43.5 percent for the nine months ended September 30, 2014 and 2015, 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 and valuation allowances. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The effective income tax rate for the nine months ended September 30, 2015 is higher than the effective rate for the nine months ended September 30, 2014 mainly due to fewer reversals of tax contingencies in the current year from the closure of statutes of limitation, and a more significant relative impact in the current year from the non-deductible HIF fees due to lower overall income.

        The Company files a consolidated federal income tax return with most of its eighty-percent or more controlled subsidiaries. The Company files a separate consolidated federal income tax return for AlphaCare of New York, Inc. ("AlphaCare") and its parent, AlphaCare Holdings, Inc. ("AlphaCare Holdings"). The Company and its subsidiaries also file income tax returns in various state and local jurisdictions. The Company is no longer subject to federal income tax assessments for years ended prior to 2012 or, with few exceptions, to state or local income tax assessments for years ended prior to 2010. Further, the statutes of limitation regarding the assessment of 2011 federal and certain state and local income taxes expired during the current quarter. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2014 were reversed in the current quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the current quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

Net Operating Loss Carryforwards

        The Company has $3.0 million of federal net operating loss carryforwards ("NOLs") available to reduce its federal consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2018 and 2019 if not used and are subject to examination and adjustment by the Internal Revenue Service ("IRS"). AlphaCare has $26.2 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2033 and 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $144.7 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these state NOLs will expire in 2017 through 2034 if not used and are subject to examination and adjustment by the respective state tax authorities.

        Deferred tax assets as of December 31, 2014 and September 30, 2015 are shown net of valuation allowances of $12.4 million and $12.9 million, respectively. These valuation allowances mostly relate to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and 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. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company's financial condition and results of operations.

Health Care Reform

        The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. For 2014 and 2015, the HIF fees were $21.4 million and $26.5 million, respectively, which have been paid. Of these amounts, $5.4 million and $16.1 million was expensed in the three and nine months ended September 30, 2014, respectively, and $6.7 million and $19.9 million was expensed in the three and nine months ended September 30, 2015, respectively, which was included in direct service costs and other operating expenses in the consolidated statements of income (loss). The Company recorded revenues of $8.8 million and $22.9 million in the three and nine months ended September 30, 2014, respectively, and $11.6 million and $34.0 million in the three and nine months ended September 30, 2015, respectively, associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers.

Stock Compensation

        At December 31, 2014 and September 30, 2015, 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, 2014, with the exception of the Performance-Based Restricted Stock Units ("PSUs") issued during the nine months ended September 30, 2015, which are described below. The Company recorded stock compensation expense of $11.9 million and $26.0 million for the three and nine months ended September 30, 2014 and $12.9 million and $40.6 million for the three and nine months ended September 30, 2015, respectively. Stock compensation expense recognized in the consolidated statements of income (loss) for the nine months ended September 30, 2014 and 2015 has been reduced for forfeitures, estimated at between zero and four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the nine months ended September 30, 2015 was $13.91 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 25.03 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 nine months ended September 30, 2014 and 2015, $2.8 million and $3.9 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 nine months ended September 30, 2014, the net change to additional paid in capital related to tax benefits (deficiencies) was $2.5 million, which includes $2.8 million of excess tax benefits offset by $(0.3) million of excess tax deficiencies. For the nine months ended September 30, 2015, the net change to additional paid in capital related to tax benefits (deficiencies) was $3.8 million, which includes $3.9 million of excess tax benefits offset by $(0.1) million of excess tax deficiencies.

        Summarized information related to the Company's stock options for the nine months ended September 30, 2015 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		3,321,063		$	50.58
Granted		902,928			63.61
Forfeited		(140,940	)		60.21
Exercised		(1,062,878	)		47.17
Outstanding, end of period		3,020,173		$	55.23
Vested and expected to vest at end of period		2,983,943		$	55.15
Exercisable, end of period		1,417,576		$	49.46

        All of the Company's options granted during the nine months ended September 30, 2015 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards ("RSAs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		1,626,827		$	57.66
Awarded		20,115			67.12
Vested		(94,547	)		57.48
Forfeited		—			—
Outstanding, end of period		1,552,395		$	57.79

        Summarized information related to the Company's nonvested restricted stock units ("RSUs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		156,695		$	54.88
Awarded		172,810			63.95
Vested		(79,036	)		52.82
Forfeited		(21,144	)		61.65
Outstanding, end of period		229,325		$	61.80

        The vesting period for RSAs ranges from 12 months to 42 months. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant. In addition, the RSUs outstanding at the beginning of the period contain associated performance hurdle(s) that must be met in order for the awards to vest. The RSUs granted during the nine months ended September 30, 2015 do not contain associated performance hurdles.

        During the nine months ended September 30, 2015, the Company granted 43,900 PSUs to members of management. During the nine months ended September 30, 2015, 3,906 of the PSUs awarded were forfeited. The PSUs are subject to market-based conditions. The estimated fair value of the PSUs granted was $85.00, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 15% to 52% (average of 28%). The PSUs will entitle the grantee to receive a number of shares of the Company's Common Stock determined over a three-year performance period ending on December 31, 2017 and vesting on March 4, 2018, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company's Total Shareholder Return (as defined below), expressed as a percentile ranking of the Company's Total Shareholder Return as compared to the Company's Peer Group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total Shareholder Return is determined by dividing the average share value of the Company's Common Stock over the 30 trading days preceding January 1, 2018 by the average share value of the Company's Common Stock over the 30 trading days beginning on January 1, 2015, with a deemed reinvestment of any dividends declared during the performance period. The Company's Peer Group includes 54 companies which comprise the S&P Health Care Services Industry Index, which was selected by the Compensation Committee of the Company's Board of Directors and includes a range of healthcare companies operating in several business segments.

Long Term Debt and Capital Lease Obligations

        On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.) to borrow up to $250.0 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, and a term loan in an original aggregate principal amount of $250.0 million (the "2014 Credit Facility"). The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on July 23, 2019, but the Company holds an option to extend the 2014 Credit Facility for an additional one year period.

        Under the 2014 Credit Facility, the annual interest rate on revolving and term loan borrowings is equal to (i) in the case of base rate loans, the sum of a borrowing margin of 0.50 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 rate loans, the sum of a borrowing margin of 1.50 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from time to time based on the Company's total leverage ratio. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the 2014 Credit Facility is 0.20 percent of the unused Revolving Loan Commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.

        On September 30, 2014, the Company completed a draw-down of the $250.0 million term loan. The borrowings will initially be maintained as a Eurodollar loan. The term loan is subject to certain quarterly amortization payments. As of September 30, 2015 the remaining balance on the term loan was $237.5 million. The term loan will mature on July 23, 2019. As of September 30, 2015, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"), which was equivalent to a total interest rate of 1.6936 percent. For the nine months ended September 30, 2015, the weighted average interest rate was 1.6813 percent. As of September 30, 2015, the contractual maturities of the term loan were as follows: 2015—$3.1 million; 2016—$15.6 million; 2017—$25.0 million; 2018—$25.0 million; and 2019—$168.8 million.

        There were $24.6 million and $24.8 million of capital lease obligations at December 31, 2014 and September 30, 2015, respectively. The Company had $32.9 million and $33.4 million of letters of credit outstanding at December 31, 2014 and September 30, 2015, respectively, and no revolving loan borrowings at December 31, 2014 or September 30, 2015.

Redeemable Non-Controlling Interest

        As of September 30, 2015 the Company held an 82% equity interest in AlphaCare Holdings. The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to 50% of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings have the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase all remaining shares. Non-controlling interests with redemption features, such as put options, that are not solely within the Company's control are considered redeemable non-controlling interests. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders' equity on the Company's consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income or loss or its redemption value. The carrying value of the non-controlling interest as of December 31, 2014 and September 30, 2015 was $5.9 million and $8.2 million, respectively. The $2.3 million increase in carrying value is a result of the impact of additional capital provided by the Company, partially offset by operating losses. The Company recognizes changes in the redemption value on a quarterly basis and adjusts the carrying amount of the non-controlling interest to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of September 30, 2015, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

Reclassifications

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

XML

General (Details 9) - USD ($) $ in Millions	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
General
Health Insurer Fee (HIF) fiscal year annual fees paid during the period			$ 26.5		$ 21.4
HIF fees expensed	$ 6.7	$ 5.4	19.9	$ 16.1
Amount of revenues associated with accrual for reimbursement of economic impact of HIF fees from its customers	$ 11.6	$ 8.8	$ 34.0	$ 22.9

XML

General (Details 8) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Income Taxes
Effective income tax rates (as a percent)		43.50%	34.30%
The ownership percentage for which the entity files a consolidated federal income tax return, low end of range	80.00%	80.00%
Unrecognized tax benefits: Changes due to lapses of statutes of limitations	$ 1.7
Deferred Tax Assets, Valuation Allowance	12.9	$ 12.9		$ 12.4
Deferred tax assets
Income Taxes
Unrecognized tax benefits: Changes due to lapses of statutes of limitations	0.5
Income tax expense
Income Taxes
Unrecognized tax benefits: Changes due to lapses of statutes of limitations	1.2
Interest expense related to unrecognized tax benefits	0.1
Federal
Income Taxes
Operating Loss Carryforwards	3.0	3.0
State
Income Taxes
Operating Loss Carryforwards	144.7	144.7
AlphaCare | Federal
Income Taxes
Operating Loss Carryforwards	$ 26.2	$ 26.2

