MAGELLAN HEALTH, INC.
(Exact name of registrant as specified in its charter)

~~(860) 507-1900~~(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):

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 ~~June~~September 30, 2014 was ~~28,816,061.~~27,645,831.



PART I—Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, 2013 and ~~June~~September 30, 2014	2
	Consolidated Statements of Income—For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2013 and 2014	3
	Consolidated Statements of Comprehensive Income—For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2013 and 2014	4
	Consolidated Statements of Cash Flows—For the ~~Six~~Nine Months Ended ~~June~~September 30, 2013 and 2014	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	3536
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	5457
Item 4:	Controls and Procedures	5557
PART II—Other Information:
Item 1:	Legal Proceedings	5658
Item 1A:	Risk Factors	5658
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	5658
Item 3:	Defaults Upon Senior Securities	5759
Item 4:	Mine Safety Disclosures	5759
Item 5:	Other Information	5759
Item 6:	Exhibits	5860
Signatures		5961

	December 31, 2013			June 30, 2014 (unaudited)						(unaudited)

							December 31, 2013			September 30, 2014
ASSETS
Current Assets:
Cash and cash equivalents	$	203,187		$	185,777		$	203,187		$	368,273
Restricted cash		236,696			167,313			236,696			165,166
Accounts receivable, less allowance for doubtful accounts of $5,447 and $5,197 at December 31, 2013 and June 30, 2014, respectively		238,185			301,869
Short-term investments (restricted investments of $117,674 and $138,929 at December 31, 2013 and June 30, 2014, respectively)		175,883			147,861
Accounts receivable, less allowance for doubtful accounts of $5,447 and $4,763 at December 31, 2013 and September 30, 2014, respectively								238,185			302,682
Short-term investments (restricted investments of $117,674 and $128,043 at December 31, 2013 and September 30, 2014, respectively)								175,883			150,558
Deferred income taxes		37,530			36,945			37,530			36,090
Pharmaceutical inventory		49,609			44,277			49,609			40,899
Other current assets (restricted deposits of $25,009 and $29,340 at December 31, 2013 and June 30, 2014, respectively)		48,268			72,732
Other current assets (restricted deposits of $25,009 and $32,692 at December 31, 2013 and September 30, 2014, respectively)								48,268			67,172


Total Current Assets		989,358			956,774			989,358			1,130,840
Property and equipment, net		172,333			172,048			172,333			175,521
Restricted long-term investments		32,430			23,494			32,430			50,866
Other long-term assets		7,197			9,962			7,197			11,601
Goodwill		488,206			557,425			488,206			566,106
Other intangible assets, net		69,694			146,985			69,694			140,313


Total Assets	$	1,759,218		$	1,866,688		$	1,759,218		$	2,075,247



LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	42,853		$	63,563		$	42,853		$	65,382
Accrued liabilities		134,652			144,588			134,652			121,408
Medical claims payable		228,341			234,645			228,341			281,133
Other medical liabilities		67,416			79,543			67,416			54,338
Current maturities of long-term capital lease obligations		3,005			2,909
Current maturities of long-term debt and capital lease obligations								3,005			15,484


Total Current Liabilities		476,267			525,248			476,267			537,745
Long-term capital lease obligations		23,720			21,947
Long-term debt and capital lease obligations								23,720			258,868
Deferred income taxes		42,046			40,581			42,046			43,069
Tax contingencies		32,343			34,179			32,343			14,217
Contingent consideration		—			43,745			—			47,941
Deferred credits and other long-term liabilities		17,803			21,169			17,803			21,744


Total Liabilities		592,179			686,869			592,179			923,584


Redeemable non-controlling interest		10,554			8,555			10,554			7,200
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2013 and June 30, 2014—Issued and outstanding—none		—			—
Authorized—10,000 shares at December 31, 2013 and September 30, 2014—Issued and outstanding—none								—			—
Ordinary common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2013 and June 30, 2014—Issued and outstanding—47,351 shares and 27,616 shares at December 31, 2013, respectively, and 49,688 and 28,816 shares at June 30, 2014, respectively		474			497
Authorized—100,000 shares at December 31, 2013 and September 30, 2014—Issued and outstanding—47,351 shares and 27,616 shares at December 31, 2013, respectively, and 49,834 and 27,646 shares at September 30, 2014, respectively								474			498
Multi-Vote common stock, par value $.01 per share
Authorized—40,000 shares at December 31, 2013 and June 30, 2014—Issued and outstanding—none		—			—
Authorized—40,000 shares at December 31, 2013 and September 30, 2014—Issued and outstanding—none								—			—
Other Stockholders' Equity:
Additional paid-in capital		922,325			973,611			922,325			994,728
Retained earnings		1,100,493			1,131,199			1,100,493			1,158,332
Accumulated other comprehensive (loss) income		(93	)		20
Ordinary common stock in treasury, at cost, 19,735 shares and 20,872 shares at December 31, 2013 and June 30, 2014, respectively		(866,714	)		(934,063	)
Accumulated other comprehensive loss								(93	)		(91	)
Ordinary common stock in treasury, at cost, 19,735 shares and 22,188 shares at December 31, 2013 and September 30, 2014, respectively								(866,714	)		(1,009,004	)


Total Stockholders' Equity		1,156,485			1,171,264			1,156,485			1,144,463


Total Liabilities, Redeemable Non-Controlling Interest and Stockholders' Equity	$	1,759,218		$	1,866,688		$	1,759,218		$	2,075,247

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,

	2013			2014			2013			2014			2013			2014			2013			2014
Net revenue:
Managed care and other	$	746,720		$	682,274		$	1,469,309		$	1,511,865		$	770,113		$	703,020		$	2,239,422		$	2,214,885
PBM and dispensing		96,028			205,740			195,200			342,624			103,485			220,150			298,685			562,774


Total net revenue		842,748			888,014			1,664,509			1,854,489			873,598			923,170			2,538,107			2,777,659


Cost and expenses:
Cost of care		537,630			481,617			1,062,657			1,087,325			564,537			495,180			1,627,194			1,582,505
Cost of goods sold		90,175			192,566			183,687			317,864			97,503			202,180			281,190			520,044
Direct service costs and other operating expenses(1)		144,497			179,034			284,124			343,756			156,834			176,928			440,958			520,684
Depreciation and amortization		16,946			22,480			33,116			42,709			17,654			23,956			50,770			66,665
Interest expense		792			2,004			1,402			2,840			789			2,879			2,191			5,719
Interest income		(358	)		(275	)		(711	)		(586	)		(291	)		(241	)		(1,002	)		(827	)


Total costs and expenses		789,682			877,426			1,564,275			1,793,908			837,026			900,882			2,401,301			2,694,790


Income before income taxes		53,066			10,588			100,234			60,581			36,572			22,288			136,806			82,869
Provision for income taxes		21,586			6,261			40,696			31,874
(Benefit) provision for income taxes														(10,660	)		(3,490	)		30,036			28,384


Net income		31,480			4,327			59,538			28,707			47,232			25,778			106,770			54,485
Less: net income (loss) attributable to non-controlling interest		—			(659	)		—			(1,999	)		—			(1,355	)		—			(3,354	)


Net income attributable to Magellan Health, Inc.	$	31,480		$	4,986		$	59,538		$	30,706		$	47,232		$	27,133		$	106,770		$	57,839



Net income per common share attributable to Magellan Health, Inc.:
Basic (See Note B)	$	1.17		$	0.18		$	2.21		$	1.13		$	1.75		$	1.02		$	3.96		$	2.14
Diluted (See Note B)	$	1.15		$	0.18		$	2.17		$	1.10		$	1.70		$	1.00		$	3.87		$	2.09

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,					Nine Months Ended September 30,

	2013			2014			2013			2014			2013		2014			2013			2014
Net income	$	31,480		$	4,327		$	59,538		$	28,707		$	47,232	$	25,778		$	106,770		$	54,485
Other comprehensive income:
Unrealized (losses) gains on available-for-sale securities(1)		(70	)		70			(147	)		113
Unrealized gains (losses) on available-for-sale securities(1)														110		(111	)		(37	)		2


Comprehensive income		31,410			4,397			59,391			28,820			47,342		25,667			106,733			54,487
Less: comprehensive income (loss) attributable to non-controlling interest		—			(659	)		—			(1,999	)		—		(1,355	)		—			(3,354	)


Comprehensive income attributable to Magellan Health, Inc.	$	31,410		$	5,056		$	59,391		$	30,819		$	47,342	$	27,022		$	106,733		$	57,841

	2013			2014			2013			2014

Cash flows from operating activities:
Net income	$	59,538		$	28,707		$	106,770		$	54,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		33,116			42,709			50,770			66,665
Non-cash interest expense		368			1,572			552			3,888
Non-cash stock compensation expense		10,240			14,022			14,764			25,983
Non-cash income tax expense (benefit)		1,335			(1,558	)
Non-cash income tax (benefit) expense								(164	)		813
Non-cash amortization on investments		4,884			2,653			7,273			3,620
Realized loss on sale of investments		—			50			—			40
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash		37,086			69,383			17,987			71,530
Accounts receivable, net		(27,361	)		(15,752	)		(19,231	)		(19,492	)
Pharmaceutical inventory		(4,150	)		5,332			(1,680	)		8,710
Other assets		(8,281	)		(27,675	)		(9,781	)		(22,378	)
Accounts payable and accrued liabilities		(29,643	)		(5,434	)		6,685			(28,461	)
Medical claims payable and other medical liabilities		6,384			18,657			16,144			39,940
Tax contingencies		1,349			1,164			(22,981	)		(15,179	)
Deferred credits and other long-term liabilities		373			3,366			2,221			3,940
Other		1,671			(145	)		1,953			138


Net cash provided by operating activities		86,909			137,051			171,282			194,242


Cash flows from investing activities:
Capital expenditures		(27,035	)		(32,007	)		(42,091	)		(50,597	)
Acquisitions and investments in businesses, net of cash acquired		(7,900	)		(124,995	)		—			(132,210	)
Purchase of investments		(165,372	)		(112,088	)		(235,946	)		(216,958	)
Maturity of investments		139,068			146,532			233,723			220,191
Other								(7,900	)		—


Net cash used in investing activities		(61,239	)		(122,558	)		(52,214	)		(179,574	)


Cash flows from financing activities:
Proceeds from issuance of debt								—			250,000
Payments to acquire treasury stock		(49,462	)		(65,254	)		(49,462	)		(139,316	)
Proceeds from exercise of stock options and warrants		16,110			34,197			24,548			41,685
Payments on capital lease obligations		(1,816	)		(2,087	)		(2,310	)		(2,606	)
Other		(747	)		1,241			484			655


Net cash used in financing activities		(35,915	)		(31,903	)
Net cash (used in) provided by financing activities								(26,740	)		150,418


Net decrease in cash and cash equivalents		(10,245	)		(17,410	)
Net increase in cash and cash equivalents								92,328			165,086
Cash and cash equivalents at beginning of period		189,464			203,187			189,464			203,187


Cash and cash equivalents at end of period	$	179,219		$	185,777		$	281,792		$	368,273



Supplemental cash flow data:
Non-cash investing activites:
Property and equipment acquired under capital leases	$	29,323		$	216		$	29,323		$	216

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation ("Magellan"), include the accounts of Magellan, its majority owned subsidiaries, and all variable interest entities ("VIEs") for which Magellan is the primary beneficiary (together with Magellan, the "Company"). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission's (the "SEC") instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2014 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 G—F—"Subsequent Events", the Company did not have any material recognizable 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, 2013 and the notes thereto, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 3, 2014.

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, managed care organizations ("MCOs"), insurance companies, employers, labor unions, various military and governmental agencies, third party administrators, consultants and brokers. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

Two of the Company's segments are in the managed healthcare business. This line of business reflects the Company's: (i) management of behavioral healthcare services, and (ii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care ("MCC"). The Company's coordination and management of physical and behavioral healthcare includes services 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 enhance the healthcare experience for individuals in need of care, while at the same time managing the cost of these services for our customers. The treatment services provided through the Company's ~~provider network include outpatient programs, intermediate care programs, inpatient treatment and~~

provider network include outpatient programs, intermediate care programs, inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

The Company's integrated management of physical and behavioral healthcare includes its full service health plans which provide for the holistic management of special populations. These special populations include individuals with serious mental illness, dual eligibles, those eligible for long term care and other populations with unique and often complex healthcare needs.

