WELLCARE HEALTH PLANS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Resultsof Operations. (2024)

Edgar Online, Inc.

Forward Looking Statements

 Statements contained in this Form 10-Q for the quarterly period ended March 31, 2012 ("2012 Form 10-Q") which are not historical fact may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions for forward-looking statements contained therein. Such statements, which may address, among other things, market acceptance of our products and services, product development, our ability to finance growth opportunities, our ability to respond to changes in laws and government regulations, implementation of our sales and marketing strategies, projected capital expenditures, liquidity and the availability of additional funding sources maybe found in the section of this 2012 Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and generally elsewhere in this report. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "targets," "predicts," "potential," "continues" or the negative of such terms or other comparable terminology. You are cautioned that forward looking statements involve risks and uncertainties, including economic, regulatory, competitive and other factors that may affect our business. Please refer to Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K") and in Part II, Item 1A of this 2012 Form 10-Q, for a discussion of certain risk factors which could materially affect our business, financial condition, cash flows, and results of operations. These forward-looking statements are inherently susceptible to uncertainty and changes in circ*mstances, as they are based on management's current expectations and beliefs about future events and circ*mstances. We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

Executive Summary

 We are a leading provider of managed care services to government-sponsored health care programs, serving approximately 2.5 million members nationwide as of March 31, 2012. We operate exclusively within the Medicare and Medicaid programs, serving the full spectrum of eligibility groups, with a focus on lower-income beneficiaries. Our primary mission is to help our government customers deliver cost-effective health care solutions, while improving health care quality and access to these programs. We are committed to operating our business in a manner that serves our key constituents - members, providers, government clients, and associates - while delivering competitive returns for our investors. Business Strategy

Our strategic priorities for 2012 include improving health care quality and access for our members, achieving a competitive cost position, and delivering prudent, profitable growth.

Key Developments and Accomplishments

Presented below are key developments and accomplishments relating to progress on our strategic business priorities that occurred or impacted our financial condition and results of operations during 2012.

· We have continued to enhance our care management capabilities. For example,

we recently strengthened our resources that are focused exclusively on

outreach to our Medicaid members to both educate them on care gaps, and to

facilitate the closure of such care gaps. Intervention and support

activities include arranging transportation assistance and three-way calls

with a member and his or her primary care physician to schedule

appointments, as well as language translation for non-English speaking

members. Additionally, we have made enhancements to our case management

 model to more effectively serve our most medically complex members. The model leverages both field-based and telephonic resources using state-specific, multi-disciplinary care teams.

· We recently expanded our service area in the Florida Medicaid program to

include Bay County, with mandatory enrollment effective as of June 1, 2012.

With this expansion, we now serve 37 of the 67 counties across the State of

Florida.

· In January 2012, Hawaii'sDepartment of Human Services selected us to serve

the state's QUEST Medicaid program, which covers beneficiaries of Hawaii's

Temporary Assistance for Needy Families ("TANF") Program and Children's Health

Insurance Program ("CHIP"), as well as other eligible beneficiaries across

Hawaii. This is an expansion of Hawaii'sMedicaid program into managed care,

where we currently serve approximately 24,000 aged, blind and disabled ("ABD")

beneficiaries. We are one of five health plans selected to serve approximately

230,000 QUEST beneficiaries across the state. Beneficiaries of the QUEST

program include low-income individuals, families and children who are not

aged, blind or disabled. Services are expected to begin on or about July 1,

2012, and we will coordinate medical, behavioral and pharmacy services with a

focus on improving health care access and the quality of care. With this new

award, we become Hawaii's only health plan to provide QUEST, QUEST Expanded

Access and Medicare Advantage services across all six islands. We are unable

to estimate our expected additional membership at this time; however, we

 The following table sets forth consolidated statements of operations data, as well as other key data used in our results of operations discussion for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. These historical results are not necessarily indicative of results to be expected for any future period. For the Three Months Ended March 31, 2012 2011 (In millions) Revenues: Premium $ 1,788.5 $ 1,472.4 Investment and other income 2.8 2.3 Total revenues 1,791.3 1,474.7 Expenses: Medical benefits (1) 1,521.8 1,263.3 Selling, general and administrative (1) 161.7 150.9 Medicaid premium taxes 20.4 18.9 Depreciation and amortization 7.0 6.5 Interest 1.1 0.1 Total expenses 1,712.0 1,439.7 Income before income taxes 79.3 35.0 Income tax expense 28.1 13.7 Net income $ 51.2 $ 21.3 Consolidated MBR (1) 86.1% 86.9%

--------------------------------------------------------------------------------

(1) Medical benefits expense, MBR, and selling, general and administrative

expense for the three months ended March 31, 2011 reflect the

reclassification of certain quality improvement costs from selling, general

and administrative expense to medical benefits expense as discussed within

 "Medical Benefits Expense" below. 28

--------------------------------------------------------------------------------

Membership

 At March 31, 2012 At December 31, 2011 At March

31, 2011

 Percentage of Percentage of Percentage of Segment Membership Total Membership Total Membership Total Medicaid 1,486,000 58.7% 1,451,000 56.6% 1,329,000 55.8% MA 150,000 5.9% 135,000 5.3% 119,000 5.0% PDP 897,000 35.4% 976,000 38.1% 935,000 39.2% Total 2,533,000 100.0% 2,562,000 100.0% 2,383,000 100.0% As of March 31, 2012, we served approximately 2,533,000 members, an increase of approximately 29,000 members from December 31, 2011 and 150,000 members from March 31, 2011. We experienced membership growth in both our Medicaid and MA segments. Medicaid segment membership increased by 35,000 compared to December 31, 2011 mainly from continued membership growth in our Kentucky Medicaid program following its launch in the fourth quarter of 2011, as well as growth in Florida. Members participating in the state-wide program were able to switch plans until January 31, 2012, and our membership increased from 129,000 at December 31, 2011 to 149,000 at March 31, 2012 due to these changes. MA segment membership increased by 15,000 based on results of the annual election period, which resulted in an increase of approximately 10,000 members effective January 1, 2012, as well as our continued focus on dually-eligible beneficiaries and expansion into 19 new counties. In our PDP segment, membership decreased by 79,000 compared to December 31, 2011 as a result of our 2012 PDP bids, which resulted in the reassignment to other plans, effective January 1, 2012, of members who were auto-assigned to us in 2011 or prior years. During the remaining months of 2012, we anticipate relatively stable membership in the Kentucky Medicaid program, given that members are no longer able to switch plans outside the annual election period. At this time, we are unable to estimate the additional membership we will receive from our new contract with Hawaii's QUEST program to serve TANF and CHIP members beginning on July 1, 2012. We were one of five plans selected to serve approximately 230,000 beneficiaries across the state. We expect MA segment membership to continue to grow during the remaining months of 2012 due to our ability to market to and enroll dually-eligible beneficiaries, as well as the growth in the broader Medicare population. We anticipate PDP segment membership will decrease slightly during the remainder of 2012 due to normal attrition being offset by fewer new members as we will be auto-assigned newly eligible members in fewer regions.

