UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, ~~2019~~2020
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 1-6639

MAGELLAN HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	58-1076937 (IRS Employer Identification No.)
~~4800 N. Scottsdale Rd~~, ~~Suite 4400~~4801 E. Washington Street ~~Scottsdale~~Phoenix, Arizona (Address of principal executive offices)	~~85251~~85034 (Zip code)

(~~602~~800) ~~572-6050~~642-1716

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MGLN	The NASDAQ Global Market

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act. ☐

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

The number of shares of Magellan Health, Inc.’s common stock outstanding as of June 30, ~~2019~~2020 was ~~24,400,553.~~25,310,420.

Table of Contents

FORM 10-Q

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

INDEX


		Page No.
	PART I — Financial Information:
Item 1:	Financial Statements	2
	Consolidated Balance Sheets—December 31, ~~2018~~2019 and June 30, ~~2019~~2020	2
	Consolidated Statements of Comprehensive Income —For the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2019~~2020	3
	Consolidated Statements Changes in Stockholders’ Equity—For the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2019~~2020	4
	Consolidated Statements of Cash Flows—For the Six Months Ended June 30, ~~2018~~2019 and ~~2019~~2020	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	4344
Item 4:	Controls and Procedures	4344
	PART II — Other Information:
Item 1:	Legal Proceedings	4344
Item 1A:	Risk Factors	4345
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	4348
Item 3:	Defaults Upon Senior Securities	4448
Item 4:	Mine Safety Disclosures	4448
Item 5:	Other Information	4448
Item 6:	Exhibits	4448
Exhibit Index		4549
Signatures		4650

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

June 30,

December 31,

2019

2018

(Unaudited)

ASSETS

Current Assets:

Cash and cash equivalents ($160,967 and $105,468 restricted at December 31, 2018 and June 30, 2019, respectively)

$
272,308

$
260,352

Accounts receivable, net

756,059

810,431

Short-term investments ($363,840 and $350,060 restricted at December 31, 2018 and June 30, 2019, respectively)

382,582

371,678

Pharmaceutical inventory

40,818

45,611

Other current assets ($43,401 and $45,896 restricted at December 31, 2018 and June 30, 2019, respectively)

95,400

96,529

Total Current Assets

1,547,167

1,584,601

Property and equipment, net

150,748

145,182

Long-term investments ($2,854 and $22,841 restricted at December 31, 2018 and June 30, 2019, respectively)

3,161

22,841

Deferred income taxes

3,411

3,212

Other long-term assets

24,530

107,431

Goodwill

1,018,156

1,018,156

Other intangible assets, net

231,883

196,368

Total Assets

$
2,979,056

$
3,077,791

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$
72,077

$
75,436

Accrued liabilities

231,356

260,980

Short-term contingent consideration

8,000

119

Medical claims payable

393,547

401,289

Other medical liabilities

169,639

166,226

Current debt, finance lease and deferred financing obligations

24,274

21,077

Total Current Liabilities

898,893

925,127

Long-term debt, finance lease and deferred financing obligations

728,608

712,650

Deferred income taxes

11,167

11,998

Tax contingencies

16,478

17,264

Long-term contingent consideration

2,124

—

Deferred credits and other long-term liabilities

36,483

76,482

Total Liabilities

1,693,753

1,743,521

Preferred stock, par value $.01 per share

Authorized—10,000 shares at December 31, 2018 and June 30, 2019-Issued and outstanding-none

—

—

Common stock, par value $.01 per share

Authorized—100,000 shares at December 31, 2018 and June 30, 2019-Issued and outstanding-53,536 and 23,935 shares at December 31, 2018, respectively, and 54,063 and 24,401 shares at June 30, 2019, respectively

535

541

Other Stockholders’ Equity:

Additional paid-in capital

1,326,645

1,364,693

Retained earnings

1,419,449

1,433,348

Accumulated other comprehensive (loss) income

(324)

415

Treasury stock, at cost, 29,601 and 29,662 shares at December 31, 2018 and June 30, 2019, respectively

(1,461,002)

(1,464,727)