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

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

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

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

The Specialty Solutions segment ("Specialty Solutions") generally reflects the management of the delivery of diagnostic imaging (radiology benefits management or "RBM") and a variety of other specialty areas such as radiation oncology, obstetrical ultrasound, cardiology and musculoskeletal management to ensure that such services are clinically appropriate and cost effective. The Company's Specialty Solutions services are currently provided under contracts with health plans and insurance companies for some or all of their commercial, Medicaid and Medicare members. The Company also contracts with state and local governmental agencies for the provision of such services to Medicaid recipients. The Company offers its Specialty Solutions services through risk-based contracts, where the Company assumes all or a substantial portion of the responsibility for the cost of providing services,

and through ASO contracts, where the Company provides services such as utilization review and claims administration, but does not assume responsibility for the cost of the services.

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 drugs that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In addition, the Company had a subcontract arrangement to provide PBM services on a risk basis for one of Public Sector's customers, which terminated on March 31, 2014.

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.

In July 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-06, "Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2011-06"), which addresses how fees mandated by the Patient Protection and the Affordable Care Act ("ACA"), as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law"), should be recognized and classified in the income statements of health insurers. The Health Reform Law imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. ASU 2011-06 stipulates that the liability incurred for that fee be amortized to expense over the calendar year in which it is payable. This ASU is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The Company is currently pursuing rate adjustments to 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 a state public sector 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. As of June 30, 2014, the Company has obtained signed commitments from four of its customers to recover the economic impact of the ACA fees. For 2014, the projected ACA fee is currently estimated to be $21.3 million and is included in accrued liabilities in the consolidated balance sheets. Of this amount $5.6 million and $10.7 million was expensed in the

may have a material impact on the Company. As of September 30, 2014, the Company has obtained signed commitments from six of its customers to recover the economic impact of the ACA fees. For 2014, the projected ACA fee is currently estimated to be $21.4 million and is included in accrued liabilities in the consolidated balance sheets. Of this amount $5.4 million and $16.1 million was expensed in the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively, which is included in direct service costs and other operating expenses in the consolidated statements of income. The Company has recorded revenues of ~~$10.9~~$8.8 million and ~~$14.1~~$22.9 million in the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively, associated with the accrual for the reimbursement of the economic impact of the ACA fees from its customers. Of the revenues recorded in the three months ended June 30, 2014, $4.8 million are associated with the three months ended March 31, 2014, due to signed commitments obtained in the three months ended June 30, 2014.

In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013 and were adopted by the Company during the quarter ended March 31, 2014. The effect of the guidance is immaterial to the Company's consolidated results of operations, financial position, and cash flows.

In May 2014, the FASB issued 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. This ASU is effective for calendar years beginning after December 15, 2016. The Company is currently assessing the potential impact this ASU will have on the Company's consolidated results of ~~operation,~~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.

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.~~

payable, other medical liabilities, contingent consideration, stock compensation assumptions, tax contingencies and legal liabilities. Actual results could differ from those estimates.

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 ~~$654.6~~$673.6 million and ~~$1,284.3~~$1,957.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$595.1~~$611.4 million and ~~$1,323.9~~$1,935.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, 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 ACA fees billed on a cost reimbursement basis. Revenues from these contracts approximated ~~$51.0~~$52.6 million and ~~$100.3~~$152.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$73.0~~$72.9 million and ~~$132.7~~$205.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively.

Block Grant Revenues. The Maricopa Contract (as defined below) was partially funded by federal, state and county block grant money, which represents annual appropriations. The Company recognizes revenue from block grant activity ratably over the period to which the block grant funding applies. Block grant revenues were approximately ~~$31.4~~$32.3 million and ~~$64.6~~$96.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and $0.0 million and ~~$33.0~~$33.3 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively.

Performance-Based Revenue. The Company has the ability to earn performance-based revenue under certain risk and non-risk contracts. Performance-based revenue generally is based on either the ability of the Company to manage care for its clients below specified targets, or on other operating metrics. For each such contract, the Company estimates and records performance-based revenue after considering the relevant contractual terms and the data available for the performance-based revenue calculation. Pro-rata performance-based revenue may be recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts. Performance-based revenues were ~~$1.5~~$2.7 million and ~~$3.4~~$6.1 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$2.4~~$1.6 million and ~~$5.4~~$7.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively.

Rebate Revenue. The Company administers a rebate program for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Each period, the Company estimates the total rebates earned based on actual volumes of pharmaceutical purchases by the Company's clients, as well as historical and/or anticipated sharing percentages. The Company earns fees based upon the volume of rebates generated for its clients. The Company does not record as rebate revenue any rebates that are passed through to its clients. Total rebate revenues were ~~$8.1~~$8.8 million and ~~$16.8 million for the three~~

~~and six months ended June 30, 2013, respectively, and $9.2 million and $13.3~~$25.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and $14.3 million and $27.6 million for the three and nine months ended September 30, 2014, 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 are recorded as a reduction of cost of goods sold.

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 were ~~$5.5~~$5.9 million and ~~$10.5~~$16.4 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$146.3~~$155.7 million and ~~$227.5~~$383.2 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively. The increase mainly relates to the October 1, 2013 acquisition of Partners Rx Management, LLC ("Partners Rx").

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 ~~$90.6~~$97.6 million and ~~$184.7~~$282.4 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$59.4~~$64.5 million and ~~$115.1~~$179.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, 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 ~~$367.2~~$557.6 million and ~~$209.5~~$213.3 million for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, respectively.

In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014 (in thousands):

Segment	Term Date	2013			2014			Term Date	2013			2014

Commercial
Customer A	June 30, 2014(1)	$	103,460		$	110,492		June 30, 2014(1)	$	156,269		$	110,138
Customer B	December 31, 2019		70,919			90,923		December 31, 2019		106,433			138,944
Customer C	August 14, 2017		29,537	*		47,769		August 14, 2017		47,625	*		76,863
Customer D	December 14, 2013(1)		38,776			—		December 14, 2013(1)		58,246			—
Public Sector
Customer E	June 30, 2015		129,471			213,000		June 30, 2015 to July 1, 2016(2)		215,396			337,893
Specialty Solutions
Customer E	December 31, 2015		60,602			69,988
Customer F	June 30, 2016(2)		30,580			26,515		December 31, 2015		96,402			109,138
Customer G	July 31, 2015		32,708			34,901		June 30, 2016(3)		43,490			28,046
Customer H								July 31, 2015		47,161			55,768
Customer A	November 30, 2016		1,154	*		26,577		November 30, 2016		1,623	*		40,003
Customer H	January 31, 2016		22,230			24,593
Customer I								January 31, 2016		34,338			38,282
Pharmacy Management
Customer I	November 30, 2014 to December 31, 2014(3)		65,335			60,972
Customer J	December 31, 2013(4)		43,274			1,267	*	November 30, 2014 to December 31, 2014(2)		99,599			92,793
Customer K	March 31, 2014(1)(5)		31,466			18,055	*	December 31, 2013(4)		68,166			2,339	*
Customer L								March 31, 2014(1)(5)		48,527			18,055	*
Customer M								December 16, 2016		—			105,079

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 ~~$178.0~~$269.1 million and ~~$179.0~~$272.0 million for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, respectively.

In addition, the Company has a significant concentration of business with the State of Florida. The Company currently has behavioral healthcare contracts with various areas in the State of Florida (the "Florida Areas") which are part of the Florida Medicaid program. The State of Florida ~~is implementing~~implemented a new system of mandated managed care through which Medicaid enrollees will receive integrated healthcare services, and ~~by July 31, 2014 it will phase~~has phased out the behavioral healthcare programs under which the Florida Areas' contracts ~~operate.~~operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program. Net revenues from the State of Florida in the aggregate totaled ~~$66.3~~$98.0 million and ~~$56.5~~$143.9 million for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, 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.

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:

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, 2013 and ~~June~~September 30, 2014 (in thousands):

	December 31, 2013								December 31, 2013

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(1)	$	—	$	101,028	$	—	$	101,028	$	—	$	101,028	$	—	$	101,028
Restricted cash(2)		—		128,318		—		128,318		—		128,318		—		128,318
Investments:
U.S. government and agency securities		1,129		—		—		1,129		1,129		—		—		1,129
Obligations of government-sponsored enterprises(3)		—		8,440		—		8,440		—		8,440		—		8,440
Corporate debt securities		—		198,594		—		198,594		—		198,594		—		198,594
Certificates of deposit		—		150		—		150		—		150		—		150


Total assets held at fair value	$	1,129	$	436,530	$	—	$	437,659	$	1,129	$	436,530	$	—	$	437,659

	June 30, 2014								September 30, 2014

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents(4)	$	—	$	72,729	$	—	$	72,729	$	—	$	73,194	$	—	$	73,194
Restricted cash(5)		—		71,911		—		71,911		—		76,428		—		76,428
Investments:
U.S. government and agency securities		2,078		—		—		2,078		2,393		—		—		2,393
Obligations of government-sponsored enterprises(3)		—		8,707		—		8,707		—		15,222		—		15,222
Corporate debt securities		—		159,420		—		159,420		—		182,659		—		182,659
Certificates of deposit		—		1,150		—		1,150		—		1,150		—		1,150


Total assets held at fair value	$	2,078	$	313,917	$	—	$	315,995	$	2,393	$	348,653	$	—	$	351,046



Liabilities
Contingent consideration	$	—	$	—	$	46,982	$	46,982		—		—		51,981		51,981


Total liabilities held at fair value	$	—	$	—	$	46,982	$	46,982	$	—	$	—	$	51,981	$	51,981

For the ~~six~~nine months ended ~~June~~September 30, 2014, 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 $250 million as of September 30, 2014 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 ~~values~~value of potential future payments related to the CDMI, LLC ("CDMI") ~~acquisition.~~and Cobalt Technologies, LLC ("Cobalt") 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 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 ~~client base.~~new contract execution. The projected revenues, gross profits, ~~and~~ 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. 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.

The following unobservable inputs were used in the fair value measurement of contingent consideration: (i) discount rate of 14.5 percent; (ii) probabilities of payment of 0.2 ~~percent~~ to 75.9 ~~percent;~~percent for CDMI and zero to 69.9 percent for Cobalt; and (iii) projected payment dates of 2015 to 2017. As of the acquisition date, the Company estimated undiscounted future contingent payments of $61.7 ~~million.~~million and $4.2 million for CDMI and Cobalt, respectively. As of ~~June~~September 30, 2014, the fair value of the short term and long term contingent consideration was ~~$47.0~~$4.0 million and $48.0 million, respectively, and is included in accrued liabilities and contingent liabilities, respectively, in the consolidated balance sheet. The change in the present value of the contingent consideration was ~~$1.2~~$1.9 million and $3.1 million for the three months and ~~six~~nine months ended ~~June~~September 30, 2014 and was recorded as interest expense in the consolidated statements of income.

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

	June 30, 2014		September 30, 2014

Balance as of beginning of period	$	—	$	—
Acquisition of CDMI		45,778		45,778
Acquisition of Cobalt				3,071
Interest accretion		1,204		3,132


Balance as of end of period	$	46,982	$	51,981

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. 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-

~~that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary~~than-temporary impairment is recognized in other-than-temporary impairment losses recognized in income in the consolidated statements of income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income.

As of December 31, 2013 and ~~June~~September 30, 2014, there were no unrealized losses that the Company believed to be other-than-temporary. No realized gains or losses were recorded for the ~~six~~nine months ended ~~June~~September 30, 2013. During the ~~six~~nine months ended ~~June~~September 30, 2014, the Company recognized a $0.1 million loss on the sale of investments. The following is a summary of short-term and long-term investments at December 31, 2013 and ~~June~~September 30, 2014 (in thousands):

	June 30, 2014									September 30, 2014

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government and agency securities	$	2,078	$	1	$	(1	)	$	2,078	$	2,394	$	—	$	(1	)	$	2,393
Obligations of government-sponsored enterprises(1)		8,707		2		(2	)		8,707		15,222		2		(2	)		15,222
Corporate debt securities		159,387		64		(31	)		159,420		182,809		27		(177	)		182,659
Certificates of deposit		1,150		—		—			1,150		1,150		—		—			1,150


Total investments at June 30, 2014	$	171,322	$	67	$	(34	)	$	171,355
Total investments at September 30, 2014										$	201,575	$	29	$	(180	)	$	201,424

The maturity dates of the Company's investments as of ~~June~~September 30, 2014 are summarized below (in thousands):

	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

2014	$	97,491	$	97,489	$	32,325	$	32,297
2015		69,149		69,186		141,233		141,169
2016		4,682		4,680		28,017		27,958


Total investments at June 30, 2014	$	171,322	$	171,355
Total investments at September 30, 2014					$	201,575	$	201,424

The Company's effective income tax rates were ~~40.6~~22.0 percent and ~~52.6~~34.3 percent for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, 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.~~contingencies and valuation allowances. The Company also accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The effective income tax rate for the ~~six~~nine months ended ~~June~~September 30, 2013 is lower than the effective rate for the ~~six~~nine months ended ~~June~~September 30, 2014 mainly due to the non-deductible ACA fees, lower reversals of tax contingencies in the current year from the closure of statutes of limitation, and ~~valuations~~increased valuation allowances in the current year for certain deferred tax assets.