Net Income

 For the three months ended March 31, 2012, our net income was $51.2 million compared to net income of $21.3 million for the same three month period in 2011. Excluding investigation-related litigation and other resolution costs of $6.1 million and $6.9 million, net of tax, for the three months ended March 31, 2012 and 2011, respectively, net income increased by $29.1 million, or 103%, in 2012 compared to the same three month period in 2011. The increase for the three months ended March 31, 2012 resulted from improved results in all our reportable segments, partially offset by an increase in selling, general and administrative ("SG&A") expense. In our  segment, the improvement was largely driven by the impact of higher membership and related premium revenues and the impact of rate increases in certain markets. The improved results in our MA segment were also due to increased membership and related premium revenues, while the improvement in the PDP segment resulted mainly from an increase in premium revenues. The increase in SG&A was consistent with the overall increase in premium revenues.

Premium Revenue

 Premium revenue for the three months ended March 31, 2012 increased by approximately $316.1 million, or 22%, compared to the same period in the prior year. The increase is primarily attributable to membership growth in our Medicaid and MA segments and rate increases in certain of our Medicaid markets. Premium revenue includes $20.4 million and $18.9 million of Medicaid premium taxes for the three months ended March 31, 2012 and 2011, respectively.

Medical Benefits Expense

 Total medical benefits expense for the three months ended March 31, 2012 increased $258.5 million, or 20%, compared to the same period in 2011. The increase is due mainly to increased membership in the Medicaid and MA segments. Favorable development of prior period medical benefits payable was not materially different between the 2012 and 2011 periods, amounting to $52.4 million for the three months ended March 31, 2012 compared to $51.0 million for the same three month period in 2011. Our consolidated MBR was 86.1% and 86.9% for the three months ended March 31, 2012 and 2011, respectively. The decrease in MBR was primarily due to rate increases in certain of our Medicaid markets and the impact of our medical cost initiatives. 29 -------------------------------------------------------------------------------- Effective January 1, 2012, we reclassified to medical benefits expense certain costs related to quality improvement activities that were formerly reported in SG&A expense. The quality improvement costs that we reclassified are consistent with the criteria specified and defined in guidance issued by the Department of Health and Human Services ("HHS") for costs that qualify to be reported as medical benefits under the minimum medical loss ratio provision of the 2010 Acts and include:

· Preventive health and wellness and care management;

· Case and disease management;

· Health plan accreditation costs;

· Provider education and incentives for closing care gaps;

· Health risk assessments and member outreach; and

· Information technology costs related to the above activities.

 The reclassification of these quality improvement costs impacted our medical benefits expense and MBR by reportable segment for the three months ended March 31, 2011 as set forth in the following table. For the Three Months Ended March 31, 2011 Previously Amounts As Reported Reclassified Adjusted

(Dollars in millions)

 Medicaid medical benefits expense $ 703.7 $ 12.4 $ 716.1 Medicaid MBR % 84.1% 1.5% 85.6% MA medical benefits expense 277.0 4.8 281.8 MA MBR % 78.1% 1.4% 79.5% PDP medical benefits expense 264.3 1.1 265.4 PDP MBR% 100.9% 0.4% 101.3% Consolidated medical benefits expense $ 1,245.0 $ 18.3 $ 1,263.3 Consolidated MBR % 85.7% 1.2% 86.9%

Selling, General and Administrative Expense

 SG&A expense includes aggregate costs related to the resolution of the previously disclosed governmental and Company investigations and related litigation, such as settlement accruals and related fair value accretion, legal fees and other similar costs. Refer to Part I - Item 1 - Note 10 - "Commitments and Contingencies" for a complete discussion of investigation-related litigation and other resolution costs. We believe it is appropriate to evaluate SG&A expense exclusive of these investigation-related litigation and other resolution costs because we do not consider them to be indicative of long-term business operations. A reconciliation of SG&A expense, including and excluding such costs, is presented below. Additionally, as discussed above, we reclassified costs related to quality improvement activities that were formerly reported in SG&A expenses to medical benefits expense effective January 1, 2012. Prior year amounts have been reclassified to conform to the current year presentation. 30 -------------------------------------------------------------------------------- The impact of the reclassification on our SG&A expense and SG&A ratio is presented below. For the Three Months Ended March 31, 2012 2011 Previously Amounts As Reported Reclassified Adjusted (In millions) SG&A expense $ 161.7 $ 169.2 $ (18.3) $ 150.9 Adjustments: Investigation-related litigation and other resolution costs (1.4) (2.0) - (2.0) Investigation-related administrative costs (11.3) (8.7) - (8.7) Total investigation-related litigation and other resolution costs (12.7) (10.7) - (10.7) SG&A expense, excluding investigation-related litigation and other resolution costs $ 149.0 $ 158.5 $ (18.3) $ 140.2 SG&A ratio 9.1% 11.6% -1.2% 10.4% SG&A ratio, excluding investigation-related litigation and other resolution costs 8.4% 10.9% -1.3% 9.6% Excluding total investigation-related litigation and other resolution costs, our SG&A expense for the three months ended March 31, 2012, increased approximately $8.8 million, or 6%, to $149.0 million from $140.2 million for the same period in 2011. The increase was due to technology investments, including those required by regulatory changes, as well as medical cost initiatives, increased spending related to the launch of our Kentucky Medicaid program and other growth initiatives. These increases were partially offset by improvements in operating efficiency. Our SG&A expense as a percentage of total revenue, excluding premium taxes ("SG&A ratio"), was 9.1% for the three months ended March 31, 2012 compared to 10.4% for the same period in 2011. After excluding the investigation-related litigation and other resolution costs, our SG&A ratio for the three months ended March 31, 2012 was 8.4% compared to 9.6% for the same period in 2011. The improvement in our SG&A ratio, excluding investigation-related litigation and other resolution costs, is related to the growth in premium revenue and improvement in our administrative cost structure driven by business simplification projects, process management in our shared services functions, and continued evaluation of our organizational design. The improvement was partially offset by costs incurred for growth and regulatory and quality initiatives. Medicaid Premium Taxes Medicaid premium taxes incurred for the three months ended March 31, 2012 and 2011 were $20.4 million and $18.9 million, respectively. The increase was mainly due to the increase in corresponding premium revenues.