Total Stockholders’ Equity

1,285,303

1,334,270

Total Liabilities and Stockholders’ Equity

$
2,979,056

$
3,077,791



	December 31,		June 30,
	2019		2020
ASSETS
Current Assets:
Cash and cash equivalents ($51,253 and $28,237 restricted at December 31, 2019 and June 30, 2020, respectively)	$	115,752	$	160,419
Accounts receivable, net		680,569		753,065
Short-term investments ($82,772 and $46,315 restricted at December 31, 2019 and June 30, 2020, respectively)		98,797		75,671
Pharmaceutical inventory		44,962		36,694
Other current assets ($36,215 and $73,905 restricted at December 31, 2019 and June 30, 2020, respectively)		69,687		80,375
Current portion of assets held for sale		663,276		1,145,904
Total Current Assets		1,673,043		2,252,128
Property and equipment, net		131,712		141,035
Long-term investments ($2,307 restricted at December 31, 2019)		2,864		—
Deferred income taxes		1,840		28,519
Other long-term assets		58,905		60,770
Goodwill		806,421		806,421
Other intangible assets, net		81,675		62,330
Assets held for sale, less current portion		335,713		—
Total Assets	$	3,092,173	$	3,351,203
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	83,790	$	99,199
Accrued liabilities		191,854		187,286
Medical claims payable		128,114		112,077
Other medical liabilities		92,915		110,268
Current debt, finance lease and deferred financing obligations		3,491		84,942
Current portion of liabilities held for sale		409,983		504,459
Total Current Liabilities		910,147		1,098,231
Long-term debt, finance lease and deferred financing obligations		679,125		641,950
Deferred income taxes		1,971		—
Tax contingencies		9,453		11,097
Deferred credits and other long-term liabilities		56,393		56,956
Liabilities held for sale, less current portion		37,301		—
Total Liabilities		1,694,390		1,808,234
Preferred stock, par value $.01 per share
Authorized—10,000 shares at December 31, 2019 and June 30, 2020-Issued and outstanding-NaN		—		—
Common stock, par value $.01 per share
Authorized—100,000 shares at December 31, 2019 and June 30, 2020-Issued and outstanding-54,285 and 24,623 shares at December 31, 2019, respectively, and 54,972 and 25,310 shares at June 30, 2020, respectively		543		550
Other Stockholders’ Equity:
Additional paid-in capital		1,386,616		1,429,995
Retained earnings		1,475,207		1,576,549
Accumulated other comprehensive income		144		602
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2019 and June 30, 2020, respectively		(1,464,727)		(1,464,727)
Total Stockholders’ Equity		1,397,783		1,542,969
Total Liabilities and Stockholders’ Equity	$	3,092,173	$	3,351,203

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2019

2018

2019


Net revenue:

Managed care and other

$
1,215,340

$
1,283,143

$
2,435,103

$
2,507,122

PBM

595,583

505,193

1,180,897

1,020,703

Total net revenue

1,810,923

1,788,336

3,616,000

3,527,825

Costs and expenses:

Cost of care

935,814

1,001,886

1,864,475

1,943,847

Cost of goods sold

558,419

461,187

1,118,084

950,980

Direct service costs and other operating expenses (1)(2)

259,152

266,434

528,229

538,358

Depreciation and amortization

33,848

33,490

64,255

64,198

Interest expense

8,678

9,141

17,044

18,248

Interest and other income

(3,363)

(5,021)

(5,839)

(9,995)

Total costs and expenses

1,792,548

1,767,117

3,586,248

3,505,636

Income before income taxes

18,375

21,219

29,752

22,189

Provision for income taxes

4,824

7,606

4,749

8,145

Net income

13,551

13,613

$
25,003

$
14,044

Net income per common share:

Basic (See Note B)

$
0.55

$
0.56

$
1.02

$
0.58

Diluted (See Note B)

$
0.53

$
0.56

$
0.98

$
0.58

Other comprehensive income

Unrealized gains (losses) on available-for-sale securities(3)

132

419

(187)