The Company files a consolidated federal income tax return for the Company and its eighty percent or more owned subsidiaries, and the Company and its subsidiaries file income tax returns in various ~~states~~state and local jurisdictions. With few exceptions, the Company is no longer subject to state or local income tax assessments by tax authorities for years ended prior to 2010. Further, the statutes of limitation regarding the assessment of federal and certain state and local income taxes for 2010 closed during the current quarter. As a result, $18.7 million of unrecognized tax benefits (excluding interest costs) recorded as of December 31, 2013 were reversed in the current quarter, of which $15.6 million is 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 current quarter and reflected as a reduction to income tax expense due to the closing of statutes of limitation on tax assessments.

At December 31, 2013 and ~~June~~September 30, 2014, 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, 2013. The Company recorded stock compensation expense of ~~$4.6~~$4.5 million and ~~$10.2~~$14.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013 and ~~$9.5~~$11.9 million and ~~$14.0~~$26.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively. Stock compensation expense recognized in the consolidated statements of income for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014 has been reduced for forfeitures, estimated at four percent for both periods.

The weighted average grant date fair value of all stock options granted during the ~~six~~nine months ended ~~June~~September 30, 2014 was ~~$13.61~~$13.55 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of 26.20 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 ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, ~~$0.5~~$1.1 million and ~~$2.4~~$2.8 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 ~~six~~nine months ended ~~June~~September 30, 2013, the net change to additional paid in capital related to tax benefits (deficiencies) was $(0.1) million, which includes $(0.6) million of excess tax deficiencies offset by the $0.5 million of excess tax benefits. For the six months ended June 30, 2014, the net change to additional paid in capital related to tax benefits (deficiencies) was $2.1 million, which includes the $2.4 million of excess tax benefits offset by $(0.3) million of excess tax deficiencies.

benefits (deficiencies) was $0.4 million, which includes the $1.1 million of excess tax benefits offset by $(0.7) million of excess tax deficiencies. 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 the $2.8 million of excess tax benefits offset by $(0.3) million of excess tax deficiencies.

Summarized information related to the Company's stock options for the ~~six~~nine months ended ~~June~~September 30, 2014 is as follows:

			Weighted Average Exercise Price				Weighted Average Exercise Price

Outstanding, beginning of period	4,010,146		$	47.23	4,010,146		$	47.23
Granted	654,636			60.22	729,636			59.89
Forfeited	(137,472	)		52.91	(232,948	)		53.91
Exercised	(813,867	)		44.54	(941,070	)		44.27


Outstanding, end of period	3,713,443		$	49.90	3,565,764		$	50.17



Vested and expected to vest at end of period	3,670,859		$	49.83	3,530,403		$	50.11



Exercisable, end of period	2,037,633		$	46.00	1,911,740		$	46.20

All of the Company's options granted during the ~~six~~nine months ended ~~June~~September 30, 2014 vest ratably on each anniversary date over the three years subsequent to grant. All options granted during the ~~six~~nine months ended ~~June~~September 30, 2014 have a ten year life.

Summarized information related to the Company's nonvested restricted stock awards ("RSAs") for the ~~six~~nine months ended ~~June~~September 30, 2014 is as follows:

Summarized information related to the Company's nonvested restricted stock units ("RSUs") for the ~~six~~nine months ended ~~June~~September 30, 2014 is as follows:

			Weighted Average Grant Date Fair Value				Weighted Average Grant Date Fair Value

Outstanding, beginning of period	194,913		$	50.21	194,913		$	50.21
Awarded	76,306			60.39	76,306			60.39
Vested	(90,177	)		49.55	(91,510	)		49.53
Forfeited	(11,293	)		54.05	(18,079	)		54.77


Outstanding, ending of period	169,749		$	54.88	161,630		$	54.89

The vesting period for RSAs ~~generally vest on the anniversary of the grant.~~ranges from 12 months to 42 months. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant, assuming that the associated performance hurdle(s) for that vesting year are met.

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

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

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"). ~~See Note G—"Subsequent Events" for more information on~~At such point, the 2011 Credit Facility was terminated. The 2014 Credit ~~Facility.~~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, 2014, the term loan bore interest at a rate of 1.50 percent plus the London Interbank Offered Rate ("LIBOR"). As of September 30, 2014, the one-month interest rate was 1.654 percent. As of September 30, 2014, the contractual maturities of the term loan were as follows: 2014—$3.1 million; 2015—$12.5 million; 2016-$15.6 million; 2017—$25.0 million; 2018—$25.0 million; and 2019—$168.8 million.

There were $26.7 million and ~~$24.9~~$24.4 million of capital lease obligations at December 31, 2013 and ~~June~~September 30, 2014, respectively. The Company had $33.7 million and $32.9 million of letters of credit outstanding at December 31, 2013 and ~~June~~September 30, 2014, respectively, and no revolving loan borrowings at December 31, 2013 or ~~June~~September 30, 2014.

The Company is required to test its goodwill for impairment on at least an annual basis and more frequently if indicators of impairment exist. The Company has selected October 1 as the date of its annual impairment test. Goodwill for each of the Company's reporting units at December 31, 2013 and ~~June~~September 30, 2014 were as follows (in thousands):

~~The changes in the carry amount of goodwill for the year ended December 31, 2013 and the six months ended June 30, 2014 are reflected in the table below (in thousands):~~

The changes in the carry amount of goodwill for the year ended December 31, 2013 and the nine months ended September 30, 2014 are reflected in the table below (in thousands):

The following is a summary of intangible assets at December 31, 2013 and ~~June~~September 30, 2014, and the estimated useful lives for such assets (in thousands):

	December 31, 2013								December 31, 2013

Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	2.5 to 18 years	$	163,990	$	(100,482	)	$	63,508	2.5 to 18 years	$	163,990	$	(100,482	)	$	63,508
Provider networks and other	1 to 16 years		11,593		(5,407	)		6,186	1 to 16 years		11,593		(5,407	)		6,186


		$	175,583	$	(105,889	)	$	69,694		$	175,583	$	(105,889	)	$	69,694

	June 30, 2014								September 30, 2014

Asset	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer agreements and lists	2.5 to 18 years	$	249,290	$	(109,407	)	$	139,883	2.5 to 18 years	$	249,390	$	(115,598	)	$	133,792
Provider networks and other	1 to 16 years		13,193		(6,091	)		7,102	1 to 16 years		13,013		(6,492	)		6,521


		$	262,483	$	(115,498	)	$	146,985		$	262,403	$	(122,090	)	$	140,313

Amortization expense was $2.3 million and ~~$4.6~~$6.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and ~~$5.7~~$6.6 million and ~~$9.6~~$16.2 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively. The Company estimates amortization expense will be $22.8 million, $25.0 million, $20.7 million, $16.9 million and $15.4 million for the years ended December 31, 2014, 2015, 2016, 2017, and 2018, respectively.

On December 31, 2013, the Company acquired a 65% equity interest in AlphaCare Holdings, Inc. ("AlphaCare Holdings"). The other shareholders of AlphaCare Holdings have the right to exercise put options, requiring the Company to purchase up to ~~50 percent~~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 interest. 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 Company recorded $10.6 million of redeemable non-controlling interest in relation to the acquisition. The carrying value of the ~~non-controlling~~non- controlling interest as of ~~June~~September 30, 2014 was ~~$8.6~~$7.2 million. The ~~$2.0~~$3.4 million reduction in carrying

value for the ~~six~~nine months ended ~~June~~September 30, 2014 is a result of 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 ~~June~~September 30, 2014, the carrying value of the non-controlling interest exceeded the redemption value and therefore no adjustment to the carrying value was required.

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

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

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,

	2013		2014		2013		2014		2013		2014		2013		2014
Numerator:
Net income attributable to Magellan Health, Inc.	$	31,480	$	4,986	$	59,538	$	30,706	$	47,232	$	27,133	$	106,770	$	57,839



Denominator:
Weighted average number of common shares outstanding—basic		26,829		27,144		26,968		27,257		26,990		26,703		26,976		27,070
Common stock equivalents—stock options		497		554		482		574		655		404		539		517
Common stock equivalents—restricted stock		10		66		14		49		4		133		11		77
Common stock equivalents—restricted stock units		—		—		26		27		54		—		35		18
Common stock equivalents—employee stock purchase plan		2		1		2		1		1		2		2		2


Weighted average number of common shares outstanding—diluted		27,338		27,765		27,492		27,908		27,704		27,242		27,563		27,684



Net income attributable to Magellan Health, Inc. per common share—basic	$	1.17	$	0.18	$	2.21	$	1.13	$	1.75	$	1.02	$	3.96	$	2.14



Net income attributable to Magellan Health, Inc. per common share—diluted	$	1.15	$	0.18	$	2.17	$	1.10	$	1.70	$	1.00	$	3.87	$	2.09

The weighted average number of common shares outstanding for the three and ~~six~~nine months ended ~~June~~September 30, 2013 and 2014 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 ~~six~~nine months ended ~~June~~September 30, 2013 and 2014 represent stock options to purchase shares of the Company's common stock, restricted stock awards and restricted stock units, and stock purchased under the Employee Stock Purchase Plan.

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

The Company had additional potential dilutive securities outstanding representing ~~1.2~~0.9 million and ~~1.9~~0.9 million options for the three and ~~six~~nine months ended ~~June~~September 30, 2013, respectively, and 0.7 million and ~~0.5~~0.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014, 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.

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 attributable to Magellan shareholders, which is defined as income before taxes, excluding stock compensation expense, non-controlling interest segment profit (loss), depreciation and amortization, interest expense, interest income, gain on sale of assets, and special charges or benefits ("Segment Profit"). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Public Sector subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Public Sector'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 care, 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):

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2013
Three Months Ended September 30, 2013
Managed care and other revenue	$	199,538		$	414,859		$	92,715		$	55,829		$	(16,221	)	$	746,720		$	190,655		$	445,260		$	94,125		$	57,164		$	(17,091	)	$	770,113
PBM and dispensing revenue		—			—			—			96,028			—			96,028			—			—			—			103,485			—			103,485
Cost of care		(123,227	)		(357,402	)		(58,742	)		(14,480	)		16,221			(537,630	)		(118,022	)		(382,913	)		(65,403	)		(15,290	)		17,091			(564,537	)
Cost of goods sold		—			—			—			(90,175	)		—			(90,175	)		—			—			—			(97,503	)		—			(97,503	)
Direct service costs and other		(41,399	)		(28,934	)		(13,863	)		(31,374	)		(28,927	)		(144,497	)		(47,032	)		(27,826	)		(13,990	)		(32,281	)		(35,705	)		(156,834	)
Stock compensation expense(1)		133			267			457			380			3,365			4,602			124			259			384			198			3,559			4,524


Segment profit (loss)	$	35,045		$	28,790		$	20,567		$	16,208		$	(25,562	)	$	75,048		$	25,725		$	34,780		$	15,116		$	15,773		$	(32,146	)	$	59,248

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2014
Three Months Ended September 30, 2014
Managed care and other revenue	$	198,025		$	319,954		$	119,326		$	44,969		$	—		$	682,274		$	144,257		$	388,682		$	120,808		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			—			—			209,265			(3,525	)		205,740			—			—			—			241,226			(21,076	)		220,150
Cost of care		(116,852	)		(275,108	)		(89,753	)		96			—			(481,617	)		(71,264	)		(337,128	)		(86,787	)		(1	)		—			(495,180	)
Cost of goods sold		—			—			—			(196,080	)		3,514			(192,566	)		—			—			—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(42,530	)		(45,391	)		(17,897	)		(41,605	)		(31,611	)		(179,034	)		(37,513	)		(45,789	)		(17,843	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		157			230			354			5,556			3,253			9,550			164			225			269			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		—			(648	)		—			—			—			(648	)		—			(1,323	)		—			—			—			(1,323	)


Segment profit (loss)	$	38,800		$	333		$	12,030		$	22,201		$	(28,369	)	$	44,995		$	35,644		$	7,313		$	16,447		$	29,834		$	(27,072	)	$	62,166