Interest Expense

 Interest expense for the three months ended March 31, 2012 and 2011 was $1.1 million and $77,000, respectively. The increase in interest expense is mainly driven by interest on the $150.0 million term loan, which was executed on August 1, 2011. Income Tax Expense Income tax expense for the three months ended March 31, 2012 was $28.1 million compared to $13.7 million for the same period in the prior year. Our effective income tax rate on pre-tax income was 35.4% for the three months ended March 31, 2012 compared to 39.1% on pre-tax income for the same three month period in 2011. The effective tax rate was lower for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to changes related to estimated non-deductible amounts associated with investigation-related litigation and other resolution costs and a decrease in the effective state income tax rate. 31 --------------------------------------------------------------------------------

Reconciling Segment Results

 The following table reconciles our reportable segment results to income before income taxes, as reported in conformity with accounting principles generally accepted in the United States ("GAAP"). For the Three Months Ended March 31, 2012 2011 (In millions) Gross Margin (1): Medicaid $ 170.9 $ 139.7 MA 92.9 72.8 PDP 2.9 (3.4) Total gross margin 266.7 209.1 Investment and other income 2.8 2.3 Other expenses (1) (190.2) (176.4) Income before income taxes $ 79.3 $ 35.0 ____________

(1) Gross margin by reportable segment and other expenses shown above reflect

the reclassification of quality improvement costs from selling, general and

administrative expense to medical benefits expense as discussed in "Medical

Benefits Expense" under "Summary of Consolidated Results." Refer to Part I -

Item 1 - Note 2 - "Segment Reporting" for reclassification by reportable

segment through the gross margin level.

 Medicaid Segment Results For the Three Months Ended March 31, 2012 2011 (Dollars in millions) Premium revenue $ 1,054.2 $ 836.9 Medicaid premium taxes 20.4 18.9 Total premiums 1,074.6 855.8 Medical benefits expense (2) 903.7 716.1 Gross margin (2) $ 170.9 $ 139.7 Medicaid membership: Georgia 562,000 559,000 Florida 419,000 410,000 Other states 505,000 360,000 1,486,000 1,329,000 Medicaid MBR (excluding premium taxes) (1) (2) 85.7% 85.6% ____________

(1) MBR measures the ratio of our medical benefits expense to premiums earned,

 after excluding Medicaid premium taxes. Because Medicaid premium taxes are included in the premium rates established in certain of our Medicaid contracts and also recognized separately as a component of expense, we

exclude these taxes from premium revenue when calculating key ratios as we

believe that their impact is not indicative of operating performance. For

GAAP reporting purposes, Medicaid premium taxes are included in premium

 revenue.

(2) Medicaid medical benefits expense, MBR and gross margin shown above reflect

the reclassification of quality improvement costs from selling, general and

administrative expenses to medical benefits expense as discussed in Medical

Benefits Expense under Summary of Consolidated Results. Refer to Part I - Item 1 - Note 2 - "Segment Reporting" for reclassification of Medicaid segment results through the gross margin level. Excluding Medicaid premium taxes, Medicaid premium revenue for the three months ended March 31, 2012 increased 26% when compared to the same period in 2011. The increase was mainly due to rate increases implemented in most markets in late 2011, and premiums associated with our Kentucky Medicaid program, which was launched on November 1, 2011, as well as the carve-in of the pharmacy benefit in our New York and Ohio Medicaid programs which were effective in October 2011. 32 -------------------------------------------------------------------------------- Medicaid medical benefits expense for the three months ended March 31, 2012 increased $187.6 million when compared to the same period in 2011. The increase was due mainly to the increase in membership and a change in the demographic mix of our members, partially offset by the impact of medical cost initiatives that we have implemented. Our Medicaid MBR for the three months ended March 31, 2012 increased by 10 basis points when compared to the same period in 2011. The increase was driven by the relatively higher MBR in the Kentucky program, offset in large part by improved performance of other programs. The Kentucky Medicaid program MBR for the three months ending March 31, 2012 was approximately 104%, essentially unchanged from the three-month period ending December 31, 2011, due to the relatively high transitional medical benefit expenses for the program. As a result of processes that we have begun to implement to improve care coordination and manage costs, and revenue enhancements that are expected in later periods during 2012, we currently expect the Kentucky Medicaid program to operate with an MBR in the mid-90% range during the remainder of 2012.

Outlook

 During the remaining months of 2012, we anticipate relatively stable membership in the Kentucky Medicaid program, given that members are no longer able to switch plans outside the annual election period. At this time, we are unable to estimate the additional membership we will receive from our new contract with Hawaii's QUEST program to serve TANF and CHIP members anticipated to begin on July 1, 2012. We expect the full year MBR for our Medicaid segment to be higher in 2012 when compared to 2011, due to the high amount of favorable development of medical benefits payable that we recognized in 2011. MA Segment Results For the Three Months Ended March 31, 2012 2011 (Dollars in millions) Premium revenue $ 438.2 $ 354.6 Medical benefits expense (1) 345.3 281.8 Gross margin (1) $ 92.9 $ 72.8 MA Membership 150,000 119,000 MA MBR (1) 78.8% 79.5% ____________

(1) Medicare medical benefits expense, MBR and gross margin shown above reflect

the reclassification of quality improvement costs from selling, general and

administrative expense to medical benefits expense as discussed in "Medical

Benefits Expense" under "Summary of Consolidated Results." Refer to Part I -

 Item 1 - Note 2 - "Segment Reporting" for reclassification of Medicare segment results through the gross margin level. MA premium revenue for the three months ended March 31, 2012 increased 24% when compared to the same period in 2011 and was mainly attributable to an increase in membership, which increased by approximately 31,000 members between March 31, 2011 and March 31, 2012 due to our product design, strengthening of our sales processes and heightened focus on membership growth activities during the annual election period in 2011. MA segment MBR decreased by 70 basis points for the three months ended March 31, 2012 compared to the same period in 2011. The decrease in the MBR was primarily due to a change in the demographic mix of our membership, as well as the impact of medical cost initiatives.

Outlook

 Currently, we expect MA segment membership to continue to grow during the remaining months of 2012, as we leverage our success in serving dually-eligible beneficiaries and as a result of the growth in the broader Medicare-eligible population. We expect MBR for the MA segment to increase compared to 2011 due to the significant prior period development that was recognized in 2011. 33 --------------------------------------------------------------------------------

 PDP Segment Results For the Three Months Ended March 31, 2012 2011 (Dollars in millions) Premium revenue $ 275.7 $ 261.9 Medical benefits expense (1) 272.8 265.3 Gross margin (deficit) (1) $ 2.9 $ (3.4) PDP Membership 897,000 935,000 PDP MBR (1) 98.9% 101.3% ____________

(1) PDP medical benefits expense, MBR and gross margin shown above reflect the reclassification of quality improvement costs from selling, general and

administrative expense to medical benefits expense as discussed in "Medical

Benefits Expense" under "Summary of Consolidated Results." Refer to Part I -

Item 1 - Note 2 - "Segment Reporting" for reclassification of PDP segment

results through the gross margin level.

 PDP premium revenue for the three months ended March 31, 2012 increased 5% when compared to the same period in 2011 primarily due to the additional premium related to the risk corridor provision of our contract with CMS partially offset by the impact of lower membership. Membership decreased by approximately 38,000 members from March 31, 2011 to March 31, 2012 due to the reassignment to other plans, effective January 1, 2012, of members who were auto-assigned to us in 2011 or prior years. PDP MBR for the three months ended March 31, 2012 decreased 240 basis points over the same period in 2011 due to the additional premium related to the risk corridor provision of our contract with CMS, partially offset by the impact of higher pharmacy claims experience.