739

Comprehensive income

$
13,683

$
14,032

$
24,816

$
14,783


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Net revenue:
Managed care and other	$	608,614	$	548,711	$	1,175,162	$	1,101,879
PBM		545,675		551,364		1,098,133		1,120,575
Total net revenue		1,154,289		1,100,075		2,273,295		2,222,454
Costs and expenses:
Cost of care		408,911		321,831		778,008		670,939
Cost of goods sold		501,081		528,067		1,027,395		1,061,308
Direct service costs and other operating expenses (1)		195,907		199,756		398,207		403,997
Depreciation and amortization		28,191		23,888		53,608		47,246
Interest expense		9,070		7,995		18,107		16,953
Interest and other income		(1,821)		(551)		(3,580)		(1,770)
Special charges		-		8,309		-		8,309
Total costs and expenses		1,141,339		1,089,295		2,271,745		2,206,982
Income from continuing operations before income taxes		12,950		10,780		1,550		15,472
Provision (benefit) for income taxes		5,735		(36,328)		2,526		(30,566)
Net income (loss) from continuing operations		7,215		47,108		(976)		46,038
Income from discontinued operations, net of tax		6,398		36,397	��	15,020		55,717
Net income	$	13,613	$	83,505	$	14,044	$	101,755

Net income (loss) per common share:
Basic (See Note A)
Continuing operations	$	0.30	$	1.88	$	(0.04)	$	1.85
Discontinued operations		0.26		1.45		0.62		2.24
Consolidated operations	$	0.56	$	3.33	$	0.58	$	4.09
Diluted (See Note A)
Continuing operations	$	0.30	$	1.86	$	(0.04)	$	1.84
Discontinued operations		0.26		1.44		0.62		2.22
Consolidated operations	$	0.56	$	3.30	$	0.58	$	4.06
Other comprehensive income
Unrealized gains on available-for-sale securities (2)		419		659		739		458
Comprehensive income	$	14,032	$	84,164	$	14,783	$	102,213

(1)	Includes stock compensation expense of ~~$10,439~~$5,207 and ~~$5,414~~$6,592, for the three months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively and ~~$18,085~~$14,607 and ~~$15,021~~$12,389 for the six months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively.

(2)

~~Includes changes in fair value~~Net of ~~contingent consideration~~income tax provision of ~~$70~~$131 and ~~$(2,149)~~$219 for the three months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively, and ~~$303~~$231 and ~~$(2,005)~~$152 for the six months ended June 30, ~~2018~~2019 and ~~2019, respectively.~~

~~(3)~~

~~Net of income tax provision (benefit) of $42 and $131 for the three months ended June 30, 2018 and 2019, respectively, and $(59) and $231 for the six months ended June 30, 2018 and 2019,~~2020, respectively.

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)


												Accumulated																Accumulated
				Common Stock				Additional				Other		Total					Common Stock				Additional					Other		Total
	Common Stock				In Treasury			Paid in		Retained		Comprehensive		Stockholders’		Common Stock				In Treasury			Paid in			Retained		Comprehensive		Stockholders’
	Shares	Amount		Shares		Amount		Capital		Earnings		(Loss) Income		Equity		Shares	Amount		Shares		Amount		Capital			Earnings		(Loss) Income		Equity
Balance at March 31, 2018	53,398	$	534		(28,771)	$	(1,397,962)	$	1,296,536	$	1,406,720	$	(699)	$	1,305,129
Stock compensation expense	—		—		—		—		10,439		—		—		10,439
Exercise of stock options	79		1		—		—		4,341		—		—		4,342
Issuance of equity	(2)		—		—		—		—		—		—		—
Repurchase of stock	—		—		(149)		(14,823)		—		—		—		(14,823)
Net income	—		—		—		—		—		13,551		—		13,551
Other comprehensive income—other	—		—		—		—		—		—		132		132
Balance at June 30, 2018	53,475	$	535		(28,920)	$	(1,412,785)	$	1,311,316	$	1,420,271	$	(567)	$	1,318,770

Balance at March 31, 2019	53,695	$	537		(29,662)	$	(1,464,727)	$	1,337,849	$	1,419,735	$	(4)	$	1,293,390	53,695	$	537		(29,662)	$	(1,464,727)	$	1,337,849		$	1,419,735	$	(4)	$	1,293,390
Stock compensation expense	—		—		—		—		5,414		—		—		5,414	—		—		—		—		5,414			—		—		5,414
Exercise of stock options	348		4		—		—		21,430		—		—		21,434	348		4		—		—		21,430			—		—		21,434
Issuance of equity	20		—		—		—		—		—		—		—	20		—		—		—		—			—		—		—
Repurchase of stock	—		—		—		—		—		—		—		—
Net income	—		—		—		—		—		13,613		—		13,613	—		—		—		—		—			13,613		—		13,613
Other comprehensive income—other	—		—		—		—		—		—		419		419	—		—		—		—		—			—		419		419
Balance at June 30, 2019	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693	$	1,433,348	$	415	$	1,334,270	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693		$	1,433,348	$	415	$	1,334,270