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2013
Nine Months Ended September 30, 2013
Managed care and other revenue	$	387,375		$	821,479		$	182,993		$	108,928		$	(31,466	)	$	1,469,309		$	578,030		$	1,266,739		$	277,118		$	166,092		$	(48,557	)	$	2,239,422
PBM and dispensing revenue		—			—			—			195,200			—			195,200			—			—			—			298,685			—			298,685
Cost of care		(236,498	)		(712,781	)		(116,809	)		(28,035	)		31,466			(1,062,657	)		(354,520	)		(1,095,694	)		(182,212	)		(43,325	)		48,557			(1,627,194	)
Cost of goods sold		—			—			—			(183,687	)		—			(183,687	)		—			—			—			(281,190	)		—			(281,190	)
Direct service costs and other		(82,791	)		(54,577	)		(27,234	)		(60,935	)		(58,587	)		(284,124	)		(129,823	)		(82,403	)		(41,224	)		(93,216	)		(94,292	)		(440,958	)
Stock compensation expense(1)		266			574			891			700			7,809			10,240			390			833			1,275			898			11,368			14,764


Segment profit (loss)	$	68,352		$	54,695		$	39,841		$	32,171		$	(50,778	)	$	144,281		$	94,077		$	89,475		$	54,957		$	47,944		$	(82,924	)	$	203,529

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2014
Nine Months Ended September 30, 2014
Managed care and other revenue	$	386,916		$	817,897		$	224,760		$	100,347		$	(18,055	)	$	1,511,865		$	531,173		$	1,206,579		$	345,568		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			—			—			348,889			(6,265	)		342,624			—			—			—			590,115			(27,341	)		562,774
Cost of care		(228,054	)		(697,626	)		(163,405	)		(16,295	)		18,055			(1,087,325	)		(299,318	)		(1,034,754	)		(250,192	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			—			—			(324,111	)		6,247			(317,864	)		—			—			—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(82,806	)		(88,349	)		(33,038	)		(77,156	)		(62,407	)		(343,756	)		(120,319	)		(134,138	)		(50,881	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		312			504			768			5,859			6,579			14,022			476			729			1,037			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		—			(1,978	)		—			—			—			(1,978	)		—			(3,301	)		—			—			—			(3,301	)


Segment profit (loss)	$	76,368		$	34,404		$	29,085		$	37,533		$	(55,846	)	$	121,544		$	112,012		$	41,717		$	45,532		$	67,367		$	(82,918	)	$	183,710

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,

	2013			2014			2013			2014			2013			2014			2013			2014
Segment profit	$	75,048		$	44,995		$	144,281		$	121,544		$	59,248		$	62,166		$	203,529		$	183,710
Stock compensation expense		(4,602	)		(9,550	)		(10,240	)		(14,022	)		(4,524	)		(11,961	)		(14,764	)		(25,983	)
Non-controlling interest segment profit (loss)		—			(648	)		—			(1,978	)		—			(1,323	)		—			(3,301	)
Depreciation and amortization		(16,946	)		(22,480	)		(33,116	)		(42,709	)		(17,654	)		(23,956	)		(50,770	)		(66,665	)
Interest expense		(792	)		(2,004	)		(1,402	)		(2,840	)		(789	)		(2,879	)		(2,191	)		(5,719	)
Interest income		358			275			711			586			291			241			1,002			827


Income before income taxes	$	53,066		$	10,588		$	100,234		$	60,581		$	36,572		$	22,288		$	136,806		$	82,869

The following tables summarize those assets that are used in the operations of each segment. The remainder of the Company's assets cannot be specifically identified by segment (in thousands):

	Commercial		Public Sector		Specialty Solutions		Pharmacy Management		Corporate and Elimination		Consolidated

Year Ended December 31, 2013
Restricted cash	$	25,107	$	196,651	$	—	$	—	$	14,938	$	236,696
Net accounts receivable		50,407		62,977		7,368		115,527		1,906		238,185
Investments		16,491		92,966		—		—		98,856		208,313
Pharmaceutical inventory		—		—		—		49,609		—		49,609
Goodwill		120,485		20,882		104,549		242,290		—		488,206
Other intangible assets, net		3,513		4,590		3,686		57,905		—		69,694

	Commercial		Public Sector		Specialty Solutions		Pharmacy Management		Corporate and Elimination		Consolidated		Commercial		Public Sector		Specialty Solutions		Pharmacy Management		Corporate and Elimination		Consolidated

Six Months Ended June 30, 2014
Nine Months Ended September 30, 2014
Restricted cash	$	11,630	$	148,316	$	—	$	—	$	7,367	$	167,313	$	18,579	$	144,882	$	—	$	—	$	1,705	$	165,166
Net accounts receivable		52,625		71,993		9,839		160,916		6,496		301,869		56,898		60,377		14,912		165,936		4,559		302,682
Investments		35,838		129,575		—		—		5,942		171,355		18,089		159,959		—		—		23,376		201,424
Pharmaceutical inventory		—		—		—		44,277		—		44,277		—		—		—		40,899		—		40,899
Goodwill		120,485		20,879		104,549		311,512		—		557,425		129,042		20,879		104,549		311,636		—		566,106
Other intangible assets, net		2,772		6,831		3,012		134,370		—		146,985		2,402		6,651		2,675		128,585		—		140,313

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 in Note C—"Business Segment Information", 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 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 is 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 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 attributable to Magellan Health, Inc. (in thousands):~~

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

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.

On October 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013. On July 24, 2013 the Company's board of directors approved an increase and extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million of its outstanding stock through October 25, 2015.

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		Average Price Paid per Share		Aggregate Cost			Average Price Paid per Share		Aggregate Cost

November 11, 2011 - December 31, 2011	671,776	$	48.72	$	32.7	671,776	$	48.72	$	32.7
January 1, 2012 - December 31, 2012	459,252		50.27		23.1	459,252		50.27		23.1
January 1, 2013 - December 31, 2013	1,159,871		51.83		60.1	1,159,871		51.83		60.1
January 1, 2014 - June 30, 2014	1,137,037		59.20		67.3
January 1, 2014 - September 30, 2014						2,453,224		57.97		142.2


	3,427,936			$	183.2	4,744,123			$	258.1

During the period from ~~July~~October 1, 2014 through ~~July~~October 21, 2014, the Company made additional open market purchases of ~~223,821~~358,128 shares of the Company's common stock at an aggregate cost of ~~$14.0~~$19.6 million (excluding broker commissions).

As a result of restructuring activities initiated in 2013, the Company recorded liabilities for employee termination costs. The restructuring activities initiated in 2013 were related to contract terminations and organizational changes made in an effort to improve the Company's ability to execute its strategy. For the nine months ended September 30, 2014, the Company incurred $1.2 million of employee termination costs and $1.3 million of lease termination and exit costs. The restructuring costs

its strategy. The Company anticipates additional restructuring costs in 2014 associated with lease termination and exit costs of $1.0 million. The additional projected restructuring costs are associated with the Commercial segment. For the six months ended June 30, 2014, the Company incurred $1.1 million of employee termination costs and $1.2 million of lease termination and exit costs. The restructuring costs incurred by segment were Commercial $1.6 million, Public Sector ~~$1.5 million, Commercial $0.7~~$0.8 million and Corporate $0.1 million. As of ~~June~~September 30, 2014, the Company incurred cumulative restructuring costs of ~~$17.6~~$17.8 million related to 2013 initiatives. As of ~~June~~September 30, 2014, the cumulative restructuring costs incurred by segment were Public Sector ~~$8.3~~$7.6 million, Commercial ~~$5.4~~$6.3 million, and Corporate $3.9 million. Restructuring costs are included in direct service costs and other operating expenses in the consolidated statements of income.

The following table summarizes the activity related to the employee termination cost aspect of the restructuring liabilities for the ~~six~~nine months ended ~~June~~September 30, 2014, by reportable segment (in thousands):

	Commercial			Public Sector			Corporate			Consolidated			Commercial			Public Sector			Corporate			Consolidated

Liability for employee termination costs at December 31, 2013	$	4,744		$	4,296		$	3,429		$	12,469		$	4,744		$	4,296		$	3,429		$	12,469
Additions		738			653			123			1,514			840			767			125			1,732
Payments		(168	)		(1,813	)		(1,964	)		(3,945	)		(2,205	)		(3,421	)		(2,303	)		(7,929	)
Liability released		—			(377	)		(20	)		(397	)		(12	)		(530	)		(20	)		(562	)


Liability for employee termination costs at June 30, 2014	$	5,314		$	2,759		$	1,568		$	9,641
Liability for employee termination costs at September 30, 2014													$	3,367		$	1,112		$	1,231		$	5,710

Pursuant to the September 6, 2013 agreement and plan of merger (the "Partners Agreement") with Partners Rx Management, LLC ("Partners Rx"), on October 1, 2013 the Company acquired all of the outstanding ownership interests of Partners Rx. Partners Rx is a full-service commercial PBM with a strong focus on health plans and self-funded employers primarily through sales through third party administrators, consultants and brokers. As consideration for the transaction, the Company paid ~~$100~~$97.3 million in cash, ~~subject to~~including net receipts of $0.7 million for working capital adjustments. The Company funded the acquisition with cash on hand.

During the ~~six~~nine months ended ~~June~~September 30, 2014, the Company made a measurement period adjustment of $0.3 million to decrease the deferred tax liability related to the Partners Rx acquisition.

As of June 30, 2014, settlement of the working capital and certain contractual liabilities remain open and therefore are subject to further estimation. In addition, the amount recognized for deferred tax assets may be impacted by the determination of these items. The Company will make appropriate adjustments to the purchase price allocation prior to the completion of the measurement period as required.

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, Inc. ("AlphaCare Holdings"), the holding company for AlphaCare New York, Inc. ("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.

The Company previously held a 7% equity interest in AlphaCare through an equity investment of $2.0 million in preferred membership units of AlphaCare's previous holding company, AlphaCare Holdings, LLC on May 17, 2013. The Company also previously loaned $5.9 million to AlphaCare Holdings, LLC. As part of the AlphaCare Agreement, AlphaCare Holdings, LLC was reorganized into a Delaware corporation, the preferred membership units and the loan were converted into Series A Participating Preferred Stock ("AlphaCare Series A Preferred") of AlphaCare Holdings and the Company purchased an additional $17.4 million of AlphaCare Series A Preferred. The Company holds a 65% voting interest in AlphaCare Holdings.

Based on the Company's 65% equity and voting 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 Public Sector segment.

During the ~~six~~nine months ended ~~June~~September 30, 2014, the Company made net retrospective adjustments to provisional amounts related to the AlphaCare Holdings acquisition that were recognized at the acquisition date that, if known, would have affected the measurement amounts recognized as of that date.

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

	Initial Amounts Recognized at Acquisition Date(1)			Measurement Period Adjustments(2)			Current Amounts Recognized at Acquisition Date

Assets acquired:
Current assets (includes $6,249 of cash and $7,900 of restricted cash)	$	14,766		$	(548	)	$	14,218
Property and equipment, net		310			(39	)		271
Other assets		475			66			541
Other identified intangible assets		4,590			2,600			7,190
Goodwill		20,882			(3	)		20,879


Total assets acquired		41,023			2,076			43,099


Liabilities assumed:
Current liabilities		3,139			1,039			4,178
Deferred tax liabilities		1,830			1,037			2,867


Total liabilities assumed		4,969			2,076			7,045


Net assets acquired		36,054			—			36,054
Less: net assets attributable to noncontrolling interest		(10,554	)		—			(10,554	)


Net consideration	$	25,500		$	—		$	25,500

Pursuant to the March 31, 2014 purchase agreement (the "CDMI Agreement") with CDMI ~~LLC ("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 $205.0 million in cash, subject to working capital adjustments. Pursuant to the CDMI Agreement, the sellers and certain key management of CDMI purchased a total of $80.0 million in Magellan restricted common stock, which will generally vest over a 42-month period, conditioned upon certain employment and performance targets. 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.

The Company reports the results of operations of CDMI within its Pharmacy Management segment. The consolidated statements of income include total revenues and Segment Profit from CDMI of ~~$6.9~~$18.2 million and ~~$5.8~~$15.6 million for the ~~two~~five months subsequent to the acquisition.