Outlook

 We expect PDP membership and premium revenues to decrease slightly during the remainder of 2012 due to normal attrition being offset by fewer new members as we will be auto-assigned newly eligible members in only the five regions where we are below the benchmark.

Liquidity and Capital Resources

Overview

 Each of our existing and anticipated sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For a further discussion of risks that can affect our liquidity, see Part I - Item 1A - "Risk Factors" included in our 2011 Form 10-K.

Cash and Investment Positions

 Our business consists of operations conducted by our regulated subsidiaries, including HMOs and insurance subsidiaries, and our non-regulated subsidiaries. The primary sources of cash for our regulated subsidiaries include premium revenue, investment income and capital contributions made by us to our regulated subsidiaries. Our regulated subsidiaries are each subject to applicable state regulations that, among other things, require the maintenance of minimum levels of capital and surplus. Our regulated subsidiaries' primary uses of cash include payment of medical expenses, management fees to our non-regulated third-party administrator subsidiary (the "TPA") and direct administrative costs, which are not covered by the agreement with the TPA, such as selling expenses and legal costs. We refer collectively to the cash and investment balances maintained by our regulated subsidiaries as "regulated cash" and "regulated investments," respectively. The primary sources of cash for our non-regulated subsidiaries are management fees and dividends received from our regulated subsidiaries and investment income. Our non-regulated subsidiaries' primary uses of cash include payment of administrative costs not charged to our regulated subsidiaries for corporate functions, including business development, branding, certain information technology services and debt service. Other primary uses include capital contributions made by our non-regulated subsidiaries to our regulated subsidiaries. We refer collectively to the cash and investment balances available in our non-regulated subsidiaries as "unregulated cash" and "unregulated investments," respectively. 34 -------------------------------------------------------------------------------- The following table presents our cash and investment positions, excluding restricted investments. March 31, December 31, 2012 2011 (In millions) Cash and cash equivalents: Regulated $ 1,190.0 $ 1,018.9 Unregulated 254.8 306.2 $ 1,444.8 $ 1,325.1 Investments: Regulated Auction rate securities 30.0 30.1 Other 287.5 249.2 317.5 279.3 Unregulated Auction rate securities 2.3 2.3 Other - - 2.3 2.3 $ 319.8 $ 281.6 Regulated cash and cash equivalents can fluctuate significantly in a particular period depending on the timing of receipts for premiums from our government partners. Our unregulated cash, cash equivalents and investments decreased from $308.5 million as of December 31, 2011 to $257.1 million as of March 31, 2012, primarily as a result of payments of certain investigation-related litigation and other resolution costs in connection with our settlement with the Civil Division of the U.S. Department of Justice (the "Civil Division") and a capital contribution made to our regulated subsidiary for the Kentucky Medicaid program. There were no dividends received from our regulated subsidiaries during the three months ended March 31, 2012; however, in April 2012 we received a total of $100 million through dividends and redemption of a surplus note.

Regulatory Capital and Dividend Restrictions

 Our operations are conducted primarily through HMO and insurance subsidiaries. Each of these subsidiaries is licensed by the insurance department in the state in which it operates, except our New York HMO subsidiary, which is licensed by the New York State Department of Health, and is subject to the rules, regulation and oversight of the applicable state agency in the areas of licensing and solvency. State insurance laws and regulations prescribe accounting practices for determining statutory net income and capital and surplus. Each of our regulated subsidiaries is required to report regularly on its operational and financial performance to the appropriate regulatory agency in the state in which it is licensed. These reports describe each of our regulated subsidiaries' capital structure, ownership, financial condition, certain intercompany transactions and business operations. From time to time, any of our regulated subsidiaries may be selected to undergo periodic audits, examinations or reviews of our operational and financial assertions by the applicable state agency. Each of our regulated subsidiaries generally must obtain approval from, or provide notice to, the state in which it is domiciled before entering into certain transactions such as declaring dividends in excess of certain thresholds, entering into other arrangements with related parties, and acquisitions or similar transactions involving an HMO or insurance company, or any change in control. For purposes of these laws, in general, control commonly is presumed to exist when a person, group of persons or entity, directly or indirectly, owns, controls or holds the power to vote 10% or more of the voting securities of another entity. Each of our HMO and insurance subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulation. The minimum statutory capital requirements differ by state and are generally based on a percentage of annualized premium revenue, a percentage of annualized health care costs, a percentage of certain liabilities, a statutory minimum RBC requirement or other financial ratios. However, one or more of our regulators could require one or more of our subsidiaries to maintain minimum levels of statutory net worth in excess of the amount required under the current applicable state laws if the regulators were to determine that such a requirement were in the interest of our members. The risk-based capital ("RBC") requirements are based on guidelines established by the National Association of Insurance Commissioners ("NAIC"), and have been adopted by most states. As of March 31, 2012, our HMO operations in Connecticut, Georgia, Illinois, Indiana, Louisiana, Missouri, New Jersey, Ohio and Texas as well as three of our insurance company subsidiaries were subject to RBC requirements. The RBC requirements may be modified as each state legislature deems appropriate for that state. The RBC formula, based on asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level ("ACL"), which represents the amount of capital required to support the regulated entity's business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain minimum capital equal to the greater of 200% of the ACL and the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Our subsidiaries operating in Texas, Georgia and Ohio are required to maintain statutory capital at RBC levels equal to 225%, 250% and 300%, respectively, of the applicable ACL. Failure to maintain these requirements would trigger regulatory action by the state. At March 31, 2012, our HMO and insurance subsidiaries were in compliance with these minimum capital requirements. 35 --------------------------------------------------------------------------------