Balance at December 31, 2017	52,973	$	530		(28,771)	$	(1,397,962)	$	1,274,811	$	1,399,495	$	(380)	$	1,276,494
Balance at March 31, 2020																54,631	$	546		(29,662)	$	(1,464,727)	$	1,402,797		$	1,493,044	$	(57)	$	1,431,603
Stock compensation expense	—		—		—		—		18,085		—		—		18,085	—		—		—		—		6,958			—		—		6,958
Exercise of stock options	379		4		—		—		21,472		—		—		21,476	324		4		—		—		20,240			—		—		20,244
Issuance of equity	123		1		—		—		(3,052)		—		—		(3,051)	17		—		—		—		—	��		—		—		—
Repurchase of stock	—		—		(149)		(14,823)		—		—		—		(14,823)
Net income	—		—		—		—		—		25,003		—		25,003	—		—		—		—		—			83,505		—		83,505
Other comprehensive (loss)—other	—		—		—		—		—		—		(187)		(187)	—		—		—		—		—					659		659
Adoption of ASC 606	—		—		—		—		—		(4,227)		—		(4,227)
Balance at June 30, 2018	53,475	$	535		(28,920)	$	(1,412,785)	$	1,311,316	$	1,420,271	$	(567)	$	1,318,770
Balance at June 30, 2020																54,972	$	550		(29,662)	$	(1,464,727)	$	1,429,995		$	1,576,549	$	602	$	1,542,969

Balance at December 31, 2018	53,536	$	535		(29,601)	$	(1,461,002)	$	1,326,645	$	1,419,449	$	(324)	$	1,285,303	53,536	$	535		(29,601)	$	(1,461,002)	$	1,326,645		$	1,419,449	$	(324)	$	1,285,303
Stock compensation expense	—		—		—		—		15,021		—		—		15,021	—		—		—		—		15,021			—		—		15,021
Exercise of stock options	389		5		—		—		23,474		—		—		23,479	389		5		—		—		23,474			—		—		23,479
Issuance of equity	138		1		—		—		(447)		—		—		(446)	138		1		—		—		(447)			—		—		(446)
Repurchase of stock	—		—		(61)		(3,725)		—		—		—		(3,725)	—		—		(61)		(3,725)		—			—		—		(3,725)
Net income	—		—		—		—		—		14,044		—		14,044	—		—		—		—		—			14,044		—		14,044
Other comprehensive income—other	—		—		—		—		—		—		739		739	—		—		—		—		—			—		739		739
Adoption of ASC 842	—		—		—		—		—		(145)		—		(145)	—		—		—		—		—			(145)		—		(145)
Balance at June 30, 2019	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693	$	1,433,348	$	415	$	1,334,270	54,063	$	541		(29,662)	$	(1,464,727)	$	1,364,693		$	1,433,348	$	415	$	1,334,270

Balance at December 31, 2019																54,285	$	543		(29,662)	$	(1,464,727)	$	1,386,616		$	1,475,207	$	144	$	1,397,783
Stock compensation expense																—		—		—		—		13,015			—		—		13,015
Exercise of stock options																540		6		—		—		31,501			—		—		31,507
Issuance of equity																147		1		—		—		(1,137)			—		—		(1,136)
Net income																—		—		—		—		—			101,755		—		101,755
Other comprehensive income—other																—		—		—		—		—			—		458		458
Adoption of ASC 326																—		—		—		—		—			(413)		—		(413)
Balance at June 30, 2020																54,972	$	550		(29,662)	$	(1,464,727)	$	1,429,995		$	1,576,549	$	602	$	1,542,969

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

(Unaudited)

(In thousands)

2018

2019

Cash flows from operating activities:

Net income

$
25,003

$
14,044

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

64,255

64,198

Non-cash interest expense

614

679

Non-cash stock compensation expense

18,085

15,021

Non-cash income tax provision (benefit)