XML

General (Details 10)	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) $ / shares shares	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) company $ / shares shares	Sep. 30, 2014 USD ($)
Share-based compensation
Stock compensation expense | $	$ 12,897,000	$ 11,961,000	$ 40,593,000	$ 25,983,000
Tax benefit from exercise of stock options and vesting of stock awards - financing cash flow | $			3,887,000	2,805,000
Change to additional paid in capital related to tax net benefits (deficiencies) | $			3,800,000	2,500,000
Excess tax benefits of tax deductions in recognized stock compensation expenses | $			3,900,000	2,800,000
Tax deficiencies and adjustments from exercise of stock options and vesting of stock awards | $			$ (100,000)	$ (300,000)
Minimum
Stock options, Non vested restricted stock awards and nonvested restricted stock units
Estimated forfeitures (as a percent)			0.00%	0.00%
Maximum
Stock options, Non vested restricted stock awards and nonvested restricted stock units
Estimated forfeitures (as a percent)			4.00%	4.00%
Stock options
Stock options, Non vested restricted stock awards and nonvested restricted stock units
Grants in period, weighted average grant date fair value (in dollars per share) | $ / shares			$ 13.91
Expected volatility (as a percent)			25.03%
Stock option activity
Outstanding, beginning of period (in shares)			3,321,063
Granted (in shares)			902,928
Forfeited (in shares)			(140,940)
Exercised (in shares)			(1,062,878)
Outstanding, end of period (in shares)	3,020,173		3,020,173
Vested and expected to vest end of period (in shares)	2,983,943		2,983,943
Exercisable, end of period (in shares)	1,417,576		1,417,576
Weighted average exercise price of stock options
Outstanding, beginning of period (in dollars per share) | $ / shares			$ 50.58
Granted (in dollars per share) | $ / shares			63.61
Forfeited (in dollars per share) | $ / shares			60.21
Exercised (in dollars per share) | $ / shares			47.17
Outstanding, end of period (in dollars per share) | $ / shares	$ 55.23		55.23
Vested and expected to vest end of period (in dollars per share) | $ / shares	55.15		55.15
Exercisable, end of period (in dollars per share) | $ / shares	$ 49.46		$ 49.46
Assumptions used for estimating value of awards granted
Vesting period			3 years
Life of options (Expiration period)			10 years
Restricted stock awards
Nonvested restricted stock awards and units
Outstanding, beginning of period (in shares)			1,626,827
Awarded (in shares)			20,115
Vested (in shares)			(94,547)
Outstanding, end of period (in shares)	1,552,395		1,552,395
Weighted average exercise price of nonvested restricted stock award and units
Outstanding, beginning of period (in dollars per share) | $ / shares			$ 57.66
Awarded (in dollars per share) | $ / shares			67.12
Vested (in dollars per share) | $ / shares			57.48
Outstanding, end of period (in dollars per share) | $ / shares	$ 57.79		$ 57.79
Restricted stock awards | Minimum
Assumptions used for estimating value of awards granted
Vesting period			12 months
Restricted stock awards | Maximum
Assumptions used for estimating value of awards granted
Vesting period			42 months
Restricted Stock Units (RSUs)
Assumptions used for estimating value of awards granted
Vesting period			3 years
Nonvested restricted stock awards and units
Outstanding, beginning of period (in shares)			156,695
Awarded (in shares)			172,810
Vested (in shares)			(79,036)
Forfeited (in shares)			(21,144)
Outstanding, end of period (in shares)	229,325		229,325
Weighted average exercise price of nonvested restricted stock award and units
Outstanding, beginning of period (in dollars per share) | $ / shares			$ 54.88
Awarded (in dollars per share) | $ / shares			63.95
Vested (in dollars per share) | $ / shares			52.82
Forfeited (in dollars per share) | $ / shares			61.65
Outstanding, end of period (in dollars per share) | $ / shares	$ 61.80		$ 61.80
Performance Based Restricted Stock Units ("PSUs")
Assumptions used for estimating value of awards granted
Expected dividend yield (as a percent)			0.00%
Risk-free interest rate (as a percent)			1.00%
Expected volatility, minimum (as a percent)			15.00%
Expected volatility, maximum (as a percent)			52.00%
Expected volatility, average (as a percent)			28.00%
Vesting period			3 years
Number of trading days considered for average share value			30
Number of companies in peer group | company			54
Nonvested restricted stock awards and units
Awarded (in shares)			43,900
Forfeited (in shares)			(3,906)
Estimated fair value | $			$ 85.00
Performance Based Restricted Stock Units ("PSUs") | Minimum
Assumptions used for estimating value of awards granted
Percentage of shares to be settled			0.00%
Performance Based Restricted Stock Units ("PSUs") | Maximum
Assumptions used for estimating value of awards granted
Percentage of shares to be settled			200.00%

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General (Details 11) - USD ($) $ in Thousands			9 Months Ended
	Sep. 30, 2014	Jul. 23, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Long-term Debt and Capital Lease Obligations
Proceeds from issuance of debt				$ 250,000
Debt disclosures
Capital lease obligations			$ 24,800		$ 24,600
Revolving Loan borrowings
Debt disclosures
Revolving borrowings outstanding			0		0
Letter of Credit
Debt disclosures
Letters of credit outstanding			33,400		$ 32,900
Term Loan
Long-term Debt and Capital Lease Obligations
Amount of term loan borrowings outstanding			237,500
Long-term Debt, Fiscal Year Maturity
2015			3,100
2016			15,600
2017			25,000
2018			25,000
2019			$ 168,800
Credit Facility 2014
Long-term Debt and Capital Lease Obligations
Maximum borrowing capacity		$ 500,000
Term of option to extend credit facility		1 year
Credit Facility 2014 | Revolving Loan borrowings
Long-term Debt and Capital Lease Obligations
Maximum borrowing capacity		$ 250,000
Commitment commission (as a percent)			0.20%
Credit Facility 2014 | Letter of Credit
Long-term Debt and Capital Lease Obligations
Maximum borrowing capacity		70,000
Stated interest rate (as a percent)			1.625%
Credit Facility 2014 | Term Loan
Long-term Debt and Capital Lease Obligations
Maximum borrowing capacity		$ 250,000
Credit Facility 2014 | Revolving and Term Loan Borrowings
Long-term Debt and Capital Lease Obligations
Borrowing margin (as a percent)			0.50%
Credit Facility 2014 | Overnight Federal Funds rate | Revolving and Term Loan Borrowings
Long-term Debt and Capital Lease Obligations
Basis spread on variable rate (as a percent)			0.50%
Credit Facility 2014 | Eurodollar rate for one month | Revolving and Term Loan Borrowings
Long-term Debt and Capital Lease Obligations
Basis spread on variable rate (as a percent)			1.00%
Credit Facility 2014 | Eurodollar denominated loans | Eurodollar rate for selected interest period | Term Loan
Long-term Debt and Capital Lease Obligations
Proceeds from issuance of debt	$ 250,000
Effective borrowing margin (as a percent)			1.50%
Effective interest rate (as a percent)			1.6936%
Weighted average interest rate (as a percent)			1.6813%
Credit Facility 2014 | Eurodollar denominated loans | Eurodollar rate for selected interest period | Revolving and Term Loan Borrowings
Long-term Debt and Capital Lease Obligations
Borrowing margin (as a percent)			1.50%

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash flows from operating activities:
Net income	$ 3,726	$ 54,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	75,239	66,665
Non-cash interest expense	297	3,888
Non-cash stock compensation expense	40,593	25,983
Non-cash income tax expense (benefit)	(1,018)	813
Non-cash amortization on investments	5,106	3,620
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash	79,959	71,530
Accounts receivable, net	(41,428)	(19,492)
Pharmaceutical inventory	(5,277)	8,710
Other assets	(48,653)	(22,378)
Accounts payable and accrued liabilities	1,230	(28,461)
Medical claims payable and other medical liabilities	59,819	39,940
Tax contingencies	(2,290)	(15,179)
Deferred credits and other long-term liabilities	10,848	3,940
Other	(26)	178
Net cash provided by operating activities	178,125	194,242
Cash flows from investing activities:
Capital expenditures	(54,604)	(50,597)
Acquisitions and investments in businesses, net of cash acquired	(55,818)	(132,210)
Purchase of investments	(391,785)	(216,958)
Maturity of investments	283,619	220,191
Net cash used in investing activities	(218,588)	(179,574)
Cash flows from financing activities:
Proceeds from issuance of debt		250,000
Payments to acquire treasury stock	(150,763)	(139,316)
Proceeds from exercise of stock options and warrants	50,074	41,685
Payments on long-term debt and capital lease obligations	(12,665)	(2,606)
Payments on contingent consideration	(8,932)
Tax benefit from exercise of stock options and vesting of stock awards	3,887	2,805
Other	408	(2,150)
Net cash provided by (used in) financing activities	(117,991)	150,418
Net increase (decrease) in cash and cash equivalents	(158,454)	165,086
Cash and cash equivalents at beginning of period	255,303	203,187
Cash and cash equivalents at end of period	96,849	368,273
Non-cash investing activities:
Property and equipment acquired under capital leases	$ 3,415	$ 216

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General (Details 12) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Redeemable Non-Controlling Interest disclosures
Redeemable non-controlling interest	$ 8,246	$ 5,957
Alpha Care Holdings Inc.
Redeemable Non-Controlling Interest disclosures
Percentage of ownership held by reporting entity	82.00%
Percentage of remaining shares which the entity may be required to purchase in the event of exercise of put options by other shareholders	50.00%
Redeemable non-controlling interest	$ 8,200	$ 5,900
Increase (Reduction) in carrying value as a result of operating income (losses)	$ 2,300

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current Assets:
Cash and cash equivalents	$ 96,849	$ 255,303
Restricted cash	135,366	215,325
Accounts receivable, less allowance for doubtful accounts of $4,047 and $3,775 at December 31, 2014 and September 30, 2015, respectively	417,141	353,713
Short-term investments (restricted investments of $132,808 and $260,224 at December 31, 2014 and September 30, 2015, respectively)	361,143	224,361
Deferred income taxes	24,627	27,226
Pharmaceutical inventory	44,652	39,375
Other current assets (restricted deposits of $30,620 and $31,267 at December 31, 2014 and September 30, 2015, respectively)	99,528	52,246
Total Current Assets	1,179,306	1,167,549
Property and equipment, net	177,056	171,916
Restricted long-term investments	9,662	43,293
Other long-term assets	12,729	11,575
Goodwill	623,907	566,106
Other intangible assets, net	141,046	133,718
Total Assets	2,143,706	2,094,157
Current Liabilities:
Accounts payable	100,526	63,929
Accrued liabilities	227,915	154,931
Medical claims payable	263,936	278,482
Other medical liabilities	147,084	72,719
Current maturities of long-term debt and capital lease obligations	16,257	15,779
Total Current Liabilities	755,718	585,840
Long-term debt and capital lease obligations	246,040	255,742
Deferred income taxes	28,548	30,950
Tax contingencies	8,809	12,320
Contingent consideration	1,609	49,839
Deferred credits and other long-term liabilities	19,528	19,951
Total Liabilities	1,060,252	954,642
Redeemable non-controlling interest	$ 8,246	$ 5,957
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share Authorized-10,000 shares at December 31, 2014 and September 30, 2015 - Issued and outstanding-none
Other Stockholders' Equity:
Additional paid-in capital	$ 1,110,523	$ 1,018,266
Retained earnings	1,184,020	1,179,897
Accumulated other comprehensive loss	(114)	(143)
Ordinary common stock in treasury, at cost, 23,150 shares and 25,687 shares at December 31, 2014 and September 30, 2015, respectively	(1,219,734)	(1,064,963)
Total Stockholders' Equity	1,075,208	1,133,558
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity	2,143,706	2,094,157
Ordinary common stock
STOCKHOLDERS' EQUITY
Common stock	$ 513	$ 501
Multi-Vote common stock
STOCKHOLDERS' EQUITY
Common stock