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 ~~$84.3~~$84.2 million, consisting of customer contracts in the amount of ~~$82.7~~$82.8 million, which is being amortized over 8 years, non-compete agreements in the amount of ~~$1.2~~$1.0 million, which is being amortized over 6.5 years and tradename in the amount of $0.4 million, which is being amortized over 20 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 CDMI assets acquired and liabilities assumed at the date of the acquisition are summarized as follows (in thousands):


Assets acquired:
Current assets (includes $41,998 of accounts receivable)	$	42,100
Current assets (includes $42,123 of accounts receivable)			$	42,226
Property and equipment, net		457		457
Other assets		9		9
Other identified intangible assets		84,300		84,220
Goodwill		68,968		69,092


Total assets acquired		195,834		196,004


Liabilities assumed:
Current liabilities		29,483		29,160
Contingent consideration		45,778		45,778


Total liabilities assumed		75,261		74,938


Net assets acquired	$	120,573	$	121,066

As of ~~June~~September 30, ~~2013~~2014, the Company established a working capital receivable of ~~$4.4~~$3.9 million that was reflected as a reduction to goodwill.

The fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, and projected revenues, gross profits, and client base. The projected revenues, gross profits, and client base 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 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. As of the acquisition date, the Company estimated undiscounted future contingent payments of $61.7 million. As of ~~June~~September 30, 2014, the fair value of the contingent consideration was ~~$47.0~~$48.8 million and is included in accrued liabilities and contingent liabilities in the consolidated balance sheet. The change in the present value of the contingent consideration was

~~$1.2~~ $1.8 million and $3.0 million for the three months and ~~six~~nine months ended ~~June~~September 30, 2014, respectively, and was recorded as interest expense in the consolidated statements of income.

The Company's estimated fair values of CDMI 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, as detailed below, 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.

In connection with the CDMI acquisition, the Company incurred $1.2 million of acquisition related costs that were expensed during the ~~six~~nine months ended ~~June~~September 30, 2014. These costs are included within direct service costs and other operating expenses in the accompanying consolidated statements of income.

Pursuant to the July 1, 2014 purchase agreement (the "Cobalt Agreement") with Cobalt, the Company acquired all of the outstanding equity interests of Cobalt. Cobalt provides computerized cognitive behavioral therapy self-service programs. As consideration for the transaction, the Company paid a base price of $7.9 million in cash, including net receipts of $0.1 million for working capital adjustments. In addition to the base purchase price, the Cobalt 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 Company reports the results of operations of Cobalt within its Commercial segment. The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. The Company will make appropriate adjustments to the purchase price allocations prior to the completion of the measurement period as required.

�� The following unaudited supplemental pro forma information represents the Company's consolidated results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2013 as if the acquisition of CDMI had occurred on January 1, 2013, and for the three and ~~six~~nine months ended ~~June~~September 30, 2014 as if the acquisition of CDMI had occurred on January 1, 2014, in all cases after giving effect to certain adjustments including interest income, depreciation and amortization, and stock compensation expense.

Such pro forma information does not purport to be indicative of operating results that would have been reported had the acquisition of CDMI occurred on January 1, 2013 and 2014 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,

	2013		2014		2013		2014		2013		2014		2013		2014
Net revenue	$	852,870	$	891,241	$	1,683,418	$	1,866,082		884,980		923,170		2,568,398		2,789,252
Net income		29,122		2,523		54,369		22,834		45,410		27,133		99,951		53,965
Income per common share attributable to Magellan Health, Inc.:
Basic	$	1.09	$	0.09	$	2.02	$	0.84	$	1.68	$	1.02	$	3.71	$	1.99
Diluted	$	1.07	$	0.09	$	1.98	$	0.81	$	1.63	$	1.00	$	3.61	$	1.94

On ~~July 23,~~October 22, 2014 the Company's board of directors approved a stock repurchase plan which authorized the Company ~~entered into a $500.0 million Credit Agreement with various lenders that provides for Magellan Rx Management, Inc.~~ to ~~borrow~~purchase up to ~~$250.0~~$200 million of ~~revolving loans, with~~its outstanding common stock through October 22, 2016. 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 ~~sublimit~~variety of ~~up to $70.0 million for~~factors including the ~~issuance of letters of credit for the account~~market price of the ~~Company,~~Company's shares, general market and ~~a term loan in an original aggregate principal amount of $250.0 million (the "2014 Credit Facility"). At such point,~~economic conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the ~~2011 Credit Facility was terminated. The 2014 Credit Facility is guaranteed by substantially all of the non-regulated subsidiaries of the Company and will mature on~~Securities

~~July 23, 2019, but~~Exchange Act of 1934, which could allow the Company ~~holds an option~~ to ~~extend~~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 ~~2014 Credit Facility for an additional one year period. The term loan~~purchase of a specific number of shares and is ~~also~~ subject to ~~certain quarterly amortization payments.~~

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,suspension 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 ontermination by the Company's ~~total leverage ratio. The Company has the option to borrow in base rate loans or Eurodollar rate loans~~board of directors 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.any time.

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

The following discussion and analysis of the financial condition and results of operations of Magellan and its majority-owned subsidiaries and all VIEs for which Magellan is the primary beneficiary should be read together with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 3, 2014.

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:

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, 2013. 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.

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, MCOs, insurance companies, employers, labor unions, various military and governmental agencies, third party administrators, consultants and brokers. The Company's business is divided into the following five segments, based on the services it provides and/or the customers that it serves, as described below.

privileged providers is integrated with clinical and quality improvement programs to enhance the healthcare experience for individuals in need of care, while at the same time managing the cost of these services for our customers. The treatment services provided through the Company's provider network include outpatient programs, intermediate care programs (such as intensive outpatient programs and partial hospitalization services), inpatient treatment and crisis intervention services. The Company generally does not directly provide or own any provider of treatment services, although it does employ licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.

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

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

Commercial. Commercial generally reflects managed behavioral healthcare services and EAP services provided under contracts with health plans, insurance companies and MCOs for some or all of their commercial, Medicaid and Medicare members, as well as with employers, including corporations, governmental agencies, military and labor unions. Commercial's contracts encompass ~~risk-based,~~risk- based, ASO and EAP arrangements. As of ~~June~~September 30, 2014, Commercial's covered lives were ~~4.1~~2.9 million, ~~15.7~~14.4 million and 13.0 million for risk-based, ASO and EAP products, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2014, Commercial's revenue was ~~$235.0~~$300.6 million, ~~$65.0~~$95.1 million and ~~$86.9~~$135.4 million for risk-based, ASO and EAP products, respectively.

Public Sector. Public Sector generally reflects: (i) the management of behavioral health services provided to recipients under Medicaid and other state sponsored programs under contracts with state and local governmental agencies, and (ii) the integrated management of physical, behavioral and pharmaceutical care for special populations covered under Medicaid and other government sponsored programs. Public Sector contracts encompass either risk-based or ASO arrangements. As of ~~June~~September 30, 2014, Public Sector's covered lives were ~~1.5~~1.4 million and ~~1.8~~1.7 million for risk-based and ASO products, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2014, Public Sector's revenue was ~~$789.9~~$1,164.8 million and ~~$28.0~~$41.8 million for risk-based and ASO products, respectively.

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

assume responsibility for the cost of the services. As of ~~June~~September 30, 2014, covered lives for Specialty

Solutions were ~~6.8~~6.5 million and ~~13.5~~15.0 million for risk-based and ASO products, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2014, revenue for Specialty Solutions was ~~$203.1~~$310.8 million and ~~$21.7~~$34.8 million for risk-based and ASO products, respectively.

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 PBM services; (ii) 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 drugs that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement. In addition, the Company had a subcontract arrangement to provide PBM services on a risk basis for one of Public Sector's customers, which terminated on March 31, 2014.

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 FFS arrangements. During the ~~six~~nine months ended ~~June~~September 30, 2014, Pharmacy Management paid ~~3.6~~6.5 million adjusted commercial network claims in the Company's PBM business. As of ~~June~~September 30, 2014, the Company had a generic dispensing rate of ~~83.6~~84.2 percent within its commercial PBM business. In addition, during the ~~six~~nine months ended ~~June~~September 30, 2014, the Company paid ~~36.2~~50.8 million adjusted PBA claims and ~~47.6 thousand~~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 ~~June~~September 30, 2014, Pharmacy Management served ~~0.5~~0.9 million commercial PBM members, ~~9.8~~9.7 million members in its medical pharmacy management programs, and 25 states and the District of Columbia in its PBA business.

In addition to the Maricopa Contract previously discussed, the following customers generated in excess of ten percent of net revenues for the respective segment for the ~~three~~nine months ended ~~June~~September 30, 2013 and 2014 (in thousands):

Segment	Term Date	2013			2014			Term Date	2013			2014

Commercial
Customer A	June 30, 2014(1)	$	103,460		$	110,492		June 30, 2014(1)	$	156,269		$	110,138
Customer B	December 31, 2019		70,919			90,923		December 31, 2019		106,433			138,944
Customer C	August 14, 2017		29,537	*		47,769		August 14, 2017		47,625	*		76,863
Customer D	December 14, 2013(1)		38,776			—		December 14, 2013(1)		58,246			—
Public Sector
Customer E	June 30, 2015		129,471			213,000		June 30, 2015 to July 1, 2016(2)		215,396			337,893
Specialty Solutions
Customer E	December 31, 2015		60,602			69,988
Customer F	June 30, 2016(2)		30,580			26,515		December 31, 2015		96,402			109,138
Customer G	July 31, 2015		32,708			34,901		June 30, 2016(3)		43,490			28,046
Customer H								July 31, 2015		47,161			55,768
Customer A	November 30, 2016		1,154	*		26,577		November 30, 2016		1,623	*		40,003
Customer H	January 31, 2016		22,230			24,593
Customer I								January 31, 2016		34,338			38,282
Pharmacy Management
Customer I	November 30, 2014 to December 31, 2014(3)		65,335			60,972
Customer J	December 31, 2013(4)		43,274			1,267	*	November 30, 2014 to December 31, 2014(2)		99,599			92,793
Customer K	March 31, 2014(1)(5)		31,466			18,055	*	December 31, 2013(4)		68,166			2,339	*
Customer L								March 31, 2014(1)(5)		48,527			18,055	*
Customer M								December 16, 2016		—			105,079

~~implementing~~implemented a new system of mandated managed care through which Medicaid enrollees will receive integrated

healthcare services, and ~~it will phase~~has phased out the behavioral healthcare programs under which the Florida Areas' contracts ~~operate by July 31, 2014.~~operated. The Company has a contract with the State of Florida to provide integrated healthcare services under the new program. Net revenues from the State of Florida in the aggregate totaled ~~$66.3~~$98.0 million and ~~$56.5~~$143.9 million for the ~~six~~nine months ended ~~June~~September 30, 2013 and 2014, respectively.

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 March 3, 2014.

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. Public Sector subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Public Sector'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 care, 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):

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2013
Three Months Ended September 30, 2013
Managed care and other revenue	$	199,538		$	414,859		$	92,715		$	55,829		$	(16,221	)	$	746,720		$	190,655		$	445,260		$	94,125		$	57,164		$	(17,091	)	$	770,113
PBM and dispensing revenue		—			—			—			96,028			—			96,028			—			—			—			103,485			—			103,485
Cost of care		(123,227	)		(357,402	)		(58,742	)		(14,480	)		16,221			(537,630	)		(118,022	)		(382,913	)		(65,403	)		(15,290	)		17,091			(564,537	)
Cost of goods sold		—			—			—			(90,175	)		—			(90,175	)		—			—			—			(97,503	)		—			(97,503	)
Direct service costs and other		(41,399	)		(28,934	)		(13,863	)		(31,374	)		(28,927	)		(144,497	)		(47,032	)		(27,826	)		(13,990	)		(32,281	)		(35,705	)		(156,834	)
Stock compensation expense(1)		133			267			457			380			3,365			4,602			124			259			384			198			3,559			4,524


Segment profit (loss)	$	35,045		$	28,790		$	20,567		$	16,208		$	(25,562	)	$	75,048		$	25,725		$	34,780		$	15,116		$	15,773		$	(32,146	)	$	59,248

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Three Months Ended June 30, 2014
Three Months Ended September 30, 2014
Managed care and other revenue	$	198,025		$	319,954		$	119,326		$	44,969		$	—		$	682,274		$	144,257		$	388,682		$	120,808		$	49,273		$	—		$	703,020
PBM and dispensing revenue		—			—			—			209,265			(3,525	)		205,740			—			—			—			241,226			(21,076	)		220,150
Cost of care		(116,852	)		(275,108	)		(89,753	)		96			—			(481,617	)		(71,264	)		(337,128	)		(86,787	)		(1	)		—			(495,180	)
Cost of goods sold		—			—			—			(196,080	)		3,514			(192,566	)		—			—			—			(223,251	)		21,071			(202,180	)
Direct service costs and other		(42,530	)		(45,391	)		(17,897	)		(41,605	)		(31,611	)		(179,034	)		(37,513	)		(45,789	)		(17,843	)		(45,535	)		(30,248	)		(176,928	)
Stock compensation expense(1)		157			230			354			5,556			3,253			9,550			164			225			269			8,122			3,181			11,961
Less: non-controlling interest segment profit (loss)(2)		—			(648	)		—			—			—			(648	)		—			(1,323	)		—			—			—			(1,323	)