(100)

1,026

Non-cash amortization on investments

1,171

(327)

Changes in assets and liabilities, net of effects from acquisitions of businesses:

Accounts receivable, net

(179,350)

(51,544)

Pharmaceutical inventory

(9,388)

(4,793)

Other assets

(57,398)

(23,890)

Accounts payable and accrued liabilities

50,322

20,821

Medical claims payable and other medical liabilities

89,932

4,329

Contingent consideration

303

(3,758)

Tax contingencies

721

610

Deferred credits and other long-term liabilities

16,884

(7,429)

Other

69

372

Net cash provided by operating activities

21,123

29,359

Cash flows from investing activities:

Capital expenditures

(37,132)

(27,804)

Acquisitions and investments in businesses, net of cash acquired

—

(320)

Purchases of investments

(334,250)

(295,768)

Proceeds from maturities and sales of investments

227,446

288,290

Net cash used in investing activities

(143,936)

(35,602)

Cash flows from financing activities:

Payments to acquire treasury stock

(14,323)

(4,124)

Proceeds from exercise of stock options

21,476

20,647

Payments on debt, finance lease and deferred financing obligations

(33,912)

(15,543)

Payments on contingent consideration

—

(6,247)

Other

(3,051)

(446)

Net cash used in financing activities

(29,810)

(5,713)

Net decrease in cash and cash equivalents

(152,623)

(11,956)

Cash and cash equivalents at beginning of period

398,732

272,308

Cash and cash equivalents at end of period

$
246,109

$
260,352

Supplemental cash flow data:

Non-cash investing activities:

Assets acquired under finance leases and deferred financing

$
4,623

$
3,302


	2019		2020
Cash flows from operating activities:
Net income	$	14,044	$	101,755
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		64,198		57,951
Special Charges		—		8,309
Non-cash interest expense		679		941
Non-cash stock compensation expense		15,021		13,015
Non-cash income tax provision (benefit)		1,026		(29,443)
Non-cash (amortization) accretion on investments		(327)		907
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net		(51,544)		(24,535)
Pharmaceutical inventory		(4,793)		8,268
Other assets		(23,890)		(38,322)
Accounts payable and accrued liabilities		20,821		62,970
Medical claims payable and other medical liabilities		4,329		10,510
Contingent consideration		(3,758)		—
Tax contingencies		610		1,343
Deferred credits and other long-term liabilities		(7,429)		(2,537)
Other		372		(289)
Net cash provided by operating activities		29,359		170,843
Net cash (used in) provided by operating activities from discontinued operations		(16,574)		178,326
Net cash provided by (used in) operating activities from continuing operations		45,933		(7,483)
Cash flows from investing activities:
Capital expenditures		(27,804)		(38,305)
Acquisitions and investments in businesses, net of cash acquired		(320)		(369)
Purchases of investments		(295,768)		(417,688)
Proceeds from maturities and sales of investments		288,290		288,137
Net cash used in investing activities		(35,602)		(168,225)
Net cash used in investing activities from discontinued operations		(3,210)		(156,800)
Net cash used in investing activities from continuing operations		(32,392)		(11,425)
Cash flows from financing activities:
Proceeds from borrowings on revolving line of credit		—		80,000
Payments to acquire treasury stock		(4,124)		—
Proceeds from exercise of stock options		20,647		29,825
Payments on debt, finance lease and deferred financing obligations		(15,543)		(40,264)
Payments on contingent consideration		(6,247)		—
Other		(446)		(1,136)
Net cash (used in) provided by financing activities		(5,713)		68,425
Net cash provided by financing activities from discontinued operations		—		4,850
Net cash (used in) provided by financing activities from continuing operations		(5,713)		63,575
Net increase in cash and cash equivalents from continuing operations		7,828		44,667
Cash and cash equivalents at beginning of period		86,923		115,752
Cash and cash equivalents at end of period	$	94,751	$	160,419

Supplemental cash flow data:
Non-cash investing activities:
Assets acquired under finance leases and deferred financing obligations	$	3,302	$	3,599

See accompanying notes to consolidated financial statements.