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$ (7,761)	$ 25,778	$ 3,726	$ 54,485
Other comprehensive income (loss):
Unrealized (losses) gains on available-for-sale securities	53	(111)	29	2
Comprehensive income (loss)	(7,708)	25,667	3,755	54,487
Less: comprehensive income (loss) attributable to non-controlling interest	47	(1,355)	(397)	(3,354)
Comprehensive income (loss) attributable to Magellan Health, Inc.	$ (7,755)	$ 27,022	$ 4,152	$ 57,841

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Business Segment Information (Details 2) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Reconciliation of segment profit to income before income taxes
Segment profit	$ 55,317	$ 62,166	$ 173,431	$ 183,710
Stock compensation expense	(12,897)	(11,961)	(40,593)	(25,983)
Changes in fair value of contingent consideration	(29,738)		(47,274)
Non-controlling interest segment profit (loss)	47	(1,323)	(397)	(3,301)
Depreciation and amortization	(26,721)	(23,956)	(75,239)	(66,665)
Interest expense	(1,654)	(2,879)	(4,933)	(5,719)
Interest income	631	241	1,597	827
Income (loss) before income taxes	$ (15,015)	$ 22,288	$ 6,592	$ 82,869

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General (Details 2) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Mar. 31, 2014 item	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($)
Net revenues
Managed Care Revenue	$ 689,500	$ 611,400		$ 2,004,400	$ 1,935,000
Fee-For-Service and Cost-Plus Contracts Revenue	85,100	72,900		248,700	205,600
Block Grant Revenues		0			33,300
Performance-Based Revenue	4,400	1,600		10,100	7,000
Rebate Revenues	23,500	14,300		56,300	27,600
PBM Revenue	327,100	155,700		842,900	383,200
Dispensing Revenue	53,700	64,500		151,600	179,600
Significant customers
Revenues generated	$ 1,190,082	$ 923,170		$ 3,328,657	2,777,659
Maricopa County Regional Behavioral Health Authority
Significant customers
Number of members receiving behavioral healthcare management and other related services | item			680,000
Revenues generated					213,300
Iowa Contracts
Significant customers
Number of contracts | item				2
Revenues generated				$ 394,800	337,900
Iowa Medicaid Contract
Significant customers
Termination notice period without cause				30 days
Iowa Medicaid Integrated Health Home Provider Agreement
Significant customers
Termination notice period without cause				60 days
Florida Medicaid Contract
Significant customers
Termination notice				1 day
Termination notice period without cause				30 days
Florida Contracts
Significant customers
Revenues generated				$ 324,100	143,900
Pharmacy Management | Customer A | Service
Significant customers
Revenues generated				$ 93,908	92,793
Minimum number of contracts per customer | item				1
Pharmacy Management | Customer B | Service
Significant customers
Revenues generated				$ 241,556	$ 105,079

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Commitments and Contingencies (Details) - October 2014 Share Repurchase Program - USD ($) $ / shares in Units, $ in Millions	1 Months Ended		9 Months Ended	10 Months Ended
	Oct. 21, 2015	Dec. 31, 2014	Sep. 30, 2015	Sep. 30, 2015	Oct. 22, 2014
Stock Repurchases
Amount authorized under stock repurchase plan					$ 200.0
Share repurchases made in open market (in shares)	616,075	232,170	2,537,081	2,769,251
Average Price Paid per Share (in dollars per share)		$ 60.65	$ 60.98
Aggregate Cost	$ 31.2	$ 14.1	$ 154.7	$ 168.8

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General (Details 4) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets
Restricted Cash	$ 135,366	$ 215,325
Investments	370,805	267,654
Cash held in bank accounts by the Company, unrestricted	51,800	116,000
Cash held in bank accounts by the Company, restricted	74,100	149,300
Liabilities
Contingent consideration	108,443	58,153
Level 2 | Term Loan
Liabilities
Fair value of debt	237,500
Fair value measured on recurring basis
Assets
Total assets measured at fair value	477,116	472,926
Liabilities
Contingent consideration	108,443	58,153
Total liabilities held at fair value	108,443	58,153
Fair value measured on recurring basis | Other than cash held in bank accounts by Company
Assets
Cash and Cash Equivalents	45,091	139,280
Restricted Cash	61,220	65,992
Fair value measured on recurring basis | U.S. Government and agency securities
Assets
Investments	4,982	4,303
Fair value measured on recurring basis | Obligations of government-sponsored enterprises
Assets
Investments	43,067	15,315
Fair value measured on recurring basis | Corporate debt securities
Assets
Investments	321,606	246,886
Fair value measured on recurring basis | Certificates of deposit
Assets
Investments	1,150	1,150
Fair value measured on recurring basis | Level 1
Assets
Total assets measured at fair value	4,982	4,303
Fair value measured on recurring basis | Level 1 | U.S. Government and agency securities
Assets
Investments	4,982	4,303
Fair value measured on recurring basis | Level 2
Assets
Total assets measured at fair value	472,134	468,623
Fair value measured on recurring basis | Level 2 | Other than cash held in bank accounts by Company
Assets
Cash and Cash Equivalents	45,091	139,280
Restricted Cash	61,220	65,992
Fair value measured on recurring basis | Level 2 | Obligations of government-sponsored enterprises
Assets
Investments	43,067	15,315
Fair value measured on recurring basis | Level 2 | Corporate debt securities
Assets
Investments	321,606	246,886
Fair value measured on recurring basis | Level 2 | Certificates of deposit
Assets
Investments	1,150	1,150
Fair value measured on recurring basis | Level 3
Liabilities
Contingent consideration	108,443	58,153
Total liabilities held at fair value	$ 108,443	$ 58,153

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net of income tax (benefit) provision	$ 27	$ (74)	$ 25	$ 1

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 3,775	$ 4,047
Short-term restricted investments (in dollars)	260,224	132,808
Other current assets, restricted deposits (in dollars)	$ 31,267	$ 30,620
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	25,687	23,150
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	51,262	50,085
Common stock, outstanding shares	25,575	26,935
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

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Net Income (Loss) per Common Share Attributable to Magellan Health, Inc. (Tables)

9 Months Ended

Sep. 30, 2015

Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

Computation of basic and diluted earnings (loss) per share

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2015			2014		2015
Numerator:
Net income (loss) attributable to Magellan Health, Inc.	$	27,133	$	(7,808	)	$	57,839	$	4,123
Denominator:
Weighted average number of common shares outstanding—basic		26,703		24,892			27,070		25,297
Common stock equivalents—stock options		404		—			517		360
Common stock equivalents—RSAs		133		—			77		640
Common stock equivalents—RSUs		—		—			18		34
Common stock equivalents—PSUs		—		—			—		39
Common stock equivalents—employee stock purchase plan		2		—			2		2
Weighted average number of common shares outstanding—diluted		27,242		24,892			27,684		26,372
Net income (loss) attributable to Magellan Health, Inc. per common share—basic	$	1.02	$	(0.31	)	$	2.14	$	0.16
Net income (loss) attributable to Magellan Health, Inc. per common share—diluted	$	1.00	$	(0.31	)	$	2.09	$	0.16

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Document and Entity Information	9 Months Ended
	Sep. 30, 2015 shares
Document and Entity Information
Entity Registrant Name	MAGELLAN HEALTH INC
Entity Central Index Key	0000019411
Document Type	10-Q
Document Period End Date	Sep. 30, 2015
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	25,574,724
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

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Business Segment Information (Tables)

9 Months Ended

Sep. 30, 2015

Business Segment Information

Schedule of operating results by business segment

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

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2014
Managed care and other revenue	$	653,747		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			241,226			(21,076	)		220,150
Cost of care		(495,179	)		(1	)		—			(495,180	)
Cost of goods sold		—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(101,145	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		658			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		(1,323	)		—			—			(1,323	)
Segment profit (loss)	$	59,404		$	29,834		$	(27,072	)	$	62,166

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2015
Managed care and other revenue	$	748,297		$	60,978		$	(26	)	$	809,249
PBM and dispensing revenue		—			409,371			(28,538	)		380,833
Cost of care		(596,323	)		—			—			(596,323	)
Cost of goods sold		—			(387,834	)		27,390			(360,444	)
Direct service costs and other		(106,675	)		(87,252	)		(26,659	)		(220,586	)
Stock compensation expense(1)		469			9,410			3,018			12,897
Changes in fair value of contingent consideration(1)		(809	)		30,547			—			29,738
Less: non-controlling interest segment profit (loss)(2)		75			—			(28	)		47
Segment profit (loss)	$	44,884		$	35,220		$	(24,787	)	$	55,317

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2014
Managed care and other revenue	$	2,083,320		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			590,115			(27,341	)		562,774
Cost of care		(1,584,264	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(305,338	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		2,242			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		(3,301	)		—			—			(3,301	)
Segment profit (loss)	$	199,261		$	67,367		$	(82,918	)	$	183,710

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2015
Managed care and other revenue	$	2,170,361		$	163,828		$	(50	)	$	2,334,139
PBM and dispensing revenue		—			1,077,088			(82,570	)		994,518
Cost of care		(1,686,944	)		5			—			(1,686,939	)
Cost of goods sold		—			(1,019,200	)		79,140			(940,060	)
Direct service costs and other		(324,695	)		(207,230	)		(84,566	)		(616,491	)
Stock compensation expense(1)		1,952			28,282			10,359			40,593
Changes in fair value of contingent consideration(1)		(638	)		47,912			—			47,274
Less: non-controlling interest segment profit (loss)(2)		(318	)		—			(79	)		(397	)
Segment profit (loss)	$	160,354		$	90,685		$	(77,608	)	$	173,431

(1)	Stock compensation expense, as well as changes in the fair value of contingent consideration recorded in relation to the acquisitions, are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.
(2)	The non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

Schedule of reconciliation of Segment Profit to consolidated income before income taxes