Credit Agreement

 In 2011, we entered into a $300.0 million senior secured credit agreement (the "Credit Agreement") that can be used for general corporate purposes. The Credit Agreement provides for a $150.0 million term loan facility as well as a $150.0 million revolving credit facility. Upon closing, we borrowed $150.0 million pursuant to the term loan facility and incurred approximately $2.5 million of debt issuance costs that have been deferred and amortized over the life of the agreement. Both the term loan and revolving credit facility are set to expire in August 2016. Payments of principal on the term loan are due on a quarterly basis through July 31, 2016. As of March 31, 2012, our remaining term loan balance was $144.4 million, which is included in the current portion of long-term debt and long-term debt line items in our consolidated balance sheet. Our term loan bears interest at 2.00% as of March 31, 2012. Loans designated by us at the time of borrowing as Alternate Base Rate ("ABR") Loans that are outstanding under the credit facility bear interest at a rate per annum equal to (i) the greatest of (a) the prime rate in effect on such day; (b) the federal funds effective rate in effect on such day plus 0.50%; and (c) the adjusted London Inter-Bank Offered Rate ("Adjusted LIBOR") for a one-month interest period on such day plus 1% plus (ii) the applicable margin. Loans designated by us at the time of borrowing as "Eurodollar Loans" that are outstanding under the credit facility bear interest at a rate per annum equal to the Adjusted LIBOR for the interest period in effect for such borrowing plus the applicable margin. The "applicable margin" means a percentage ranging from 0.50% to 2.00% per annum for ABR Loans and a percentage ranging from 1.50% to 3.00% per annum for Eurodollar Loans, depending upon our ratio of total debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"). Unutilized commitments under the Credit Agreement are subject to a fee of 0.25% to 0.45% depending upon the Company's ratio of total debt to cash flow. Interest on the term loan is payable based on the LIBOR election period, which ranges from one to six months based upon our election, with interest on the unutilized commitment payable quarterly. Interest on the unutilized revolving credit facility and borrowings under the term loan were $0.1 million and $0.8 million, respectively, for a total interest expense amount of $0.9 million for the three month period ended March 31, 2012. As of March 31, 2012 interest payable for the term loan was $0.2 million. The Credit Agreement is subject to customary covenants and restrictions which, among other things, limit our ability to incur additional indebtedness. In addition, the Credit Agreement also includes certain financial covenants that require (a) a maximum total consolidated debt to consolidated EBITDA ratio of 2.25 times; (b) a minimum fixed charge coverage ratio of 3.00 times; (c) a minimum level of statutory net worth for our HMO and insurance subsidiaries; and (d) a requirement to maintain cash in an amount equal to one year of payment obligations due and payable to the Civil Division during the next twelve consecutive months, so long as such obligations remain outstanding. For more information regarding our obligations to the Department of Justice see Item 1 - Financial Statements - Note 10, Commitments and Contingencies - Government Investigations - Civil Division of the United States Department of Justice. The Credit Agreement also contains customary representations and warranties and events of default. The payment of outstanding principal under the Credit Agreement and accrued interest thereon may be accelerated and become immediately due and payable upon our default of payment or other performance obligations or our failure to comply with financial or other covenants in the Credit Agreement, subject to applicable notice requirements and cure periods as provided in the Credit Agreement.

As of the date of this filing, the revolving credit facility has not been drawn upon and we remain in compliance with all covenants.

Auction Rate Securities

As of March 31, 2012, $32.3 million of our long-term investments were comprised of municipal note securities with an auction reset feature ("auction rate securities"), which are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities and carry investment grade credit ratings. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every seven or 35 days. As of the date of this Form 10-Q, auctions have failed for our auction rate securities and there is no assurance that auctions will succeed in the future. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our remaining auction rate securities in the near term may be limited or non-existent. In addition, while all of our auction rate securities currently carry investment grade ratings, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. Although auctions continue to fail, we believe we will be able to liquidate these securities without significant loss. There are government guarantees or municipal bond insurance in place and we have the ability and the present intent to hold these securities until maturity or market stability is restored. Accordingly, we do not believe our auction rate securities are impaired and as a result, we have not recorded any impairment losses for our auction rate securities. However, it could take until the final maturity of the underlying securities to realize our investments' recorded value. The final maturity of the underlying securities could be as long as 28 years. The weighted-average life of the underlying securities for our auction rate securities portfolio is 23 years.

Financial Impact of Government Investigation and Litigation

 On March 23, 2012, the settlement agreements entered into on April 26, 2011 to resolve matters under investigation by the Civil Division and certain other federal and state enforcement agencies were finalized and became effective (the "Settlement"). Under the terms of the Settlement, WellCare will, among other things, pay the Civil Division a total of $137.5 million over 36 months plus interest accrued at 3.125% from December 22, 2010. This Settlement includes amounts previously accrued as a result of overpayments received by WellCare from the Florida Agency for Health Care Administration during 2005. The Settlement provides for a contingent payment of an additional $35 million in the event that we are acquired or otherwise experience a change in control within three years of the effective date of the Settlement, provided that the change in control transaction exceeds certain minimum transaction value thresholds as specified in the Settlement. On March 30, 2012, we made a payment of $39.8 million to the Civil Division, consisting of a $34.4 million principal payment and $5.5 million of accrued interest. The remaining liability is to be paid in three annual installments of $34.4 million plus related interest. 36 --------------------------------------------------------------------------------

Overview of Cash Flow Activities

Our cash flows are summarized as follows:

 For the Three Months Ended March 31, 2012 2011 (In millions) Net cash provided by (used in) operating activities $ 8.3 $ (43.9) Net cash used in investing activities (53.3) (120.4) Net cash provided by financing activities 164.8 37.7

Net Cash Provided By (Used In) Operating Activities

 We generally receive premiums in advance of payments of claims for health care services; however, cash flows related to our operations can fluctuate significantly in a particular period depending on the timing of premiums receipts from our government partners or payments related to the resolution of government investigations and related litigation. For the three months ended March 31, 2012, cash provided by operating activities benefited from the receipt of $207.1 million for April 2012Medicare premiums, but was negatively impacted by the delayed premiums associated with our Georgia Medicaid program and the $39.8 million payment made to the Civil Division on March 30, 2012. As discussed in "Premium Rates and Payments" under "Business and Financial Outlook," the Georgia DCH has delayed the payment of certain premiums for February and March 2012, totaling approximately $161.5 million as of March 31, 2012. Premium payments continued to be delayed in April, with only partial payments made, resulting in cumulative delayed premium payments of $229.5 million as of April 30, 2012. The Georgia DCH has announced plans to begin restoring these payments at some point during the second quarter of 2012. It is not clear whether the Georgia DCH will be able to fully restore all of the delayed payment by the end of the second quarter of 2012. If the delays continue through the second quarter of 2012 as anticipated, our consolidated operating cash flow for the second quarter of 2012 will be materially impacted. However, at this time, the delays are considered to be a timing issue and we believe we have adequate liquidity to manage the delays. We do not expect these delays to impact the operation of our programs in Georgia or elsewhere. Net cash used in operating activities in 2011 primarily consisted of an increase in premiums receivable of $62.4 million, a  payment related to the investigation resolution and $43.5 million of payments on accounts payable and other accrued expenses, partially offset by an increase in medical benefits payable of $47.6 million and $17.1 million in unearned premiums.

Net Cash Used In Investing Activities

During the three months ended March 31, 2012, cash used in investing activities primarily reflects our investment in marketable securities of approximately $115.4 million and purchases of property and equipment of $15.4 million, partially offset by $77.5 million of proceeds from maturities of marketable securities and restricted investments.

 During the three months ended March 31, 2011, cash used in investing activities primarily reflects our investment into marketable securities of approximately $113.3 million and purchases of property and equipment totaling approximately $8.7 million, partially offset by $1.5 million of proceeds from the maturities of restricted investments net of purchases.

Net Cash Provided By Financing Activities

 Included in financing activities are funds receivable for the benefit of members, which decreased approximately $160.2 million and $37.8 million during the three months ended March 31, 2012 and 2011, respectively. These funds represent reinsurance and low-income cost subsidies funded by CMS in connection with the Medicare Part D program, for which we assume no risk.