Segment profit (loss)	$	38,800		$	333		$	12,030		$	22,201		$	(28,369	)	$	44,995		$	35,644		$	7,313		$	16,447		$	29,834		$	(27,072	)	$	62,166

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2013
Nine Months Ended September 30, 2013
Managed care and other revenue	$	387,375		$	821,479		$	182,993		$	108,928		$	(31,466	)	$	1,469,309		$	578,030		$	1,266,739		$	277,118		$	166,092		$	(48,557	)	$	2,239,422
PBM and dispensing revenue		—			—			—			195,200			—			195,200			—			—			—			298,685			—			298,685
Cost of care		(236,498	)		(712,781	)		(116,809	)		(28,035	)		31,466			(1,062,657	)		(354,520	)		(1,095,694	)		(182,212	)		(43,325	)		48,557			(1,627,194	)
Cost of goods sold		—			—			—			(183,687	)		—			(183,687	)		—			—			—			(281,190	)		—			(281,190	)
Direct service costs and other		(82,791	)		(54,577	)		(27,234	)		(60,935	)		(58,587	)		(284,124	)		(129,823	)		(82,403	)		(41,224	)		(93,216	)		(94,292	)		(440,958	)
Stock compensation expense(1)		266			574			891			700			7,809			10,240			390			833			1,275			898			11,368			14,764


Segment profit (loss)	$	68,352		$	54,695		$	39,841		$	32,171		$	(50,778	)	$	144,281		$	94,077		$	89,475		$	54,957		$	47,944		$	(82,924	)	$	203,529

	Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated			Commercial			Public Sector			Specialty Solutions			Pharmacy Management			Corporate and Elimination			Consolidated

Six Months Ended June 30, 2014
Nine Months Ended September 30, 2014
Managed care and other revenue	$	386,916		$	817,897		$	224,760		$	100,347		$	(18,055	)	$	1,511,865		$	531,173		$	1,206,579		$	345,568		$	149,620		$	(18,055	)	$	2,214,885
PBM and dispensing revenue		—			—			—			348,889			(6,265	)		342,624			—			—			—			590,115			(27,341	)		562,774
Cost of care		(228,054	)		(697,626	)		(163,405	)		(16,295	)		18,055			(1,087,325	)		(299,318	)		(1,034,754	)		(250,192	)		(16,296	)		18,055			(1,582,505	)
Cost of goods sold		—			—			—			(324,111	)		6,247			(317,864	)		—			—			—			(547,362	)		27,318			(520,044	)
Direct service costs and other		(82,806	)		(88,349	)		(33,038	)		(77,156	)		(62,407	)		(343,756	)		(120,319	)		(134,138	)		(50,881	)		(122,691	)		(92,655	)		(520,684	)
Stock compensation expense(1)		312			504			768			5,859			6,579			14,022			476			729			1,037			13,981			9,760			25,983
Less: non-controlling interest segment profit (loss)(2)		—			(1,978	)		—			—			—			(1,978	)		—			(3,301	)		—			—			—			(3,301	)


Segment profit (loss)	$	76,368		$	34,404		$	29,085		$	37,533		$	(55,846	)	$	121,544		$	112,012		$	41,717		$	45,532		$	67,367		$	(82,918	)	$	183,710

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,

	2013			2014			2013			2014			2013			2014			2013			2014
Segment profit	$	75,048		$	44,995		$	144,281		$	121,544		$	59,248		$	62,166		$	203,529		$	183,710
Stock compensation expense		(4,602	)		(9,550	)		(10,240	)		(14,022	)		(4,524	)		(11,961	)		(14,764	)		(25,983	)
Non-controlling interest segment profit (loss)		—			(648	)		—			(1,978	)		—			(1,323	)		—			(3,301	)
Depreciation and amortization		(16,946	)		(22,480	)		(33,116	)		(42,709	)		(17,654	)		(23,956	)		(50,770	)		(66,665	)
Interest expense		(792	)		(2,004	)		(1,402	)		(2,840	)		(789	)		(2,879	)		(2,191	)		(5,719	)
Interest income		358			275			711			586			291			241			1,002			827


Income before income taxes	$	53,066		$	10,588		$	100,234		$	60,581		$	36,572		$	22,288		$	136,806		$	82,869

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 in Note C—"Business Segment Information", 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 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 is 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 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 attributable to Magellan Health, Inc. (in thousands):

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

Quarter ended ~~June~~September 30, 2014 ("Current Year Quarter"), compared to the quarter ended ~~June~~September 30, 2013 ("Prior Year Quarter")

Net revenue related to Commercial decreased by ~~0.8~~24.3 percent or ~~$1.5~~$46.4 million from the Prior Year Quarter to the Current Year Quarter. The decrease in revenue is mainly due to terminated contracts of ~~$26.5 million, customer settlements in the Prior Year Quarter of $6.7~~$72.7 million and decreased membership from existing customers of ~~$3.0~~$4.8 million. These decreases were partially offset by favorable rate changes of ~~$20.4~~$13.9 million, new contracts implemented after (or during) the Prior Year Quarter of ~~$3.9~~$4.5 million ~~customer settlements in the Current Year Quarter of $1.4 million, favorable prior period rate, membership and other adjustments of $0.9 million recorded in the Current Year Quarter~~ and other net favorable increases of ~~$8.1~~$12.7 million (mainly related to higher care associated with a cost-plus contract).

Cost of care decreased by ~~5.2~~39.6 percent or ~~$6.4~~$46.8 million from the Prior Year Quarter to the Current Year Quarter. The decrease in cost of care is primarily due to terminated contracts of ~~$21.4~~$56.9 million, decreased membership from existing customers of ~~$3.5~~$4.1 million and favorable prior period medical claims development recorded in the Current Year Quarter of ~~$3.3 million and customer settlements in the Current Year Quarter of $1.3 million, which~~$4.1 million. These decreases were partially offset by ~~new business of $0.7 million and~~ unfavorable care trends and other net variances of ~~$22.4~~$18.3 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from ~~81.4~~80.2 percent in the Prior Year Quarter to ~~76.8~~65.1 percent in the Current Year Quarter, mainly due to changes in business mix.

Direct service costs ~~increased~~decreased by ~~2.7~~20.2 percent or ~~$1.1~~$9.5 million from the Prior Year Quarter to the Current Year Quarter primarily due to terminated contracts of $7.4 million and severance and restructuring cost pertaining to terminated contracts in the Prior Year Quarter of $5.0 million, which decreases were partially offset by new contracts implemented after (or during) the Prior Year Quarter of ~~$1.5~~$1.7 million and other net ~~unfavorable variances~~increases of ~~$2.7 million, which increases were partially offset by terminated contracts of $3.1~~$1.2 million. Direct service costs increased as a percentage of revenue from ~~20.7~~24.7 percent in the Prior Year Quarter to ~~21.5~~26.0 percent in the Current Year Quarter, mainly due to changes in business mix.

Net revenue related to Public Sector decreased by ~~22.9~~12.7 percent or ~~$94.9~~$56.6 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to terminated contracts of ~~$190.5~~$219.1 million, ~~decreased membership from existing customers~~the revenue impact of ~~$2.3~~favorable prior period medical claims development recorded in the Current Year Period of $4.4 million and ~~other net~~the revenue impact of unfavorable ~~variances~~prior period development recorded in the Prior Year Quarter of ~~$1.6~~$1.3 million. These decreases were partially offset by increased membership from existing customers of $90.6 million, new contracts implemented after (or during) the Prior Year Quarter of ~~$85.1~~$53.0 million, revenue recorded for ACA ~~tax~~fees of ~~$10.9~~$8.8 million, favorable rate changes of $6.0 million, performance incentives of $1.2 million and ~~the revenue impact~~other net favorable variances of ~~favorable prior period care development recorded in the Current Year Quarter of $3.5~~$8.6 million.

Cost of care decreased by ~~23.0~~12.0 percent or ~~$82.3~~$45.8 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to terminated contracts of ~~$170.3~~$195.7 million and ~~decreased membership from existing customers~~favorable prior period medical claims development recorded in the Current Year Quarter of ~~$1.8~~$12.9 million. These decreases were partially offset by increased membership from existing customers of $90.5 million, new contracts of ~~$70.0~~$38.2 million, unfavorable ~~prior period medical claims development recorded in the~~

~~Current Year Quarter of $10.3 million, favorable~~ prior period medical claims development recorded in the Prior Year Quarter of ~~$6.2~~$10.7 million, higher care associated with favorable rate changes of $5.4 million and unfavorable care trends and other net variances of ~~$3.3 million.~~$18.0 million (includes $5.1 million of care cost related to amendment pending execution). Cost of care increased as a percentage of risk revenue from ~~87.9~~87.6 percent in the Prior Year Quarter to 89.9 percent in the Current Year Quarter mainly due to ~~unfavorable prior period care development.~~business mix.

Direct service costs increased by ~~56.9~~64.6 percent or ~~$16.5~~$18.0 million from the Prior Year Quarter to the Current Year Quarter, mainly due to the accrual for ACA ~~tax~~fees of ~~$5.6~~$5.4 million in the Current Year Quarter, as well as costs to support new business and development costs for the Magellan Complete Care product. Direct service costs increased as a percentage of revenue from ~~7.0~~6.2 percent for the Prior Year Quarter to ~~14.2~~11.8 percent in the Current Year Quarter mainly due to ACA ~~taxes, cost~~fees, costs to support new business, run out costs on a terminated contract and development costs for the Magellan Complete Care product.

Net revenue related to Specialty Solutions increased by ~~28.7~~28.3 percent or ~~$26.6~~$26.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of ~~$30.5 million, increase in membership from existing customers of $6.0 million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of $1.8~~$40.2 million and other net favorable variances of ~~$0.2~~$1.3 million. These increases were partially offset by decreased membership from existing customers of $9.4 million and unfavorable rate changes of ~~$9.7 million and terminated contracts of $2.2~~$5.4 million.

Cost of care increased by ~~52.8~~32.7 percent or ~~$31.0~~$21.4 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily attributed to new contracts of ~~$24.4 million, increased~~$32.8 million. This increase was partially offset by decreased membership from existing customers of ~~$3.8~~$7.7 million, favorable prior period medical claims development recorded in the ~~Prior~~Current Year Quarter of ~~$4.1~~$3.0 million and other net ~~unfavorable~~favorable variances of ~~$1.6 million. These increases were partially offset by terminated contacts of $1.7 million and favorable prior period medical claims development for the Current Year Quarter of $1.2~~$0.7 million. Cost of care increased as a percentage of risk revenue from ~~70.7~~77.8 percent in the Prior Year Quarter to ~~82.9~~80.6 percent in the Current Year Quarter mainly due to ~~unfavorable rate changes and~~ business mix.

Direct service costs increased by ~~29.1~~27.5 percent or ~~$4.0~~$3.9 million from the Prior Year Quarter to the Current Year Quarter. As a percentage of revenue, direct service costs in the Current Year Quarter of ~~15.0~~14.8 percent were consistent with the Prior Year Quarter.

Managed care and other revenue related to Pharmacy Management decreased by ~~19.5~~13.8 percent or ~~$10.9~~$7.9 million from the Prior Year Quarter to the Current Year Quarter. This decrease is primarily due to terminated contracts of ~~$19.5~~$21.2 million and ~~decreased rebate revenue due to term changes~~other net unfavorable variances of ~~$2.5~~$0.9 million. These decreases were partially offset by revenue of ~~$6.9~~$11.4 million for CDMI which was acquired on April 30, 2014 ~~new contracts implemented after the Prior Year Quarter~~and an increase in government pharmacy revenue of ~~$3.6 million and other net favorable variances of $0.6~~$2.8 million.

PBM and Distribution revenue related to Pharmacy Management increased by ~~117.9~~133.1 percent or ~~$113.2~~$137.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to new contracts implemented after (or during) the Prior Year Quarter of $90.8 million, revenue of ~~$87.4~~$89.5 million for Partners Rx which was acquired on October 1, 2013, ~~new contracts implemented after the Prior Year Quarter~~an increase in pharmacy employer revenue of ~~$58.5~~$3.6 million and other net ~~increased dispensing activity from existing customers~~increases of ~~$5.6~~$0.8 million. These increases were partially offset by terminated contracts of ~~$36.6~~$40.8 million and ~~other~~ net ~~decreases~~decreased dispensing activity from existing customers of ~~$1.7~~$6.2 million.