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Segment profit	$	62,166		$	55,317		$	183,710		$	173,431
Stock compensation expense		(11,961	)		(12,897	)		(25,983	)		(40,593	)
Changes in fair value of contingent consideration		—			(29,738	)		—			(47,274	)
Non-controlling interest segment profit (loss)		(1,323	)		47			(3,301	)		(397	)
Depreciation and amortization		(23,956	)		(26,721	)		(66,665	)		(75,239	)
Interest expense		(2,879	)		(1,654	)		(5,719	)		(4,933	)
Interest income		241			631			827			1,597
Income (loss) before income taxes	$	22,288		$	(15,015	)	$	82,869		$	6,592

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CONSOLIDATED STATEMENTS OF INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net revenue:
Managed care and other	$ 809,249	$ 703,020	$ 2,334,139	$ 2,214,885
PBM and dispensing	380,833	220,150	994,518	562,774
Total net revenue	1,190,082	923,170	3,328,657	2,777,659
Cost and expenses:
Cost of care	596,323	495,180	1,686,939	1,582,505
Cost of goods sold	360,444	202,180	940,060	520,044
Direct service costs and other operating expenses (1) (2)	220,586	176,928	616,491	520,684
Depreciation and amortization	26,721	23,956	75,239	66,665
Interest expense	1,654	2,879	4,933	5,719
Interest income	(631)	(241)	(1,597)	(827)
Total costs and expenses	1,205,097	900,882	3,322,065	2,694,790
Income (loss) before income taxes	(15,015)	22,288	6,592	82,869
(Benefit) provision for income taxes	(7,254)	(3,490)	2,866	28,384
Net income (loss)	(7,761)	25,778	3,726	54,485
Less: net income (loss) attributable to non-controlling interest	47	(1,355)	(397)	(3,354)
Net income (loss) attributable to Magellan Health, Inc.	$ (7,808)	$ 27,133	$ 4,123	$ 57,839
Net income (loss) per common share attributable to Magellan Health, Inc.:
Basic (in dollars per share)	$ (0.31)	$ 1.02	$ 0.16	$ 2.14
Diluted (in dollars per share)	$ (0.31)	$ 1.00	$ 0.16	$ 2.09

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies

Commitments and Contingencies

NOTE D—Commitments and Contingencies

Legal

        The Company's operating activities entail 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 and other 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 22, 2014 the Company's board of directors approved a new stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 22, 2016. Stock repurchases under the program may be purchased from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any time.

        Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period	Total Number of Shares Purchased		Average Price Paid per Share		Aggregate Cost
November 24, 2014 - December 31, 2014		232,170	$	60.65	$	14.1
January 1, 2015 - September 30, 2015		2,537,081		60.98		154.7
		2,769,251			$	168.8

        The Company made additional open market purchases of 616,075 shares of the Company's common stock at an aggregate cost of $31.2 million (excluding broker commissions) during the period from October 1, 2015 through October 21, 2015, which was the date the repurchase program was completed.

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Business Segment Information

9 Months Ended

Sep. 30, 2015

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 1—"General." The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes ("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. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare's customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company's employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company's segments are defined above.

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

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2014
Managed care and other revenue	$	653,747		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			241,226			(21,076	)		220,150
Cost of care		(495,179	)		(1	)		—			(495,180	)
Cost of goods sold		—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(101,145	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		658			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		(1,323	)		—			—			(1,323	)
Segment profit (loss)	$	59,404		$	29,834		$	(27,072	)	$	62,166

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Three Months Ended September 30, 2015
Managed care and other revenue	$	748,297		$	60,978		$	(26	)	$	809,249
PBM and dispensing revenue		—			409,371			(28,538	)		380,833
Cost of care		(596,323	)		—			—			(596,323	)
Cost of goods sold		—			(387,834	)		27,390			(360,444	)
Direct service costs and other		(106,675	)		(87,252	)		(26,659	)		(220,586	)
Stock compensation expense(1)		469			9,410			3,018			12,897
Changes in fair value of contingent consideration(1)		(809	)		30,547			—			29,738
Less: non-controlling interest segment profit (loss)(2)		75			—			(28	)		47
Segment profit (loss)	$	44,884		$	35,220		$	(24,787	)	$	55,317

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2014
Managed care and other revenue	$	2,083,320		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			590,115			(27,341	)		562,774
Cost of care		(1,584,264	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(305,338	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		2,242			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		(3,301	)		—			—			(3,301	)
Segment profit (loss)	$	199,261		$	67,367		$	(82,918	)	$	183,710

	Healthcare			Pharmacy Management			Corporate and Elimination			Consolidated
Nine Months Ended September 30, 2015
Managed care and other revenue	$	2,170,361		$	163,828		$	(50	)	$	2,334,139
PBM and dispensing revenue		—			1,077,088			(82,570	)		994,518
Cost of care		(1,686,944	)		5			—			(1,686,939	)
Cost of goods sold		—			(1,019,200	)		79,140			(940,060	)
Direct service costs and other		(324,695	)		(207,230	)		(84,566	)		(616,491	)
Stock compensation expense(1)		1,952			28,282			10,359			40,593
Changes in fair value of contingent consideration(1)		(638	)		47,912			—			47,274
Less: non-controlling interest segment profit (loss)(2)		(318	)		—			(79	)		(397	)
Segment profit (loss)	$	160,354		$	90,685		$	(77,608	)	$	173,431

(1)	Stock compensation expense, as well as changes in the fair value of contingent consideration recorded in relation to the acquisitions, are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.
(2)	The non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of Segment Profit.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Segment profit	$	62,166		$	55,317		$	183,710		$	173,431
Stock compensation expense		(11,961	)		(12,897	)		(25,983	)		(40,593	)
Changes in fair value of contingent consideration		—			(29,738	)		—			(47,274	)
Non-controlling interest segment profit (loss)		(1,323	)		47			(3,301	)		(397	)
Depreciation and amortization		(23,956	)		(26,721	)		(66,665	)		(75,239	)
Interest expense		(2,879	)		(1,654	)		(5,719	)		(4,933	)
Interest income		241			631			827			1,597
Income (loss) before income taxes	$	22,288		$	(15,015	)	$	82,869		$	6,592

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General (Details 3) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Concentration of Business
Net revenue	$ 1,190,082	$ 923,170	$ 3,328,657	$ 2,777,659
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			$ 294,900	$ 272,000

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies

Schedule of stock repurchases made under open market

        Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period	Total Number of Shares Purchased		Average Price Paid per Share		Aggregate Cost
November 24, 2014 - December 31, 2014		232,170	$	60.65	$	14.1
January 1, 2015 - September 30, 2015		2,537,081		60.98		154.7
		2,769,251			$	168.8

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2015

Summary of Significant Accounting Policies

Recent Accounting Pronouncements

Recent Accounting Pronouncements

        In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"), which is a new comprehensive revenue recognition standard that will supersede virtually all existing revenue guidance under GAAP. In July 2015, the FASB approved to defer the effective date of ASU 2014-09. This ASU is now effective for calendar years beginning after December 15, 2017. The Company is currently assessing the potential impact this ASU will have on the Company's consolidated results of operations, financial position, and cash flows.

        In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12"), which revises the accounting treatment for stock compensation tied to performance targets. This ASU is effective for calendar years beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40)" ("ASU 2014- 15"), which provides guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This amendment should reduce diversity in the timing and content of footnote disclosures. This ASU is effective for the annual period beginning after December 15, 2016 and for annual and interim reporting periods thereafter. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amendments are effective for annual and interim reporting periods of public entities beginning after December 31, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In April 2015, the FASB issued ASU No. 2015-05, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance to clarify the customer's accounting for fees paid in a cloud computing arrangement. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendment under this ASU requires that an entity measure inventory at the lower of cost or net realizable value. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

        In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments" ("ASU 2015-16"). The amendment under this ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2015. The guidance is not expected to materially impact the Company's consolidated results of operations, financial position, or cash flows.

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, contingent consideration, 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 $611.4 million and $1,935.0 million for the three and nine months ended September 30, 2014, respectively, and $689.5 million and $2,004.4 million for the three and nine months ended September 30, 2015, 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. This includes revenues received in relation to the Patient Protection and Affordable Care Act health insurer fee ("HIF fee") billed on a cost reimbursement basis. Revenues from these contracts approximated $72.9 million and $205.6 million for the three and nine months ended September 30, 2014, respectively, and $85.1 million and $248.7 million for the three and nine months ended September 30, 2015, respectively.

        Block Grant Revenues.    The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represented annual appropriations. The Company recognized revenue from block grant activity ratably over the period to which the block grant funding applied. Block grant revenues were approximately $0.0 million and $33.3 million for the three and nine months ended September 30, 2014, respectively. The Maricopa Contract terminated on March 31, 2014.

        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 approximated $1.6 million and $7.0 million, respectively, for the three and nine months ended September 30, 2014, respectively, and $4.4 million and $10.1 million for the three and nine months ended September 30, 2015, 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 approximated $14.3 million and $27.6 million for the three and nine months ended September 30, 2014, respectively, and $23.5 million and $56.3 million for the three and nine months ended September 30, 2015, respectively.

        In relation to the Company's PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

PBM and Dispensing Revenue

        Pharmacy Benefit Management Revenue.    The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments collected by the pharmacy and any associated administrative fees, when claims are adjudicated. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collection of payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client's members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. PBM revenues approximated $155.7 million and $383.2 million for the three and nine months ended September 30, 2014, respectively, and $327.1 million and $842.9 million for the three and nine months ended September 30, 2015, 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 $64.5 million and $179.6 million for the three and nine months ended September 30, 2014, respectively, and $53.7 million and $151.6 million for the three and nine months ended September 30, 2015, respectively.

Significant Customers

        Customers exceeding ten percent of the consolidated Company's net revenues

        The Company provides behavioral healthcare management and other related services to members in the state of Iowa pursuant to contracts with the State of Iowa (the "Iowa Contracts"). The Company currently has two contracts; the Iowa Medicaid Contract and Iowa Medicaid Integrated Health Home Provider Agreement ("IHH Agreement"). Under the Iowa Medicaid Contract, the Company is responsible for providing managed mental health and substance abuse treatment to enrollees under a Medicaid 1915(b) waiver, as well as substance abuse treatment services plan funded by federal block grant and state appropriations under the authority of the Iowa Department of Public Health. The Iowa Health and Wellness Plan for members who qualify as an "exempt individual", as defined in 441 of the Iowa Administrative Code, were also added to the contract on January 1, 2014. The latest Iowa Medicaid Contract began on January 1, 2010 and extended through June 30, 2015. The Iowa Department of Human Services and the Iowa Department of Public Health has the right to terminate the Iowa Medicaid Contract upon 30 days notice for any reason or no reason at all. In June 2015, the Company received a notice of intent to extend the Iowa Medicaid Contract through December 31, 2015, to coincide with the start date of the new Iowa High Quality Healthcare Initiative, as discussed below. Under the IHH Agreement, the Company establishes a health home for individuals identified with serious and persistent mental illness through enrolled provider organizations capable of providing enhanced care. The IHH Agreement began on July 1, 2013 and extends through June 30, 2016 unless sooner terminated by either party with 60 days notice for any reason or no reason at all. The IHH program is part of the new Iowa High Quality Healthcare Initiative and we expect that the end of the IHH agreement will coincide with the start date of the new initiative. The Iowa Contracts generated net revenues of $337.9 million and $394.8 million for the nine months ended September 30, 2014 and 2015, respectively.