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, ~~2019~~2020

(Unaudited)

NOTE A—General

Basis of Presentation

The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three and six months ended June 30, ~~2019~~2020 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. On April 30, 2020, the Company and Molina Healthcare, Inc. (“Molina”) entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company has agreed to sell its Magellan Complete Care (“MCC”) business to Molina (the “MCC Sale”) for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as discontinued operations. See Note E—“Discontinued Operations” for additional information.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, ~~2018~~2019 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, ~~2019.~~2020.

Business Overview

The Company ~~is a leader within~~provides managed care services for some of the ~~healthcare management business, and is focused on delivering innovative specialty solutions for the fastest growing,~~ most complex ~~areas of health, including special populations, complete pharmacy benefits, and other specialty carve-out~~ areas of healthcare. The Company ~~develops~~offers innovative solutions that combine ~~advanced~~ analytics, ~~agile~~ technology and clinical ~~excellence~~rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers ~~we serve.~~Magellan serves. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and ~~third party~~third-party administrators (“TPAs”). Magellan operates ~~three~~3 segments: Healthcare, Pharmacy Management and Corporate.

Healthcare

The Healthcare segment “Healthcare” ~~consists~~previously consisted of ~~two~~2 reporting units – Behavioral & Specialty Health and ~~Magellan Complete Care (“MCC”).~~MCC. As a result of the MCC Sale, the Healthcare segment now only includes the Behavioral and Specialty Health reporting unit.

The Behavioral & Specialty Health reporting unit’s customers include health plans, accountable care organizations (“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for (i) behavioral health, (ii) employee assistance plans (“EAP”) and (iii) other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The Behavioral & Specialty Health unit also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies.

~~The~~ MCC, ~~reporting unit~~which is now reflected as discontinued operations, contracts with state Medicaid agencies and the Centers for Medicare and Medicaid Services (“CMS”) to manage care for beneficiaries under various Medicaid and Medicare programs. MCC manages a wide range of services from total medical cost to carve out long-term support services. MCC largely focuses on managing care for more acute special populations including individuals with serious mental illness (“SMI”), dual eligibles, aged, blind and disabled (“ABD”) and other populations with unique and often complex healthcare needs.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Magellan’s coordination and management of these healthcare and long-term support services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

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 Healthcare management services primarily through: (i) ~~risk-based products,~~risk-based contractual arrangements, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed PMPM fee, or (ii) administrative services only (“ASO”) ~~products,~~contractual arrangements, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in some instances, a gain share.

Pharmacy Management

The Pharmacy Management segment (“Pharmacy Management”) is comprised of ~~products and solutions~~services that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s ~~services~~customer solutions include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.

These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to ~~health plans,~~managed care organizations, employers, third party administrators, ~~managed care organizations,~~ state governments, Medicare Part D, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy ~~products~~services to its existing customers and market its pharmacy solutions to the Healthcare customer base.

Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management provides services to the Healthcare segment for ~~its~~most of the MCC business.

On May 11, 2020, the Company announced its decision to exit the Medicare Part D business at the end of 2020. The Company will retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM needs of its existing and prospective Medicare customers.

Corporate

This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

Summary of Significant Accounting Policies

~~Recent Accounting Pronouncements~~

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. The FASB also issued various ASUs which subsequently amended ASU 2016-02. These amendments and ASU 2016-02, collectively known as Accounting Standard Codification 842 (“ASC 842”), are effective for annual and interim reporting periods of public entities beginning after December 15, 2018. The Company adopted ASC 842 on a modified retrospective basis on January 1, 2019. The Company applied the transition method which does not require adjustments to comparative periods nor requires modified disclosures in those comparative periods. In addition, the Company elected the package of practical expedients, the practical expedient which permits combining lease and non-lease components (which was applicable to our real estate leases) and the short-term lease practical expedient. The Company implemented new leasing software capable of producing the data to prepare the required accounting and disclosures prescribed by ASC 842. Adoption of ASC 842 resulted in the recognition of right-of-use (“ROU”) assets and lease liabilities of $59.8 million and $67.9 million, respectively as of January 1, 2019. The adoption of ASC 842 did not have a material impact on the Company’s consolidated results of operations or cash flows.