Cost of care decreased by ~~$14.6~~$15.3 million from the Prior Year Quarter to the Current Year Quarter due to a terminated contract.

Cost of goods sold increased by ~~117.4~~129.0 percent or ~~$105.9~~$125.7 million from the Prior Year Quarter to the Current Year Quarter. This increase is primarily due to ~~cost of goods sold for Partners Rx of $79.3 million,~~ new contracts implemented after the Prior Year Quarter of ~~$57.2~~$88.2 million, cost of goods sold for Partners Rx of $79.9 million and ~~increased dispensing activity from existing customers~~increase in pharmacy employer of ~~$4.1~~$3.5 million. These increases were partially offset by terminated contracts of ~~$33.9~~$38.3 million, decreased dispensing activity from existing customers of $7.4 million and other net decreases of ~~$0.8~~$0.2 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.2 percent in the Prior Year Quarter to 92.5 percent the Current Year Quarter, ~~of 93.7 percent was consistent with the Prior Year Quarter.~~mainly due to business mix.

Direct service costs increased by ~~32.6~~41.1 percent or ~~$10.2~~$13.3 million from the Prior Year Quarter to the Current Year Quarter. This increase mainly relates to the Partners Rx and CDMI acquisitions, in addition to implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from ~~20.7~~20.1 percent in the Prior Year Quarter to ~~16.4~~15.7 percent in the Current Year Quarter, mainly due to business mix.

Other operating expenses related to the Corporate and Other segment ~~increased~~decreased by ~~9.3~~15.3 percent or ~~$2.7~~$5.5 million from the Prior Year Quarter to the Current Year Quarter. The ~~increase~~decrease relates primarily to discretionary benefits of ~~$1.3~~$2.0 million, legal fees of ~~$0.8~~$1.6 million, ~~and~~ severance cost of ~~$0.6~~$1.2 million and other net favorable variances of $0.7 million. As a percentage of total net revenue, other operating expenses ~~increased~~decreased from ~~3.4~~4.1 percent for the Prior Year Quarter to ~~3.6~~3.3 percent for the Current Year Quarter mainly due to business mix.

Depreciation and amortization expense increased by ~~32.7~~35.7 percent or ~~$5.5~~$6.3 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 increased by ~~153.0 percent or $1.2~~$2.1 million from the Prior Year Quarter to the Current Year Quarter, mainly due to ~~the change in the present value of~~interest recorded related to the contingent consideration ~~liability~~liabilities related to the CDMI ~~acquisition.~~

The Company's effective income tax rates were ~~40.7~~(29.2) percent and ~~59.1~~(15.7) 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 ~~effective rate~~ mainly due to the non-deductible ACA fees, lower reversals of tax contingencies in the Current Year Quarter from the closure of statutes of limitation, and ~~valuation~~increased valuations allowances in the Current Year Quarter for certain deferred tax assets.

The statutes of limitation regarding the assessment of federal and certain state and local income taxes for 2010 closed during the Current Year Quarter. As a result, $18.7 million of unrecognized tax benefits (excluding interest costs) recorded as of December 31, 2013 were reversed in the Current Year Quarter, of which $15.6 million is 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 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 federal and certain state and local income taxes for 2009 closed during the Prior Year Quarter. As a result, $27.2 million of unrecognized tax benefits recorded as of December 31, 2012 were reversed in the Prior Year Quarter, of which $22.7 million was reflected as a discrete reduction to income tax expense, $3.9 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 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 ~~June~~September 30, 2014 ("Current Year Period"), compared to the ~~six~~nine months ended ~~June~~September 30, 2013 ("Prior Year Period")

Net revenue related to Commercial decreased by ~~0.1~~8.1 percent or ~~$0.5~~$46.9 million from the Prior Year Period to the Current Year Period. The decrease in revenue is mainly due to terminated contracts of ~~$51.6~~$124.4 million, decreased membership from existing customers of ~~$10.4~~$20.0 million and customer settlements in the Prior Year Period of $6.7 million. These decreases were partially offset by favorable rate changes of ~~$36.4~~$55.8 million, new contracts implemented after (or during) the Prior Year Period of ~~$8.4~~$13.5 million, favorable prior period rate, membership and other adjustments of $2.4 million in the Current Year Period and other net favorable increases of ~~$21.0~~$32.5 million (mainly related to higher care associated with a cost-plus contract).

Cost of care decreased by ~~3.6~~15.6 percent or ~~$8.4~~$55.2 million from the Prior Year Period to the Current Year Period. The decrease in cost of care is primarily due to terminated contracts of ~~$41.7~~$88.4 million, decreased membership from existing customers of ~~$8.4~~$12.9 million, favorable prior period medical claims development recorded in the Current Year Period of ~~$2.4~~$2.5 million and customer settlements in the Current Year Period of $2.4 million. These decreases were partially offset by unfavorable care trends and other net variances of ~~$41.1~~$44.7 million, favorable prior period medical claims development recorded in the Prior Year Period of ~~$4.4~~$4.5 million and ~~decreased membership from existing customers~~new contracts implemented after (or during) the Prior Year Period of ~~$1.0~~$1.8 million. Cost of care decreased as a percentage of risk revenue (excluding EAP business) from ~~79.0~~79.4 percent in the Prior Year Period to ~~76.8~~72.7 percent in the Current Year Period, mainly due to business mix.

Direct service ~~was consistent~~costs decreased by 7.3 percent or $9.5 million from the Prior Year Period to the Current Year ~~Period.~~Period mainly due to terminated contracts, as well as the inclusion in the Prior Year Period of severance and restructuring costs of $5.0 million. Direct service costs increased as a percentage of revenue ~~of 21.4~~from 22.5 percent ~~was consistent between periods.~~for the Prior Year Period to 22.7 percent in the Current Year Period mainly due to business mix.

Net revenue related to Public Sector decreased by ~~0.4~~4.7 percent or ~~$3.6~~$60.2 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to terminated contracts of ~~$190.5 million and decreased membership from existing customers of $2.3~~$412.1 million, which ~~decreases were~~decrease was partially offset by new contracts implemented after (or during) the Prior Year Period of ~~$157.1~~$209.7 million, increased membership from existing customers of $88.4 million, revenue recorded for ACA fees of $22.9 million, favorable rate changes of ~~$16.4~~$21.6 million, performance incentive revenue ~~recorded for ACA tax~~ of ~~$14.1~~$2.1 million and other net favorable variances of ~~$1.6~~$7.2 million.

Cost of care decreased by ~~2.1~~5.6 percent or ~~$15.2~~$60.9 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to terminated contracts of ~~$170.4~~$367.0 million and ~~decreased membership from existing customers~~favorable prior period medical claims development recorded in the Current Year Period of ~~$1.2~~$2.0 million. These decreases were partially offset by new contracts implemented after (or during) the Prior Year Period of ~~$130.4~~$168.2 million, increased membership from existing customers of $90.2 million, care associated with

rate changes for contracts with minimum care requirements of ~~$14.1~~$19.5 million, favorable prior period medical claims development recorded in the Prior Year Period of $7.8 million, unfavorable medical claims development for the Prior Year Period which was recorded after the Prior Year Period of $2.3 million, unfavorable prior period medical claims development recorded in the Current Year Period of $1.3$18.0 million and unfavorable care trends and other net variances of ~~$0.5~~$12.2 million. Cost of care ~~decreased~~increased as a percentage of risk revenue from ~~88.5~~88.2 percent in the Prior Year Period to ~~88.3~~88.8 percent in the Current Year Period mainly due to business mix.

Direct service costs increased by ~~61.9~~62.8 percent or ~~$33.8~~$51.7 million from the Prior Year Period to the Current Year Period, mainly due to the accrual for ACA ~~tax~~fees of ~~$10.7~~$16.1 million in the Current Year Period and costs to support new business and development costs for the Magellan Complete Care product. Direct service costs increased as a percentage of revenue from ~~6.6~~6.5 percent for the Prior Year Period to ~~10.8~~11.1 percent in the Current Year Period mainly due to ACA ~~taxes,~~fees, run out administrative cost on terminated contracts, costs to support new business and development costs for the Magellan Complete Care product.

Net revenue related to Specialty Solutions increased by ~~22.8~~24.7 percent or ~~$41.8~~$68.5 million from the Prior Year Period to the Current Year Period. This increase is primarily due to new contracts implemented after (or during) the Prior Year Period of ~~$49.3~~$88.3 million, increase in membership from existing customers of ~~$14.2~~$3.0 million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Period of $2.0 million and other net favorable variances of ~~$0.5~~$3.6 million. These increases were partially offset by unfavorable rate changes of ~~$19.9~~$23.9 million and terminated contracts of ~~$4.3~~$4.5 million.

Cost of care increased by ~~39.9~~37.3 percent or ~~$46.6~~$68.0 million from the Prior Year Period to the Current Year Period. This increase is primarily attributed to new contracts of ~~$39.6~~$61.4 million, ~~increased membership from existing customers of $10.0 million and~~ favorable prior period medical claims development recorded in the Prior Year Period of ~~$5.0~~$5.5 million, increased membership from existing customers of $3.4 million and other net unfavorable variances of $4.2 million. These increases were partially offset by terminated contracts of $3.6 million and favorable prior period medical claims development recorded in the Current Year Period of ~~$2.1 million and other net favorable variances of $2.3~~$2.9 million. Cost of care increased as a percentage of risk revenue from ~~71.6~~73.7 percent in the Prior Year Period to 80.5 percent in the Current Year Period mainly due to unfavorable rate changes and care trends.

Direct service costs increased by ~~21.3~~23.4 percent or ~~$5.8~~$9.7 million from the Prior Year Period to the Current Year ~~Period.~~Period, mainly due to new business. As a percentage of revenue, direct service costs ~~were consistent~~decreased from 14.9 percent for the Prior Year Period to 14.7 percent in the Current Year ~~Period.~~

Managed care and other revenue related to Pharmacy Management decreased by ~~7.9~~9.9 percent or ~~$8.6~~$16.5 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to terminated contracts of ~~$23.7~~$42.3 million and decreased rebate revenue due to change in terms of ~~$3.9~~$4.6 million. These decreases were partially offset by revenue of ~~$6.9~~$18.2 million for CDMI which was

acquired on April 30, 2014, new contracts implemented after the Prior Year Period of $7.5 million, increased ~~revenue from a subcontract with Public Sector of $2.8 million and increased~~ Medical Pharmacy revenue of $1.8 million, increased Government Pharmacy revenue of $1.6 million and other net favorable variances of $1.3 million.

PBM and Distribution revenue related to Pharmacy Management increased by ~~78.7~~97.6 percent or ~~$153.7~~$291.4 million from the Prior Year Period to the Current Year Period. This increase is primarily due to revenue of ~~$166.9~~$245.3 million for Partners Rx which was acquired on October 1, 2013, new contracts of ~~$58.6~~$149.4 million, an increase in pharmacy employer revenue of $13.9 million and other net ~~increased dispensing activity from existing customers~~increases of ~~$2.5~~$0.7 million. These increases were partially offset by terminated distribution contracts of ~~$72.5~~$113.3 million and ~~other~~ net ~~decreases~~decreased dispensing activity from existing customers of ~~$1.8~~$4.6 million.

Cost of care decreased by ~~41.9~~62.4 percent or ~~$11.7~~$27.0 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to a terminated contract of ~~$14.6~~$27.0 million. Cost of care increased as a percentage of risk revenue from ~~89.1~~89.3 percent in the Prior Year Period to ~~90.1~~90.2 percent in the Current Year Period mainly due to ~~unfavorable~~favorable care trends.

Cost of goods sold increased by ~~76.4~~94.7 percent or ~~$140.4~~$266.2 million from the Prior Year Period to the Current Year Period. This increase is primarily due to cost of goods sold for Partners Rx of ~~$151.0~~$220.4 million, new contracts implemented after (or during) the Prior Year Period of ~~$57.3~~$145.5 million and ~~increased dispensing activity from existing customers~~pharmacy employer of ~~$1.6~~$13.3 million. These increases were partially offset by terminated contracts of ~~$68.1~~$105.6 million and ~~other net deceases~~decreased dispensing activity from existing customers of ~~$1.4~~$7.4 million. As a percentage of the portion of net revenue that relates to PBM and dispensing activity, cost of goods sold decreased from 94.1 percent in the Prior Year Period to ~~92.9~~92.8 percent in the Current Year Period, mainly due to business mix.