        On February 16, 2015 the Iowa Department of Human Services (the "Agency") released the Iowa High Quality Healthcare Initiative Request for Proposal ("RFP"). The RFP includes the services provided by the Company's current Iowa Contracts. On August 17, 2015, the Company was notified that it was not selected as a winning bidder by the Agency for the RFP.

        The Company provides behavioral healthcare management and other related services to members in the state of Florida pursuant to contracts with the State of Florida (the "Florida Contracts"). The Company had behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which were part of the Florida Medicaid program. The State of Florida implemented a new system of mandated managed care through which Medicaid enrollees receive integrated healthcare services, and in 2014 phased out the behavioral healthcare programs under which the Florida Areas' contracts operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program ("the Florida Medicaid Contract"). The Florida Medicaid Contract began on February 4, 2014 and extends through December 31, 2018, unless sooner terminated by the parties. The State of Florida has the right to terminate the Florida Medicaid Contract with cause, as defined, upon 24 hour notice and upon 30 days notice for any reason or no reason at all. The Florida Contracts generated net revenues of $143.9 million and $324.1 million for the nine months ended September 30, 2014 and 2015, respectively.

        Through March 31, 2014, the Company provided behavioral healthcare management and other related services to approximately 680,000 members in Maricopa County, Arizona as the Regional Behavioral Health Authority ("RBHA") for GSA6 ("Maricopa County") pursuant to a contract with the State of Arizona (the "Maricopa Contract"). The Maricopa Contract was for the management of the publicly funded behavioral health system that delivered mental health, substance abuse and crisis services for adults, youth, and children. The Maricopa Contract terminated on March 31, 2014. The Maricopa Contract generated net revenues of $213.3 million for the nine months ended September 30, 2014.

Customers exceeding ten percent of segment net revenues

        In addition to the Iowa Contracts, the Florida Contracts, and the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the nine months ended September 30, 2014 and 2015 (in thousands):

Segment	Term Date	2014		2015
Healthcare
None
Pharmacy Management
Customer A	November 30, 2015 to April 4, 2016(1)		92,793		93,908	*
Customer B	December 16, 2016		105,079		241,556

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

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. Net revenues from the Pennsylvania Counties in the aggregate totaled $272.0 million and $294.9 million for the nine months ended September 30, 2014 and 2015, 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 has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These 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 assets and liabilities that are required to be measured at fair value as of December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	139,280	$	—	$	139,280
Restricted cash(2)		—		65,992		—		65,992
Investments:
U.S. government and agency securities		4,303		—		—		4,303
Obligations of government-sponsored enterprises(3)		—		15,315		—		15,315
Corporate debt securities		—		246,886		—		246,886
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,303	$	468,623	$	—	$	472,926
Liabilities
Contingent consideration	$	—	$	—	$	58,153	$	58,153
Total liabilities held at fair value	$	—	$	—	$	58,153	$	58,153

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	45,091	$	—	$	45,091
Restricted cash(5)		—		61,220		—		61,220
Investments:
U.S. government and agency securities		4,982		—		—		4,982
Obligations of government-sponsored enterprises(6)		—		43,067		—		43,067
Corporate debt securities		—		321,606		—		321,606
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,982	$	472,134	$	—	$	477,116
Liabilities
Contingent consideration	$	—	$	—	$	108,443	$	108,443
Total liabilities held at fair value	$	—	$	—	$	108,443	$	108,443

(1)	Excludes $116.0 million of cash held in bank accounts by the Company.
(2)	Excludes $149.3 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 $51.8 million of cash held in bank accounts by the Company.
(5)	Excludes $74.1 million of restricted cash held in bank accounts by the Company.
(6)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        For the nine months ended September 30, 2015, the Company has not transferred any assets between fair value measurement levels.

        The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The estimated fair value of the Company's term loan of $237.5 million as of September 30, 2015 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

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

        The contingent consideration liability reflects the fair value of potential future payments related to the CDMI, LLC ("CDMI"), Cobalt Therapeutics, LLC ("Cobalt"), and 4D Pharmacy Management Systems, Inc. ("4D") acquisitions. The CDMI purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016. The Cobalt purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $6.0 million. The potential future payments are contingent upon engagement of new members and new contract execution through June 30, 2017. The 4D purchase agreement provides for potential contingent payments up to a maximum aggregate amount of $30.0 million. The potential future payments are contingent upon the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and retention of certain business through 2018.

        As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, client base, member engagement, and new contract execution. The projected revenues, gross profits, client base, member engagement, and new contract execution are derived from the Company's latest internal operational forecasts. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in a change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income (loss). As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurement guidance.

        For CDMI, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 0.33 percent to 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 100 percent; and (iii) projected payment dates of 2016 to 2017. For CDMI, the Company estimated undiscounted future contingent payments of $65.7 million and $90.4 million as of December 31, 2014 and September 30, 2015, respectively. The net increase is due to changes in operational forecasts and probabilities of payment of $34.6 million, partially offset by a decrease of $9.9 million due to payments. As of September 30, 2015, the fair value of the short term and long term contingent consideration for CDMI was $89.8 million and $0.3 million, respectively.

        For Cobalt, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 14.5 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately zero to 50 percent; and (iii) projected payment dates of 2016 to 2017. For Cobalt, the Company estimated undiscounted future contingent payments of $4.2 million and $2.7 million as of December 31, 2014 and September 30, 2015, respectively. The decrease is due to changes in operational forecasts and probabilities of payment of $1.2 million and payments of $0.3 million. As of September 30, 2015, the fair value of the short term and long term contingent consideration for Cobalt was $1.0 million and $1.3 million, respectively.

        For 4D, the following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of approximately 11.0 percent; (ii) probabilities of payment for the individual components of the contingent consideration arrangement of approximately 5 to 100 percent; and (iii) projected payment dates of 2015 to 2016. For 4D, the Company estimated undiscounted future contingent payments of $20.6 million and $16.4 million as of the acquisition date and September 30, 2015, respectively. The net $4.2 million decrease is due to payments of $6.0 million, partially offset by a net increase of $1.8 million, mainly due to changes in operational forecasts and probabilities of payment. As of September 30, 2015, the fair value of the short term contingent consideration for 4D was $16.0 million.

        As of September 30, 2015, the fair value of the short term and long term contingent consideration was $106.8 million and $1.6 million, respectively, and is included in accrued liabilities and contingent consideration, respectively, in the consolidated balance sheets. The change in the fair value of the contingent consideration was $29.7 million and $47.3 million for the three and nine months ended September 30, 2015, respectively, which was recorded as direct service costs and other operating expenses in the consolidated statements of income (loss). The increase was mainly a result of changes in the present value and estimated undiscounted liability, as noted above.

        The following table summarizes the Company's liability for contingent consideration for the nine months ended (in thousands):

	September 30, 2015
Balance as of beginning of period	$	58,153
Acquistion of 4D		19,290
Change in fair value		47,274
Payments		(16,274	)
Balance as of end of period	$	108,443

Cash and Cash Equivalents

Cash and Cash Equivalents

        Cash and cash equivalents include cash on hand and at banks, short-term deposits with an original maturity of three months or less with financial institutions. Bank overdrafts are reflected within accounts payable on the balance sheets. Bank overdrafts for the nine months ended September 30, 2014 and 2015 are $0.0 million and $28.5 million, respectively.

Investments

Investments

        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 income (loss). 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 income (loss) and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

        As of December 31, 2014 and September 30, 2015, there were no unrealized losses that the Company determined to be other-than-temporary. No realized gains or losses were recorded for the nine months ended September 30, 2014 or 2015. The following is a summary of short-term and long-term investments at December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,305	$	—	$	(2	)	$	4,303
Obligations of government-sponsored enterprises(1)		15,318		1		(4	)		15,315
Corporate debt securities		247,118		8		(240	)		246,886
Certificates of deposit		1,150		—		—			1,150
Total investments at December 31, 2014	$	267,891	$	9	$	(246	)	$	267,654

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,976	$	6	$	—		$	4,982
Obligations of government-sponsored enterprises(2)		43,045		25		(3	)		43,067
Corporate debt securities		321,817		24		(235	)		321,606
Certificates of deposit		1,150		—		—			1,150
Total investments at September 30, 2015	$	370,988	$	55	$	(238	)	$	370,805

(1)	Includes investments in notes issued by the Federal Home Loan Bank.
(2)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

        The maturity dates of the Company's investments as of September 30, 2015 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2015	$	110,723	$	110,679
2016		258,579		258,439
2017		1,686		1,687
Total investments at September 30, 2015	$	370,988	$	370,805

Income Taxes

Income Taxes

        The Company's effective income tax rates were 34.3 percent and 43.5 percent for the nine months ended September 30, 2014 and 2015, 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 and valuation allowances. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The effective income tax rate for the nine months ended September 30, 2015 is higher than the effective rate for the nine months ended September 30, 2014 mainly due to fewer reversals of tax contingencies in the current year from the closure of statutes of limitation, and a more significant relative impact in the current year from the non-deductible HIF fees due to lower overall income.