Contractual Obligations

 In our 2011 Form 10-K, we reported our contractual obligations as of December 31, 2011. Since then, our estimate of the timing of our resolution for matters investigated by the Civil Division has been revised. For further information regarding the settlement agreement related to this matter, please refer to Part I - Item 1 - Note 10 - Commitments and Contingencies.

On March 1, 2012, the Company entered into an operating lease agreement commencing on June 1, 2012 for additional office space in Tampa, Florida. Expected cash payments under the lease are set forth below.

 Payments due within: March 31, 2012 (In millions) Less than 1 year $ 0.6 1 - 3 years 3.1 3 - 5 years 1.7 More than 5 years - $ 5.4

Critical Accounting Estimates

 In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of our results of operations and financial condition in conformity with GAAP. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circ*mstances. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that our accounting estimates relating to premium revenue recognition, medical benefits expense and medical benefits payable, and goodwill and intangible assets, are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We have not changed our methodology in deriving these critical accounting estimates from those previously disclosed in our 2011 Form 10-K. Premium Revenue Recognition We receive premiums from the Centers for Medicare & Medicaid Services (CMS) and other federal and state agencies for the members that are assigned to, or have selected, us to provide health care services under our Medicaid and Medicare contracts. The premiums we receive for each member vary according to the specific government program and are generally determined at the beginning of the respective contract period. These premiums are subject to adjustment by CMS and the federal and state agencies throughout the term of the contracts, although such adjustments are typically made at the commencement of each new contract renewal period. 37

-------------------------------------------------------------------------------- We recognize premium revenues in the period in which we are obligated to provide services to our members. We are generally paid by CMS and the federal and state agencies in the month in which we provide services. Any amounts that have been earned and have not been received are recorded in our consolidated balance sheets as premium receivables. Any amounts received by us in advance of the period of service are recorded as unearned premiums in the consolidated balance sheets and are not recognized as revenue until the respective services have been provided. On a monthly basis we bill members for any premiums for which they are responsible according to their respective plan. We estimate, on an ongoing basis, the amount of member billings that may not be fully collectible based on historical trends. An allowance is established for the estimated amount that may not be collectible. Historically, the allowance for member premiums receivable has not been significant relative to premium revenue. In addition, we routinely monitor the collectability of specific premium receivables, including Medicaid newborn/obstetric deliveries receivables (see Medicaid below), and net receivables for member retroactivity as described below, and reflect any required adjustments in current operations. We record adjustments to revenues based on member retroactivity. These adjustments reflect changes in the number and eligibility status of enrollees subsequent to when revenue was billed. Premium payments that we receive are based upon eligibility lists produced by CMS and federal and state agencies. We verify these lists to determine whether we have been paid for the correct premium category and program. From time to time, CMS and federal and state agencies require us to reimburse them for premiums that we received for individuals who were subsequently determined by us, CMS or the federal and state agencies to be ineligible for any government-sponsored program or to belong to a plan other than ours. Additionally, the verification of membership may result in additional premiums due to us from CMS and federal and state agencies for individuals who were subsequently determined to belong to our plan for periods in which we received no premium for that member. We estimate the amount of outstanding retroactivity adjustments each period and adjust premium revenue accordingly. As applicable, the estimates of retroactivity adjustments are based on historical trends, premiums billed, the volume of member and contract renewal activity and other information. The amounts receivable or payable identified by us through reconciliation and verification of membership eligibility lists relate to current and prior periods. The amounts receivable or payable identified by us through reconciliation and verification of membership eligibility lists, which relate to current and prior periods, are included in premium receivables, net and other accrued expenses and liabilities in the accompanying consolidated balance sheets.

Medicaid

 Our Medicaid segment generates revenues primarily from PMPM premiums earned pursuant to our contracts with government agencies in the states in which we operate health plans. Our Medicaid contracts with state government agencies are generally multi-year contracts subject to annual renewal provisions. Annual rate changes are recorded when they become effective. In some instances, our fixed base PMPM premiums are subject to risk score adjustments based on the acuity of our membership. Generally, the risk score is determined by the state agency's analysis of encounter submissions of processed claims data to determine the acuity of our membership relative to the entire state's Medicaid membership. In Georgia, Illinois, Kentucky, Missouri, New York and Ohio, we are eligible to receive supplemental payments for newborns and/or obstetric deliveries. Each contract is specific as to how and when these supplemental payments are earned and paid. Upon delivery of a newborn, the government payor is notified according to the contract terms. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member. Additionally, in some states, supplemental payments are received for certain services such as high cost drugs and early childhood prevention screenings.

Minimum Medical Expense Provisions

 Our Florida Medicaid and Healthy Kids contracts and Illinois Medicaid contract require us to expend a minimum percentage of premiums on eligible medical expense. To the extent that we expend less than the minimum percentage of the premiums on eligible medical expense, we are required to refund all or some portion of the difference between the minimum and our actual allowable medical expense. We estimate the amounts due to the state agencies as a return of premium based on the terms of our contracts with the applicable state agency and such amounts are included in net income as reductions of premium revenues.

Medicare Advantage (MA)

 The amount of premiums we receive for each MA member is established by contract, although the rates vary according to a combination of factors, including upper payment limits established by CMS, the member's geographic location, age, gender, medical history or condition, or the services rendered to the member. Changes to monthly premiums are also based upon the members' health status as described under "Risk-Adjusted Premiums" below. MA premiums are due monthly and are recognized as revenue during the period in which we are obligated to provide services to members. Our MA contracts with CMS generally have terms of one year and expire at the end of each calendar year. We also offer coverage of prescription drug benefits under the Medicare Part D program as a component of our MA plans. See further discussion of revenue recognition policies specific to Medicare Part D in "PDP" below. 38 --------------------------------------------------------------------------------

Risk-Adjusted Premiums

CMS employs a risk-adjustment model to determine the premium amount it pays for each MA member. This model apportions premiums paid to all plans according to the health status of each beneficiary enrolled. As a result, our CMS monthly premium payments per member may change materially, either favorably or unfavorably. The CMS risk-adjustment model pays more for MA members with predictably higher costs. Diagnosis data from inpatient and ambulatory treatment settings are used to calculate the risk-adjusted premiums we receive. We collect claims and encounter data for our MA members and submit the necessary diagnosis data to CMS within prescribed deadlines. After reviewing the respective submissions, CMS establishes the premium payments to MA plans generally at the beginning of the calendar year, and then adjusts premium levels on two separate occasions on a retroactive basis. The first retroactive adjustment for a given fiscal year generally occurs during the third quarter of such fiscal year. This initial settlement (the "Initial CMS Settlement") represents the updating of risk scores for the current year based on the severity of claims incurred in the prior fiscal year. CMS then issues a final retroactive risk-adjusted premium settlement for that fiscal year in the following year (the "Final CMS Settlement"). We reassess the estimates of the Initial CMS Settlement and the Final CMS Settlement each reporting period and any resulting adjustments are made to premium revenue. We develop our estimates for MA risk-adjusted premiums utilizing historical experience and predictive models as sufficient member risk score data becomes available over the course of each CMS plan year. Our models are populated with available risk score data on our members. Risk premium adjustments are based on member risk score data from the previous year. Risk score data for members who entered our plans during the current plan year, however, is not available for use in our models; therefore, we make assumptions regarding the risk scores of this subset of our member population. All such estimated amounts are periodically updated as additional diagnosis code information is reported to CMS and adjusted to actual amounts when the ultimate adjustment settlements are either received from CMS or we receive notification from CMS of such settlement amounts. The data provided to CMS to determine the risk score is subject to audit by CMS even after the annual settlements occur. These audits may result in the refund of premiums to CMS previously received by us. While our experience to date has not resulted in a material refund, this refund could be significant in the future, which would reduce our premium revenue in the year in which CMS determines repayment is required.