Direct service costs increased by ~~26.6~~31.6 percent or ~~$16.2~~$29.5 million from the Prior Year Period to the Current Year Period. This increase mainly relates to the Partners Rx acquisition, as well as implementation costs and ongoing costs to support new business. As a percentage of revenue, direct service costs decreased from ~~20.0~~20.1 percent in the Prior Year Period to ~~17.2~~16.6 percent in the Current Year Period, mainly due to business mix.

Other operating expenses related to the Corporate and Other segment ~~increased~~decreased by ~~6.5~~1.7 percent or ~~$3.8~~$1.6 million from the Prior Year Period to the Current Year Period. The ~~increase~~decrease relates primarily to ~~legal fees of $1.3 million, severance cost of $0.9 million,~~ discretionary benefits of ~~$0.7~~$1.3 million and other net ~~unfavorable~~favorable one time items in the Current Year Period of ~~$0.9~~$0.3 million. As a percentage of total net

revenue, other operating expenses decreased from ~~3.5~~3.7 percent for the Prior Year Period to ~~3.4~~3.3 percent for the Current Year Period, mainly due to business mix.

Depreciation and amortization expense increased by ~~29.0~~31.3 percent or ~~$9.6~~$15.9 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 increased by ~~102.6 percent or $1.4~~$3.5 million from the Prior Year Period to the Current Year Period, mainly due to ~~the change in the present value of~~interest recorded related to the contingent consideration ~~liability~~liabilities related to the CDMI ~~acquisition.~~and Cobalt acquisitions.

The Company's effective income tax rates were ~~40.6~~22.0 percent and ~~52.6~~34.3 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 ~~effective rate~~ mainly due to the non-deductible ACA fees, lower reversals of tax contingencies in the Current Year Period from the closure of statutes of limitation, and increased valuation allowances in the Current Year Period for certain deferred tax assets.

The statutes of limitation regarding the assessment of federal and certain state and local income taxes for 2010 closed during the Current Year Period. As a result, $18.7 million of unrecognized tax benefits (excluding interest costs) recorded as of December 31, 2013 were reversed in the Current Year Period, of which $15.6 million is 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 Current Year Period 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 federal and certain state and local income taxes for 2009 closed during the Prior Year Period. As a result, $27.2 million of unrecognized tax benefits recorded as of December 31, 2012 were reversed in the Prior Year Period, of which $22.7 million was reflected as a discrete reduction to income tax expense, $3.9 million as an increase to additional paid-in capital, and the remainder as a decrease to deferred tax assets. Additionally, $2.1 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.

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 1A—"Risk Factors" 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; and (vii) changes in estimates regarding medical costs and IBNR.

A portion of the Company's business is subject to rising care costs due to an increase in the number and frequency of covered members seeking behavioral healthcare or radiology services, and higher costs per inpatient day or outpatient visit for behavioral services, and higher costs per scan for radiology services. Many of these factors are beyond the Company's control. Future results of operations will be heavily dependent on management's ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses.

In relation to the managed behavioral healthcare business, the Company is a market leader in a mature market with many viable competitors. The Company is continuing its attempts to grow its business in the managed behavioral healthcare industry through aggressive marketing and development

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

Care Trends. The Company expects that same-store normalized cost of care trend for the 12-month forward outlook to be 6 to 8 percent for Commercial, 0 to 2 percent for Public Sector and 3 to 5 percent for Specialty Solutions.

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 ~~June~~September 30, 2014, 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.

Operating Activities. The Company reported net cash provided by operating activities of ~~$86.9~~$171.3 million and ~~$137.1~~$194.2 million for the Prior Year Period and Current Year Period, respectively. The ~~$50.2~~$22.9 million increase in operating cash flows from the Prior Year Period to the Current Year Period is attributable to net favorable working capital changes between periods and lower tax payments, partially offset by the decrease in Segment Profit between periods and the impact of the net shift of restricted funds between cash and investments that results in an operating cash flow change that is directly offset by an investing cash flow change.

The net favorable impact of working capital changes between periods totaled ~~$90.6~~$37.5 million. Operating cash flows for the Prior Year Period were impacted by net unfavorable working capital changes of ~~$47.1~~$10.8 million, which were largely attributable to management incentive payments ~~an increase in accounts receivable, as well as~~and a net increase in restricted cash requirements associated with the Company's regulated entities, partially offset by accruals associated with the management incentive plan. For the Current Year Period, operating cash flows were impacted by net favorable working capital changes of ~~$43.5~~$26.7 million, largely attributable to a net decrease in restricted cash requirements associated with the Company's regulated entities ~~an increase in medical claims payable,~~ and accruals associated with the management incentive plan, partially offset by the payment of ACA fees and management incentive payments. Tax payments for the Current Year Period totaled ~~$40.3~~$45.0 million, which represents a decrease of ~~$1.3~~$10.0 million from the Prior Year Period.

Segment Profit for the Current Year Period decreased ~~$22.7~~$19.8 million from the Prior Year Period. Restricted cash of ~~$31.3~~$33.6 million and ~~$12.3~~$28.8 million for the Prior Year Period and Current Year Period, respectively, were shifted to restricted investments that increased operating cash flows. The net impact of the shift in restricted funds between periods is a decrease in operating cash flows of ~~$19.0~~$4.8 million.

During the Current Year Period, the Company's restricted cash decreased ~~$69.4~~$71.5 million. The change in restricted cash is attributable to decreases in restricted cash of ~~$52.2~~$42.2 million associated with the Company's regulated entities, the net shift of restricted cash of ~~$12.3~~$28.8 million to restricted investments and other net decreases of ~~$4.9~~$0.5 million. The net change in restricted cash for the Company's regulated entities is attributable to a net decrease in restricted cash requirements of ~~$35.1~~$52.9 million that resulted in an operating cash flow source, ~~and~~partially offset by a net ~~decreases~~increase in restricted cash of ~~$17.1~~$10.7 million that ~~are~~is offset by changes in other assets and liabilities, primarily accounts receivable, accrued liabilities, medical claims payable and other medical liabilities, thus having no impact on operating cash flows.

Investing Activities. The Company utilized ~~$27.0~~$42.1 million and ~~$32.0~~$50.6 million during the Prior Year Period and Current Year Period, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, leaseholds) and capitalized software for the Prior Year Period were ~~$7.9~~$12.1 million and ~~$19.1~~$30.0 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of ~~$10.9~~$16.7 million and ~~$21.1~~$33.9 million, respectively. The Company acquired property and equipment of $29.3 million and $0.2 million under capital leases in the Prior Year Period and Current Year Period, respectively. During the Prior Year Period the Company used net cash of ~~$26.3~~$2.2 million for the net purchase of "available-for-sale" securities, with the Company receiving net cash of ~~$34.4~~$3.2 million during the Current

Year Period from the net maturity of "available-for-sale" securities. In addition, during the Prior Year Period the Company executed a note receivable in the amount of $5.9 million and purchased preferred stock of $2.0 million from ~~AlphaCare, with the Company acquiring CDMI during~~AlphaCare. During the Current Year Period, the Company acquired CDMI and Cobalt for $125.0 ~~million.~~million and $7.9 million, respectively, and received a working capital settlement of $0.7 million related to Partners Rx.

Financing Activities. During the Prior Year Period, the Company paid $49.5 million for the repurchase of treasury stock under the Company's share repurchase program ~~paid $1.8~~and $2.3 million on capital lease ~~obligations, and had other net unfavorable items of $0.7 million.~~obligations. In addition, the Company received ~~$16.1~~$24.6 million from the exercise of stock ~~options.~~options and had other net favorable items of $0.5 million.

�� During the Current Year Period, the Company received $250.0 million from the issuance of debt and $41.7 million from the exercise of stock and had other net favorable items of $0.6 million. In addition, the Company paid ~~$65.3~~$139.3 million for the repurchase of treasury stock under the Company's share repurchase program and ~~paid $2.1~~$2.6 million on capital lease obligations. ~~In addition, the Company received $34.2 million from the exercise of stock options and had other net favorable items of $1.2 million.~~

Liquidity. During the remainder of 2014, the Company expects to fund its estimated capital expenditures of ~~$24.0~~$5.4 million to ~~$34.0~~$15.4 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 2014. 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 25, 2011 the Company's board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 25, 2013. On July 24, 2013 the Company's board of directors approved an increase and extension of the stock repurchase plan which authorizes the Company to purchase up to $300 million of its outstanding stock through October 25, 2015.

Stock repurchases under the program may be ~~purchased~~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. ~~The $250.0 million term loan under the 2014 Credit Facility may be drawn at any time, but no later~~

~~than September 30, 2014.~~ Pursuant to this program, the Company made open market purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):

Period		Average Price Paid per Share		Aggregate Cost			Average Price Paid per Share		Aggregate Cost

November 11, 2011 - December 31, 2011	671,776	$	48.72	$	32.7	671,776	$	48.72	$	32.7
January 1, 2012 - December 31, 2012	459,252		50.27		23.1	459,252		50.27		23.1
January 1, 2013 - December 31, 2013	1,159,871		51.83		60.1	1,159,871		51.83		60.1
January 1, 2014 - June 30, 2014	1,137,037		59.20		67.3
January 1, 2014 - September 30, 2014						2,453,224		57.97		142.2


	3,427,936			$	183.2	4,744,123			$	258.1

Off-Balance Sheet Arrangements. As of ~~June~~September 30, 2014, the Company has no material off-balance sheet arrangements.

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

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"). At such point, the 2011 Credit Facility was terminated. 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. ~~The term loan is also subject to certain quarterly amortization payments.~~

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.

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:


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended ~~June~~September 30, 2014
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to


Delaware (State or other jurisdiction of incorporation or organization)		58-1076937 (IRS Employer Identification No.)
~~55 Nod Road, Avon, Connecticut~~4800 Scottsdale Rd, Suite 4400 Scottsdale, Arizona (Address of principal executive offices)		~~06001~~ 85251 (Zip code)


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

			Weighted Average Grant Date Fair Value				Weighted Average Grant Date Fair Value

Outstanding, beginning of period	192,165		$	56.59	192,165		$	56.59
Awarded(1)	1,448,674			57.74	1,450,316			57.74
Vested	(16,569	)		52.82	(16,569	)		52.82
Forfeited	—			—	—			—


Outstanding, ending of period	1,624,270		$	57.65	1,625,912		$	57.66

Period		Average Price Paid per Share(2)			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands)(1)(2)			Average Price Paid per Share(2)			Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (in thousands)(1)(2)

April 1 - 30, 2014	207,381	$	55.86	207,381	$	155,521
May 1 - 31, 2014	306,431		58.10	306,431		137,717
June 1 - 30, 2014	338,336		61.97	338,336		116,752
July 1 - 31, 2014							358,009	$	61.46	358,009	$	94,750
August 1 - 31, 2014							467,599		55.46	467,599		68,818
September 1 - 30, 2014							490,579		54.97	490,579		41,851


	852,148			852,148			1,316,187			1,316,187

	December 31, 2013		June 30, 2014

Health Plan	$	120,485	$	120,485
Specialty Solutions		104,549		104,549
Pharmacy Management		242,290		311,512
Public Sector		20,882		20,879


Total	$	488,206	$	557,425

	December 31, 2013		June 30, 2014

Balance as of beginning of period	$	426,939	$	488,206
Acquisition of Partners Rx(1)		40,385		254
Acquisition of AlphaCare Holdings(1)		20,882		(3	)
Acquisition of CDMI		—		68,968


Balance as of end of period	$	488,206	$	557,425

Exhibit No.			Description

	~~2.1~~31.1		Amendment No. 1 to Purchase Agreement, dated as of April 30, 2014, among Magellan Health Services, Inc., CDMI, LLC and each of the Sellers' party thereto, which was filed as Exhibit 2.2 to the Company's current report on Form 8-K, which was filed on April 30, 2014 and is incorporated herein by reference.
	~~3.1~~		Certificate of Ownership and Merger dated June 4, 2014, which was filed as Exhibit 3.1 to the Company's current report on Form 8-K, which was filed on June 4, 2014 and is incorporated herein by reference.
	~~3.2~~		Bylaws of the Company as amended and restated on June 4, 2014, which was filed as Exhibit 3.2 to the Company's current report on Form 8-K, which was filed on June 4, 2014 and is incorporated herein by reference.
	~~4.1~~		~~$500,000,000 Credit Agreement, dated as of July 23, 2014, among Magellan Rx Management, Inc., as borrower, Magellan Health, Inc., various lenders and Citibank, N.A., as administrative agent.~~
	~~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 ~~June~~September 30, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) related notes.


Date: ~~July 25,~~October 24, 2014	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)