        The Company files a consolidated federal income tax return with most of its eighty-percent or more controlled subsidiaries. The Company files a separate consolidated federal income tax return for AlphaCare of New York, Inc. ("AlphaCare") and its parent, AlphaCare Holdings, Inc. ("AlphaCare Holdings"). The Company and its subsidiaries also file income tax returns in various state and local jurisdictions. The Company is no longer subject to federal income tax assessments for years ended prior to 2012 or, with few exceptions, to state or local income tax assessments for years ended prior to 2010. Further, the statutes of limitation regarding the assessment of 2011 federal and certain state and local income taxes expired during the current quarter. As a result, $1.7 million of tax contingency reserves recorded as of December 31, 2014 were reversed in the current quarter, of which $1.2 million is reflected as a discrete reduction to income tax expense and $0.5 million as a decrease to deferred tax assets. Additionally, $0.1 million of accrued interest was reversed in the current quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

Net Operating Loss Carryforwards

        The Company has $3.0 million of federal net operating loss carryforwards ("NOLs") available to reduce its federal consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2018 and 2019 if not used and are subject to examination and adjustment by the Internal Revenue Service ("IRS"). AlphaCare has $26.2 million of federal NOLs available to reduce its consolidated taxable income in 2015 and subsequent years. These NOLs will expire in 2033 and 2034 if not used and are subject to examination and adjustment by the IRS. The Company and its subsidiaries also have $144.7 million of state NOLs available to reduce state taxable income at certain subsidiaries in 2015 and subsequent years. Most of these state NOLs will expire in 2017 through 2034 if not used and are subject to examination and adjustment by the respective state tax authorities.

        Deferred tax assets as of December 31, 2014 and September 30, 2015 are shown net of valuation allowances of $12.4 million and $12.9 million, respectively. These valuation allowances mostly relate to uncertainties regarding the eventual realization of the AlphaCare federal NOLs and 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. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. Future changes in the estimated realizable portion of deferred tax assets could materially affect the Company's financial condition and results of operations.

Health Care Reform

Health Care Reform

        The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. For 2014 and 2015, the HIF fees were $21.4 million and $26.5 million, respectively, which have been paid. Of these amounts, $5.4 million and $16.1 million was expensed in the three and nine months ended September 30, 2014, respectively, and $6.7 million and $19.9 million was expensed in the three and nine months ended September 30, 2015, respectively, which was included in direct service costs and other operating expenses in the consolidated statements of income (loss). The Company recorded revenues of $8.8 million and $22.9 million in the three and nine months ended September 30, 2014, respectively, and $11.6 million and $34.0 million in the three and nine months ended September 30, 2015, respectively, associated with the accrual for the reimbursement of the economic impact of the HIF fees from its customers.

Stock Compensation

Stock Compensation

        At December 31, 2014 and September 30, 2015, 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, 2014, with the exception of the Performance-Based Restricted Stock Units ("PSUs") issued during the nine months ended September 30, 2015, which are described below. The Company recorded stock compensation expense of $11.9 million and $26.0 million for the three and nine months ended September 30, 2014 and $12.9 million and $40.6 million for the three and nine months ended September 30, 2015, respectively. Stock compensation expense recognized in the consolidated statements of income (loss) for the nine months ended September 30, 2014 and 2015 has been reduced for forfeitures, estimated at between zero and four percent for both periods.

        The weighted average grant date fair value of all stock options granted during the nine months ended September 30, 2015 was $13.91 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 25.03 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 nine months ended September 30, 2014 and 2015, $2.8 million and $3.9 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 nine months ended September 30, 2014, the net change to additional paid in capital related to tax benefits (deficiencies) was $2.5 million, which includes $2.8 million of excess tax benefits offset by $(0.3) million of excess tax deficiencies. For the nine months ended September 30, 2015, the net change to additional paid in capital related to tax benefits (deficiencies) was $3.8 million, which includes $3.9 million of excess tax benefits offset by $(0.1) million of excess tax deficiencies.

        Summarized information related to the Company's stock options for the nine months ended September 30, 2015 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		3,321,063		$	50.58
Granted		902,928			63.61
Forfeited		(140,940	)		60.21
Exercised		(1,062,878	)		47.17
Outstanding, end of period		3,020,173		$	55.23
Vested and expected to vest at end of period		2,983,943		$	55.15
Exercisable, end of period		1,417,576		$	49.46

        All of the Company's options granted during the nine months ended September 30, 2015 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

        Summarized information related to the Company's nonvested restricted stock awards ("RSAs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		1,626,827		$	57.66
Awarded		20,115			67.12
Vested		(94,547	)		57.48
Forfeited		—			—
Outstanding, end of period		1,552,395		$	57.79

        Summarized information related to the Company's nonvested restricted stock units ("RSUs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		156,695		$	54.88
Awarded		172,810			63.95
Vested		(79,036	)		52.82
Forfeited		(21,144	)		61.65
Outstanding, end of period		229,325		$	61.80

        The vesting period for RSAs ranges from 12 months to 42 months. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant. In addition, the RSUs outstanding at the beginning of the period contain associated performance hurdle(s) that must be met in order for the awards to vest. The RSUs granted during the nine months ended September 30, 2015 do not contain associated performance hurdles.

        During the nine months ended September 30, 2015, the Company granted 43,900 PSUs to members of management. During the nine months ended September 30, 2015, 3,906 of the PSUs awarded were forfeited. The PSUs are subject to market-based conditions. The estimated fair value of the PSUs granted was $85.00, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of 1%, and expected volatility of 15% to 52% (average of 28%). The PSUs will entitle the grantee to receive a number of shares of the Company's Common Stock determined over a three-year performance period ending on December 31, 2017 and vesting on March 4, 2018, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled will be a percentage of shares for which the award is targeted and will depend on the Company's Total Shareholder Return (as defined below), expressed as a percentile ranking of the Company's Total Shareholder Return as compared to the Company's Peer Group (as defined below). The number of shares for which the PSUs will be settled vary from zero to 200 percent of the shares specified in the grant. Total Shareholder Return is determined by dividing the average share value of the Company's Common Stock over the 30 trading days preceding January 1, 2018 by the average share value of the Company's Common Stock over the 30 trading days beginning on January 1, 2015, with a deemed reinvestment of any dividends declared during the performance period. The Company's Peer Group includes 54 companies which comprise the S&P Health Care Services Industry Index, which was selected by the Compensation Committee of the Company's Board of Directors and includes a range of healthcare companies operating in several business segments.

Long Term Debt and Capital Lease Obligations

Long Term Debt and Capital Lease Obligations

        On July 23, 2014, the Company entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc. (a wholly owned subsidiary of Magellan Health, Inc.) to borrow up to $250.0 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, and a term loan in an original aggregate principal amount of $250.0 million (the "2014 Credit Facility"). The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on July 23, 2019, but the Company holds an option to extend the 2014 Credit Facility for an additional one year period.

        Under the 2014 Credit Facility, the annual interest rate on revolving and term loan borrowings is equal to (i) in the case of base rate loans, the sum of a borrowing margin of 0.50 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 rate loans, the sum of a borrowing margin of 1.50 percent plus the Eurodollar rate for the selected interest period, which rates shall be adjusted from time to time based on the Company's total leverage ratio. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. Letters of credit issued bear interest at the rate of 1.625 percent. The commitment commission on the 2014 Credit Facility is 0.20 percent of the unused Revolving Loan Commitment, which rate shall be adjusted from time to time based on the Company's total leverage ratio.

        On September 30, 2014, the Company completed a draw-down of the $250.0 million term loan. The borrowings will initially be maintained as a Eurodollar loan. The term loan is subject to certain quarterly amortization payments. As of September 30, 2015 the remaining balance on the term loan was $237.5 million. The term loan will mature on July 23, 2019. As of September 30, 2015, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"), which was equivalent to a total interest rate of 1.6936 percent. For the nine months ended September 30, 2015, the weighted average interest rate was 1.6813 percent. As of September 30, 2015, the contractual maturities of the term loan were as follows: 2015—$3.1 million; 2016—$15.6 million; 2017—$25.0 million; 2018—$25.0 million; and 2019—$168.8 million.

        There were $24.6 million and $24.8 million of capital lease obligations at December 31, 2014 and September 30, 2015, respectively. The Company had $32.9 million and $33.4 million of letters of credit outstanding at December 31, 2014 and September 30, 2015, respectively, and no revolving loan borrowings at December 31, 2014 or September 30, 2015.

Redeemable Non-controlling Interest

Redeemable Non-Controlling Interest

        As of September 30, 2015 the Company held an 82% equity interest in AlphaCare Holdings. The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to 50% of the remaining shares prior to January 1, 2017 provided certain membership levels are attained. After December 31, 2016 the other shareholders of AlphaCare Holdings have the right to exercise put options requiring the Company to purchase all or any portion of the remaining shares. In addition, after December 31, 2016 the Company has the right to purchase all remaining shares. Non-controlling interests with redemption features, such as put options, that are not solely within the Company's control are considered redeemable non-controlling interests. Redeemable non-controlling interest is considered to be temporary and is therefore reported in a mezzanine level between liabilities and stockholders' equity on the Company's consolidated balance sheet at the greater of the initial carrying amount adjusted for the non-controlling interest's share of net income or loss or its redemption value. The carrying value of the non-controlling interest as of December 31, 2014 and September 30, 2015 was $5.9 million and $8.2 million, respectively. The $2.3 million increase in carrying value is a result of the impact of additional capital provided by the Company, partially offset by operating losses. The Company recognizes changes in the redemption value on a quarterly basis and adjusts the carrying amount of the non-controlling interest to equal the redemption value at the end of each reporting period. Under this method, this is viewed at the end of the reporting period as if it were also the redemption date for the non-controlling interest. The Company will reflect redemption value adjustments in the earnings per share calculation if redemption value is in excess of the carrying value of the non-controlling interest. As of September 30, 2015, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

Reclassifications

Reclassifications

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

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Acquisitions

9 Months Ended

Sep. 30, 2015

Acquisitions

Acquisitions

NOTE E—Acquisitions

Acquisition of 4D Pharmacy Management Systems, Inc.

        Pursuant to the March 17, 2015 Purchase Agreement (the "4D Agreement") with 4D Pharmacy Management Systems, Inc. ("4D"), on April 1, 2015 the Company acquired (the "4D Acquisition") all of the outstanding equity interests of 4D. 4D is a privately held, full-service PBM serving managed care organizations, employers and government-sponsored benefit programs, such as Medicare Part D plans.

        As consideration for the 4D Acquisition, the Company paid $55 million in cash, subject to working capital adjustments. There are additional potential contingent payments up to an aggregate amount of $30 million. The contingent payment provisions provide for (i) cash payments of up to $10 million based on the achievement of certain growth targets in the underlying dual eligible membership served by 4D during calendar year 2015 and (ii) cash payments of up to $20 million for retention of certain business through 2018. The Company funded the 4D Acquisition with cash on hand.

        The Company reports the results of operations of 4D within its Pharmacy Management segment.