PDP

We offer Medicare Part D coverage on a stand-alone basis through our PDP plans. The monthly payments received from CMS for PDP are also based upon contracts with CMS that have terms of one year and expire at the end of each calendar year. Annually, we provide written bids to CMS for our PDPs, which reflect the estimated costs of providing prescription drug benefits over the plan year. Substantially all of the premium for Medicare Part D coverage is paid by the federal government, and the balance is due from the enrolled members. Payments received under the Medicare Part D program are described below: Member Premium-We receive a monthly premium from members based on the plan year bid submitted to CMS. The member premium, which is fixed for the entire plan year, is recognized over the contract period and reported as premium revenue. We establish an allowance for uncollectible member premiums as previously discussed. CMS Direct Premium Subsidy-We receive a monthly premium from CMS based on the plan year bid submitted to CMS. The monthly payment is a risk-adjusted amount per member and is based upon the member's health status as determined by CMS, as more fully described above under "Medicare Advantage (MA), Risk Adjusted Premiums". We do not have access to diagnosis data with respect to our stand-alone PDP members and therefore, we cannot anticipate changes in our members' risk scores. Changes in CMS premiums related to risk-score adjustments for our stand-alone PDP membership are recognized when the amounts become determinable and collectability is reasonably assured, which occurs when we are notified by CMS of such adjustments. Although such adjustments have not been considered to be material in the past, future adjustments could be material. Low-Income Premium Subsidy-For qualifying low-income subsidy ("LIS") members, CMS pays for some or all of the LIS member's monthly premium. The CMS payment is dependent upon the member's income level, which is determined by the Social Security Administration. Low-Income Cost Sharing Subsidy-For qualifying LIS members, CMS reimburses plans for all or a portion of the LIS member's deductible, coinsurance and co-payment amounts above the out-of-pocket threshold. Low-income cost sharing subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the plan year bid submitted to CMS. Catastrophic Reinsurance Subsidy-CMS reimburses us for 80% of the drug costs after a member reaches his or her out-of-pocket catastrophic threshold through a catastrophic reinsurance subsidy. Catastrophic reinsurance subsidies are paid by CMS prospectively as a fixed amount per member per month, and are determined based upon the plan year bid submitted to CMS. 39 -------------------------------------------------------------------------------- Coverage Gap Discount Subsidy-Beginning in 2011, CMS requires plans and pharmaceutical manufacturers to share the cost of providing discounts on prescription drug costs to qualifying members who are in the coverage gap phase of the Medicare Part D cycle. CMS reimburses plans for the plan's share of discounts provided to qualifying members through monthly prospective payments. The prospective discount payments are determined based upon the plan year bid submitted by plan sponsors to CMS and current plan enrollment. After the close of the annual plan year, CMS reconciles our actual experience to prospective payments we received for low income cost sharing, catastrophic reinsurance, and coverage gap discount subsidies and any differences are settled between CMS and our plans. As such, these subsidies represent funding from CMS for which we assume no risk. The receipt of these subsidies and the payments of the actual prescription drug costs related to the low-income cost sharing, catastrophic reinsurance and coverage gap discounts are not recognized as premium revenues or benefits expense, but are reported on a net basis as funds receivable/held for the benefit of members in the consolidated balance sheets. These receipts and payments are reported as financing activity in our consolidated statements of cash flows. Historically, we have not experienced material adjustments related to the CMS annual reconciliation of prior plan year low-income cost sharing and catastrophic reinsurance subsidies. CMS Risk Corridor-Premiums from CMS are subject to risk sharing through the Medicare Part D risk corridor provisions. The CMS risk corridor calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in the plan year bid, to actual experience. Variances of more than 5% above the target amount will result in CMS making additional payments to plan sponsors, and variances of more than 5% below the target amount will require plan sponsors to refund to CMS a portion of the premiums received. Risk corridor payments due to or from CMS are estimated throughout the year as if the annual contract were to terminate at the end of the reporting period, and are recognized as adjustments to premium revenues and other payables to government partners. This estimate provides no consideration of future pharmacy claims experience, but does require us to consider factors that may not be certain, including: membership, risk scores, prescription drug events, or PDEs, and rebates. Approximately nine months after the close of the annual plan year, CMS reconciles actual experience to the target amount and any differences are settled between CMS and our plans. Historically, we have not experienced material adjustments related to the CMS settlement of the prior plan year risk corridor estimate.