        The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. A portion of the excess purchase price over tangible net assets acquired has been allocated to identified intangible assets totaling $24.6 million, consisting of customer contracts in the amount of $21.1 million, which is being amortized over 10 years, non-compete agreements in the amount of $2.2 million, which is being amortized over 5 years and tradename in the amount of $1.3 million, which is being amortized over 18 months. The entire excess purchase price over tangible net assets acquired is amortizable for tax purposes, although the Company's effective rate will not be impacted by the tax amortization.

        The estimated fair values of 4D assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):

Assets acquired:
Current assets (includes $14,178 of cash and $21,417 of accounts receivable)	$	35,638
Property and equipment, net		238
Other identified intangible assets		24,600
Goodwill		49,136
Total assets acquired		109,612
Liabilities assumed:
Current liabilities		33,882
Contingent consideration		19,291
Total liabilities assumed		53,173
Net assets acquired	$	56,439

        As of September 30, 2015, the Company established a working capital payable of $0.2 million that was reflected as an increase to goodwill.

        The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, projected membership, and projected client base. The projected membership and client base are derived from the Company's latest internal operational forecasts and assumptions. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. Changes in the operational forecasts, probabilities of payment, discount rates, or projected payment dates may result in change in the fair value measurement. Any changes in the fair value measurement are reflected as income or expense in the consolidated statements of income (loss). The Company estimated undiscounted future contingent payments of $20.6 million and $16.4 million as of the acquisition date and September 30, 2015, respectively. The net $4.2 million decrease was due to payments of $6.0 million, partially offset by a net increase of $1.8 million, mainly due to changes in probabilities of payment. As of September 30, 2015, the fair value of the contingent consideration for 4D was $16.0 million, which is entirely short term and is included in accrued liabilities in the consolidated balance sheet.

        The Company's estimated fair values of 4D assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

        As of September 30, 2015, the Company incurred cumulative acquisition related costs of $0.7 million in connection with the 4D acquisition. For the nine months ended September 30, 2015, the Company incurred $0.2 million of acquisition related costs, which are included within direct service costs and other operating expenses in the accompanying statements of income.

        Pro Forma disclosures related to the 4D acquisition have been excluded as immaterial.

Acquisition of AlphaCare Holdings, Inc.

        Pursuant to the August 13, 2013 stock purchase agreement (the "AlphaCare Agreement"), on December 31, 2013 the Company acquired a 65% equity interest in AlphaCare Holdings, the holding company for AlphaCare, a Health Maintenance Organization ("HMO") in New York that operates a New York Managed Long- Term Care Plan in Bronx, New York, Queens, Kings and Westchester Counties, and Medicare Plans in Bronx, New York, Queens and Kings Counties.

        During the nine months ended September 30, 2015, the Company purchased an additional $23.6 million in shares of Series B Participating Preferred Stock and Series C Participating Preferred Stock. As of September 30, 2015, the Company held an 82% interest and the remaining shareholders held an 18% interest in AlphaCare Holdings.

        Based on the Company's 82% equity interest in AlphaCare Holdings, the Company has included the results of operations in its consolidated financial statements. The Company reports the results of operations of AlphaCare Holdings within the Healthcare segment.

Acquisition of CDMI, LLC

        Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI, on April 30, 2014 the Company acquired all of the outstanding equity interests of CDMI. CDMI provides a range of clinical consulting programs and negotiates and administers drug rebates for managed care organizations and other customers. As consideration for the transaction, the Company paid a base price of $201.0 million, including net receipts of $4.0 million for working capital adjustments. In addition to the base purchase price, the CDMI Agreement provides for potential contingent payments up to a maximum aggregate amount of $165.0 million. The potential future payments are contingent upon CDMI meeting certain client retention, client conversion, and gross profit milestones through December 31, 2016.

Other Acquisitions

        Pursuant to the January 15, 2015 purchase agreement (the "HSM Agreement") with HSM Physical Health, Inc. ("HSM") and HSM Companies Inc., on January 31, 2015 the Company acquired all of the outstanding equity interests of HSM. HSM provides cost containment and utilization management services focused on physical and musculoskeletal health specialties. As consideration for the transaction, the Company paid a base price of $13.5 million in cash, subject to working capital adjustments. The Company reports the results of operations of HSM within its Healthcare segment. The Company's estimated fair values of HSM's assets acquired and liabilities assumed at the date of acquisition are determined based on certain valuations and analyses that have yet to be finalized, and accordingly, the assets acquired and liabilities assumed are subject to adjustment once the analyses are completed. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

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Subsequent Events

9 Months Ended

Sep. 30, 2015

Subsequent Events

Subsequent Events

NOTE F—Subsequent Events

        On October 26, 2015 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 26, 2017. Stock repurchases under the program may be made from time to time in open market transactions (including blocks) or in privately negotiated transactions. The timing of repurchases and the actual amount purchased will depend on a variety of factors including the market price of the Company's shares, general market and economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow the Company to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from working capital and anticipated cash from operations. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Company's board of directors at any time.

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General (Tables)

9 Months Ended

Sep. 30, 2015

General

Summary of revenues and covered lives for Healthcare segment by product classification and customer type

        The following tables summarize, for the periods indicated, revenues and covered lives for Healthcare by product classification and customer type (in thousands):

	Revenue for nine months ended September 30, 2015
	Risk-based		ASO		Total
Commercial
Behavioral(1)	$	245,493	$	93,193	$	338,686
Specialty		353,896		42,162		396,058
Government(2)		1,383,627		51,990		1,435,617
Total	$	1,983,016	$	187,345	$	2,170,361

	Covered lives as of September 30, 2015
	Risk-based		ASO
Commercial
Behavioral(1)		12,815		12,518
Specialty		7,704		16,538
Government(2)		5,059		1,946

(1)	Includes revenues of $36.9 million from EAP services provided on a risk basis to health plans and employers with 10.2 million covered lives.
(2)	Includes revenues of $115.1 million from EAP services provided on a risk basis to federal governmental entities with 3.5 million covered lives.

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

        In addition to the Iowa Contracts, the Florida Contracts, and the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the nine months ended September 30, 2014 and 2015 (in thousands):

Segment	Term Date	2014		2015
Healthcare
None
Pharmacy Management
Customer A	November 30, 2015 to April 4, 2016(1)		92,793		93,908	*
Customer B	December 16, 2016		105,079		241,556

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

Schedule of fair value of financial assets and liabilities

        In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's assets and liabilities that are required to be measured at fair value as of December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	139,280	$	—	$	139,280
Restricted cash(2)		—		65,992		—		65,992
Investments:
U.S. government and agency securities		4,303		—		—		4,303
Obligations of government-sponsored enterprises(3)		—		15,315		—		15,315
Corporate debt securities		—		246,886		—		246,886
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,303	$	468,623	$	—	$	472,926
Liabilities
Contingent consideration	$	—	$	—	$	58,153	$	58,153
Total liabilities held at fair value	$	—	$	—	$	58,153	$	58,153

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	45,091	$	—	$	45,091
Restricted cash(5)		—		61,220		—		61,220
Investments:
U.S. government and agency securities		4,982		—		—		4,982
Obligations of government-sponsored enterprises(6)		—		43,067		—		43,067
Corporate debt securities		—		321,606		—		321,606
Certificates of deposit		—		1,150		—		1,150
Total assets held at fair value	$	4,982	$	472,134	$	—	$	477,116
Liabilities
Contingent consideration	$	—	$	—	$	108,443	$	108,443
Total liabilities held at fair value	$	—	$	—	$	108,443	$	108,443

(1)	Excludes $116.0 million of cash held in bank accounts by the Company.
(2)	Excludes $149.3 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 $51.8 million of cash held in bank accounts by the Company.
(5)	Excludes $74.1 million of restricted cash held in bank accounts by the Company.
(6)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

Summary of the Company's liability for contingent consideration

        The following table summarizes the Company's liability for contingent consideration for the nine months ended (in thousands):

	September 30, 2015
Balance as of beginning of period	$	58,153
Acquistion of 4D		19,290
Change in fair value		47,274
Payments		(16,274	)
Balance as of end of period	$	108,443

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

        As of December 31, 2014 and September 30, 2015, there were no unrealized losses that the Company determined to be other-than-temporary. No realized gains or losses were recorded for the nine months ended September 30, 2014 or 2015. The following is a summary of short-term and long-term investments at December 31, 2014 and September 30, 2015 (in thousands):

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,305	$	—	$	(2	)	$	4,303
Obligations of government-sponsored enterprises(1)		15,318		1		(4	)		15,315
Corporate debt securities		247,118		8		(240	)		246,886
Certificates of deposit		1,150		—		—			1,150
Total investments at December 31, 2014	$	267,891	$	9	$	(246	)	$	267,654

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	4,976	$	6	$	—		$	4,982
Obligations of government-sponsored enterprises(2)		43,045		25		(3	)		43,067
Corporate debt securities		321,817		24		(235	)		321,606
Certificates of deposit		1,150		—		—			1,150
Total investments at September 30, 2015	$	370,988	$	55	$	(238	)	$	370,805

(1)	Includes investments in notes issued by the Federal Home Loan Bank.
(2)	Includes investments in notes issued by the Federal Home Loan Bank and Federal Farm Credit Banks.

Summary of maturity dates of investments

        The maturity dates of the Company's investments as of September 30, 2015 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value
2015	$	110,723	$	110,679
2016		258,579		258,439
2017		1,686		1,687
Total investments at September 30, 2015	$	370,988	$	370,805

Schedule of stock option activity

        Summarized information related to the Company's stock options for the nine months ended September 30, 2015 is as follows:

	Options			Weighted Average Exercise Price
Outstanding, beginning of period		3,321,063		$	50.58
Granted		902,928			63.61
Forfeited		(140,940	)		60.21
Exercised		(1,062,878	)		47.17
Outstanding, end of period		3,020,173		$	55.23
Vested and expected to vest at end of period		2,983,943		$	55.15
Exercisable, end of period		1,417,576		$	49.46

Schedule of Non vested restricted stock award activity

        Summarized information related to the Company's nonvested restricted stock awards ("RSAs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		1,626,827		$	57.66
Awarded		20,115			67.12
Vested		(94,547	)		57.48
Forfeited		—			—
Outstanding, end of period		1,552,395		$	57.79

Schedule of Non vested restricted stock units

        Summarized information related to the Company's nonvested restricted stock units ("RSUs") for the nine months ended September 30, 2015 is as follows:

	Shares			Weighted Average Grant Fair Value
Outstanding, beginning of period		156,695		$	54.88
Awarded		172,810			63.95
Vested		(79,036	)		52.82
Forfeited		(21,144	)		61.65
Outstanding, end of period		229,325		$	61.80

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Business Segment Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Operating results by business segment
Managed care and other revenue	$ 809,249	$ 703,020	$ 2,334,139	$ 2,214,885
PBM and dispensing revenue	380,833	220,150	994,518	562,774
Cost of care	(596,323)	(495,180)	(1,686,939)	(1,582,505)
Cost of goods sold	(360,444)	(202,180)	(940,060)	(520,044)
Direct service costs and other	(220,586)	(176,928)	(616,491)	(520,684)
Stock compensation expense	12,897	11,961	40,593	25,983
Changes in fair value of contingent consideration	29,738		47,274
Less: non-controlling interest segment profit (loss)	47	(1,323)	(397)	(3,301)
Segment profit (loss)	55,317	62,166	173,431	183,710
Operating segments | Healthcare
Operating results by business segment
Managed care and other revenue	748,297	653,747	2,170,361	2,083,320
Cost of care	(596,323)	(495,179)	(1,686,944)	(1,584,264)
Direct service costs and other	(106,675)	(101,145)	(324,695)	(305,338)
Stock compensation expense	469	658	1,952	2,242
Changes in fair value of contingent consideration	(809)		(638)
Less: non-controlling interest segment profit (loss)	75	(1,323)	(318)	(3,301)
Segment profit (loss)	44,884	59,404	160,354	199,261
Operating segments | Pharmacy Management
Operating results by business segment
Managed care and other revenue	60,978	49,273	163,828	149,620
PBM and dispensing revenue	409,371	241,226	1,077,088	590,115
Cost of care		(1)	5	(16,296)
Cost of goods sold	(387,834)	(223,251)	(1,019,200)	(547,362)
Direct service costs and other	(87,252)	(45,535)	(207,230)	(122,691)
Stock compensation expense	9,410	8,122	28,282	13,981
Changes in fair value of contingent consideration	30,547		47,912
Segment profit (loss)	35,220	29,834	90,685	67,367
Corporate and Elimination
Operating results by business segment
Managed care and other revenue	(26)		(50)	(18,055)
PBM and dispensing revenue	(28,538)	(21,076)	(82,570)	(27,341)
Cost of care				18,055
Cost of goods sold	27,390	21,071	79,140	27,318
Direct service costs and other	(26,659)	(30,248)	(84,566)	(92,655)
Stock compensation expense	3,018	3,181	10,359	9,760
Less: non-controlling interest segment profit (loss)	(28)		(79)
Segment profit (loss)	$ (24,787)	$ (27,072)	$ (77,608)	$ (82,918)

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General (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) multiplier item	Sep. 30, 2014 USD ($)	Jul. 01, 2015 item
Operating results by business segment
Revenues	$ 1,190,082	$ 923,170	$ 3,328,657	$ 2,777,659
Number of reorganized business units | item					2
Healthcare
Operating results by business segment
Revenues			2,170,361
Healthcare | Risk-based
Operating results by business segment
Revenues			1,983,016
Healthcare | ASO (Administrative Services Only)
Operating results by business segment
Revenues			187,345
Healthcare | Commercial | Behavioral
Operating results by business segment
Revenues			338,686
Healthcare | Commercial | Specialty
Operating results by business segment
Revenues			396,058
Healthcare | Commercial | Risk-based | Behavioral
Operating results by business segment
Revenues			$ 245,493
Covered Lives | item	12,815,000		12,815,000
Healthcare | Commercial | Risk-based | Specialty
Operating results by business segment
Revenues			$ 353,896
Covered Lives | item	7,704,000		7,704,000
Healthcare | Commercial | ASO (Administrative Services Only) | Behavioral
Operating results by business segment
Revenues			$ 93,193
Covered Lives | item	12,518,000		12,518,000
Healthcare | Commercial | ASO (Administrative Services Only) | Specialty
Operating results by business segment
Revenues			$ 42,162
Covered Lives | item	16,538,000		16,538,000
Healthcare | Commercial | EAP (Employee Assistance Programs) | Behavioral
Operating results by business segment
Revenues			$ 36,900
Covered Lives | item	10,200,000		10,200,000
Healthcare | Government
Operating results by business segment
Revenues			$ 1,435,617
Healthcare | Government | Risk-based
Operating results by business segment
Revenues			$ 1,383,627
Covered Lives | item	5,059,000		5,059,000
Healthcare | Government | ASO (Administrative Services Only)
Operating results by business segment
Revenues			$ 51,990
Covered Lives | item	1,946,000		1,946,000
Healthcare | Government | EAP (Employee Assistance Programs)
Operating results by business segment
Revenues			$ 115,100
Covered Lives | item	3,500,000		3,500,000
Pharmacy Management
Operating results by business segment
Number of multiple applied for adjusted claim | multiplier			3
Number of days for applying the multiple			90 days
Pharmacy Management | PBM (Pharmacy Benefit Management)
Operating results by business segment
Adjusted claims paid			$ 13,200
Pharmacy Management | PBA (Pharmacy Benefit Administration)
Operating results by business segment
Adjusted claims paid			$ 44,200
Number of states served | item	25		25
Pharmacy Management | Specialty Dispensing
Operating results by business segment
Adjusted claims paid			$ 100
Pharmacy Management | Commercial PBM
Operating results by business segment
Generic dispensing rate (as a percent)			84.20%
Number of members served | item			1,600,000
Pharmacy Management | Medical pharmacy management programs
Operating results by business segment
Number of members served | item			9,800,000

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General (Details 6) - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Short-term and long-term investments
Bank overdrafts	$ 28,500	$ 0
Other-than-temporary unrealized losses	0		$ 0
Realized gains or losses	0	$ 0
Amortized Cost	370,988		267,891
Gross Unrealized Gains	55		9
Gross Unrealized Losses	(238)		(246)
Estimated Fair Value	370,805		267,654
U.S. Government and agency securities
Short-term and long-term investments
Amortized Cost	4,976		4,305
Gross Unrealized Gains	6
Gross Unrealized Losses			(2)
Estimated Fair Value	4,982		4,303
Obligations of government-sponsored enterprises
Short-term and long-term investments
Amortized Cost	43,045		15,318
Gross Unrealized Gains	25		1
Gross Unrealized Losses	(3)		(4)
Estimated Fair Value	43,067		15,315
Corporate debt securities
Short-term and long-term investments
Amortized Cost	321,817		247,118
Gross Unrealized Gains	24		8
Gross Unrealized Losses	(235)		(240)
Estimated Fair Value	321,606		246,886
Certificates of deposit
Short-term and long-term investments
Amortized Cost	1,150		1,150
Estimated Fair Value	$ 1,150		$ 1,150

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CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Stock compensation expense	$ 12,897	$ 11,961	$ 40,593	$ 25,983
Changes in fair value of contingent consideration	$ 29,738		$ 47,274

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Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

9 Months Ended

Sep. 30, 2015

Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

NOTE B—Net Income (Loss) per Common Share Attributable to Magellan Health, Inc.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2015			2014		2015
Numerator:
Net income (loss) attributable to Magellan Health, Inc.	$	27,133	$	(7,808	)	$	57,839	$	4,123
Denominator:
Weighted average number of common shares outstanding—basic		26,703		24,892			27,070		25,297
Common stock equivalents—stock options		404		—			517		360
Common stock equivalents—RSAs		133		—			77		640
Common stock equivalents—RSUs		—		—			18		34
Common stock equivalents—PSUs		—		—			—		39
Common stock equivalents—employee stock purchase plan		2		—			2		2
Weighted average number of common shares outstanding—diluted		27,242		24,892			27,684		26,372
Net income (loss) attributable to Magellan Health, Inc. per common share—basic	$	1.02	$	(0.31	)	$	2.14	$	0.16
Net income (loss) attributable to Magellan Health, Inc. per common share—diluted	$	1.00	$	(0.31	)	$	2.09	$	0.16

        The weighted average number of common shares outstanding for the three and nine months ended September 30, 2014 and 2015 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 and nine months ended September 30, 2014 and 2015 represent stock options to purchase shares of the Company's common stock, RSAs, RSUs, PSUs and stock purchased under the Employee Stock Purchase Plan.

        The Company had additional potential dilutive securities outstanding representing 0.7 million and 0.6 million options for the three and nine months ended September 30, 2014, respectively, and 1.4 million and 1.1 million options for the three and nine months ended September 30, 2015, 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 attributable to common shareholder per common share calculation as the Company uses the treasury stock method of calculating diluted shares.

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General (Details 7) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Amortized Cost
Investments amortized cost maturity dates 2015	$ 110,723
Investments amortized cost maturity dates 2016	258,579
Investments amortized cost maturity dates 2017	1,686
Amortized Cost	370,988	$ 267,891
Estimated Fair Value
Investments fair value maturity dates 2015	110,679
Investments fair value maturity dates 2016	258,439
Investments fair value maturity dates 2017	1,687
Estimated Fair Value	$ 370,805	$ 267,654

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Acquisitions (Details 2) - USD ($) $ in Millions		1 Months Ended	9 Months Ended
	Jan. 31, 2015	Apr. 30, 2014	Sep. 30, 2015	Dec. 31, 2013
Alpha Care Holdings Inc.
Acquisitions
Percentage of equity interest acquired				65.00%
Amount of additional Preferred Shares purchased			$ 23.6
Percentage of ownership held			82.00%
Voting interest of remaining shareholders			18.00%
CDMI
Acquisitions
Amount of consideration paid in cash		$ 201.0
Reduction to consideration paid due to net receipts received for working capital adjustments		4.0
Acquisition disclosures
Maximum potential contingent payments		$ 165.0
HSM
Acquisitions
Amount of consideration paid in cash	$ 13.5

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Acquisitions (Tables)

9 Months Ended

Sep. 30, 2015

Acquisitions

Summary of estimated fair values of assets acquired and liabilities assumed at the date of the acquisition

        The estimated fair values of 4D assets acquired and liabilities assumed at the date of acquisition are summarized as follows (in thousands):

Assets acquired:
Current assets (includes $14,178 of cash and $21,417 of accounts receivable)	$	35,638
Property and equipment, net		238
Other identified intangible assets		24,600
Goodwill		49,136
Total assets acquired		109,612
Liabilities assumed:
Current liabilities		33,882
Contingent consideration		19,291
Total liabilities assumed		53,173
Net assets acquired	$	56,439