Estimating Medical Benefits Payable and Medical Benefits Expense

 The cost of medical benefits is recognized in the period in which services are provided and includes an estimate of the cost of incurred but not reported ("IBNR") medical benefits. Medical benefits payable represents amounts for claims fully adjudicated but not yet paid and estimates for IBNR and includes direct medical expenses and medically-related administrative costs. Direct medical expenses include amounts paid or payable to hospitals, physicians and providers of ancillary services, such as laboratories and pharmacies. Such expense may also include reserves for estimated referral claims related to health care providers under contract with us who are financially troubled or insolvent and who may not be able to honor their obligations for the costs of medical services provided by other providers. In these instances, we may be required to honor these obligations for legal or business reasons. Based on our current assessment of providers under contract with us, such losses have not been and are not expected to be significant. Also, included in direct medical expense are estimates for provider settlements due to clarification of contract terms, out-of-network reimbursem*nt, claims payment differences and amounts due to contracted providers under risk-sharing arrangements. Medically-related administrative costs include items such as preventative health and wellness, care management, case and disease management, and other quality improvement costs which are included in medical benefits expense, and other costs, such as utilization review services, network and provider credentialing and claims handling costs, which are recorded in selling, general, and administrative expenses. The medical benefits payable estimate has been, and continues to be, our most significant estimate included in the consolidated financial statements. We use a consistent methodology to record management's best estimate of medical benefits payable based on the experience and information available to us at the time. This estimate is determined utilizing standard actuarial methodologies based upon historical experience and key assumptions consisting of trend factors and completion factors using an assumption of moderately adverse conditions, which vary by business segment. These standard actuarial methodologies include using, among other factors, contractual requirements, historic utilization trends, the interval between the date services are rendered and the date claims are paid, denied claims activity, disputed claims activity, benefits changes, expected health care cost inflation, seasonality patterns, maturity of lines of business and changes in membership. The factors and assumptions described above that are used to develop our estimate of medical benefits expense and medical benefits payable inherently are subject to greater variability when there is more limited experience or information available to us. The ultimate claims payment amounts, patterns and trends for new products and geographic areas cannot be precisely predicted at their onset, since we, the providers and the members do not have experience in these products or geographic areas. Standard accepted actuarial methodologies, discussed above, would allow for this inherent variability. This can result in larger differences between the originally estimated medical benefits payable and the actual claims amounts paid. Conversely, during periods where our products and geographies are more stable and mature, we have more reliable claims payment patterns and trend experience. With more reliable data, we should be able to more closely estimate the ultimate claims payment amounts; therefore, we may experience smaller differences between our original estimate of medical benefits payable and the actual claim amounts paid. 40 -------------------------------------------------------------------------------- In developing our estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For the more recent months, which constitute the majority of the amount of the medical benefits payable, we estimate claims incurred by applying observed trend factors to the fixed fee PMPM costs for prior months, which costs have been estimated using completion factors, in order to estimate the PMPM costs for the most recent months. We validate our estimates of the most recent PMPM costs by comparing the most recent months' utilization levels to the utilization levels in prior months and actuarial techniques that incorporate a historical analysis of claim payments, including trends in cost of care provided and timeliness of submission and processing of claims. Many aspects of the managed care business are not predictable. These aspects include the incidences of illness or disease (such as congestive heart failure cases, cases of upper respiratory illness, the length and severity of the flu season, diabetes, the number of full-term versus premature births and the number of neonatal intensive care babies). Therefore, we must continually monitor our historical experience in determining our trend assumptions to reflect the ever-changing mix, needs and size of our membership. Among the factors considered by management are changes in the level of benefits provided to members, seasonal variations in utilization, identified industry trends and changes in provider reimbursem*nt arrangements, including changes in the percentage of reimbursem*nts made on a capitation as opposed to a fee-for-service basis. These considerations are reflected in the trends in our medical benefits expense. Other external factors such as government-mandated benefits or other regulatory changes, catastrophes and epidemics may impact medical cost trends. Other internal factors such as system conversions and claims processing interruptions may impact our ability to accurately predict estimates of historical completion factors or medical cost trends. Medical cost trends potentially are more volatile than other segments of the economy. Management uses considerable judgment in determining medical benefits expense trends and other actuarial model inputs. We believe that the amount of medical benefits payable as of March 31, 2012 is adequate to cover our ultimate liability for unpaid claims as of that date; however, actual payments may differ from established estimates. If the completion factors we used in estimating our IBNR for the three months ended March 31, 2012 were decreased by 1%, our net income would decrease by approximately $24.2 million. If the completion factors were increased by 1%, our net income would increase by approximately $23.5 million. Changes in medical benefits payable estimates are primarily the result of obtaining more complete claims information and medical expense trend data over time. Volatility in members' needs for medical services, provider claims submissions and our payment processes result in identifiable patterns emerging several months after the causes of deviations from assumed trends occur. Since our estimates are based upon PMPM claims experience, changes cannot typically be explained by any single factor, but are the result of a number of interrelated variables, all of which influence the resulting medical cost trend. Differences between actual experience and estimates used to establish the liability, which we refer to as prior period developments, are recorded in the period when such differences become known and have the effect of increasing or decreasing the reported medical benefits expense in such periods. After determining an estimate of the base reserve, actuarial standards of practice require that a margin for uncertainty be considered in determining the estimate for unpaid claim liabilities. If a margin is included, the claim liabilities should be adequate under moderately adverse conditions. Therefore, we make an additional estimate in the process of establishing the IBNR, which also uses standard actuarial techniques, to account for adverse conditions that may cause actual claims to be higher than estimated compared to the base reserve, for which the model is not intended to account. We refer to this additional liability as the provision for moderately adverse conditions. The provision for moderately adverse conditions is a component of our overall determination of the adequacy of our IBNR reserve and the provision for moderately adverse conditions is intended to capture the potential adverse development from factors such as our entry into new geographical markets, our provision of services to new populations such as the aged, blind and disabled, the variations in utilization of benefits and increasing medical cost, changes in provider reimbursem*nt arrangements, variations in claims processing speed and patterns, claims payment, the severity of claims, and outbreaks of disease such as the flu. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNR after considering the base actuarial model reserves and the provision for moderately adverse conditions. We consistently apply our IBNR estimation methodology from period to period. We review our overall estimates of IBNR on a monthly basis. As additional information becomes known to us, we adjust our assumptions accordingly to change our estimate of IBNR. Therefore, if moderately adverse conditions do not occur, evidenced by more complete claims information in the following period, then our prior period estimates will be revised downward, resulting in favorable development. However, when a portion of the development related to the prior year incurred claims is offset by an increase determined to address moderately adverse conditions for the current year incurred claims, we do not consider that development amount as having any impact on net income during the period. If moderately adverse conditions occur and are more than we estimated, then our prior period estimates will be revised upward, resulting in unfavorable development, which would decrease current period net income. 41 -------------------------------------------------------------------------------- For the three months ended March 31, 2012 and 2011, medical benefits expense was impacted by approximately $52.4 million and $51.0 million, respectively, of net favorable development related to prior fiscal years. The net favorable prior year development in the first quarters of 2012 and 2011 was attributable to the respective preceding year's medical cost trend emerging favorably, mostly in our Medicaid segment and to a lesser extent in our MA segment, primarily due to lower than projected utilization. The factors impacting the changes in the determination of medical benefits payable discussed above were not discernible in advance. The impact became clearer over time as claim payments were processed and more complete claims information was obtained.

Goodwill and Intangible Assets

We review goodwill and other intangible assets for potential impairment at least annually, or more frequently if events or changes in circ*mstances occur that may affect the estimated useful life or the recoverability of the remaining balance of goodwill or other intangible assets. Such events or changes in circ*mstances would include significant changes in membership, state funding, federal and state government contracts and provider networks. We evaluate the potential impairment of goodwill and other intangible assets using both the income and market approach. In doing so, we must make assumptions and estimates, such as projected revenues and the discount factor, in estimating fair values. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and might produce significantly different results. We use a two-step process to review goodwill for impairment. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. An impairment loss is recognized for goodwill and intangible assets if the carrying value of such assets exceeds its fair value. We select the second quarter of each year for our annual goodwill potential impairment test, which generally coincides with the finalization of federal and state contract negotiations and our initial budgeting process, with the test completed during the third quarter of that year. As of our most recent testing date, we have determined that the estimated fair value of the Medicaid reporting segment exceeded its carrying value. Based on our review at March 31, 2012, including consideration of the termination of our Missouri and OhioMedicaid contracts as discussed in Part I - Item 1 - Note 1 - "Organization, Basis of Presentation and Significant Accounting Policies", we determined that there was no impairment of recorded goodwill and intangible assets as of March 31, 2012.

Wordcount:

14137

WELLCARE HEALTH PLANS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations. (2024)