~~The cumulative effect of the change to our consolidated January 1, 2019 balance sheet for the adoption of ASC 842 was as follows (in thousands):~~

Balance at December 31, 2018

Adjustments Due to ASC 842

Balance at January 1, 2019
Assets

Deferred income taxes
$
3,411

$
52

$
3,463
Other long-term assets

24,530

59,820

84,350
Total Assets

2,979,056

59,872

3,038,928

Liabilities and Stockholders' Equity

Accrued liabilities

231,356

13,018

244,374
Total Current Liabilities

898,893

13,018

911,911
Deferred credits and other long-term liabilities

36,483

46,999

83,482
Total Liabilities

1,693,753

60,017

1,753,770
Retained earnings

1,419,449

(145)

1,419,304
Total Stockholders' Equity

1,285,303

(145)

1,285,158
Total Liabilities and Stockholders' Equity

2,979,056

59,872

3,038,928

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

~~The impact of the adoption of ASC 842 on our consolidated balance sheet as of June 30, 2019 was as follows (in thousands):~~

As Reported

Adjustments

Balance Without ASC 842 Adoption

Assets

Other long-term assets
$
107,431

$
(52,862)

$
54,569

Total Assets

3,077,791

(52,862)

3,024,929

Liabilities and Stockholders' Equity

Accrued liabilities

260,980

(11,700)

249,280

Total Current Liabilities

925,127

(11,700)

913,427

Deferred credits and other long-term liabilities

76,482

(41,398)

35,084

Total Liabilities

1,743,521

(53,098)

1,690,423

Retained earnings

1,433,348

236

1,433,584

Total Stockholders' Equity

1,334,270

236

1,334,506

Total Liabilities and Stockholders' Equity

3,077,791

(52,862)

3,024,929

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This ASU amends the accounting on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 31, 2018. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operation, financial position and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this ASU eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under ASC 606 which are explained in more detail in “~~Revenue Recognition~~~~” below. Actual results could differ from those estimates.~~

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under Accounting Standard Codification 606 (“ASC 606”) which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.

Revenue Recognition

Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three and six months ended June 30, 2019 and 2020 by major service line, type of customer and timing of revenue recognition (in thousands):


	Three Months Ended June 30, 2019
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	400,591	$	—	$	(65)	$	400,526
EAP risk-based		87,296		—		—		87,296
ASO		58,226		10,327		(82)		68,471
PBM, including dispensing		—		480,167		(4,335)		475,832
Medicare Part D		—		69,843		—		69,843
PBA		—		33,476		—		33,476
Formulary management		—		18,426		—		18,426
Other		—		419		—		419
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

Type of Customer
Government	$	236,014	$	173,804	$	—	$	409,818
Non-government		310,099		438,854		(4,482)		744,471
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	550,010	$	(4,335)	$	545,675
Transferred over time		546,113		62,648		(147)		608,614
Total net revenue	$	546,113	$	612,658	$	(4,482)	$	1,154,289

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)


	Three Months Ended June 30, 2020
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	344,199	$	—	$	(92)	$	344,107
EAP risk-based		77,419		—		—		77,419
ASO		59,403		12,271		(85)		71,589
PBM, including dispensing		—		499,484		(4,831)		494,653
Medicare Part D		—		56,711		—		56,711
PBA		—		30,811		—		30,811
Formulary management		—		25,061		—		25,061
Other		—		(276)		—		(276)
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075

Type of Customer
Government	$	222,393	$	208,989	$	—	$	431,382
Non-government		258,628		415,073		(5,008)		668,693
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	556,195	$	(4,831)	$	551,364
Transferred over time		481,021		67,867		(177)		548,711
Total net revenue	$	481,021	$	624,062	$	(5,008)	$	1,100,075

~~Revenue Recognition~~

Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three and six months ended June 30, 2019 by major service line, type of customer and timing of revenue recognition (in thousands):


	Three Months Ended June 30, 2019								Six Months Ended June 30, 2019
	Healthcare		Pharmacy Management		Elimination		Total		Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	400,591	$	—	$	(65)	$	400,526	$	762,399	$	—	$	(143)	$	762,256
EAP risk-based		87,296		—		—		87,296		176,913		—		—		176,913
ASO		57,995		10,327		(82)		68,240
Magellan Complete Care
Risk-based, non-EAP		659,362		—		—		659,362
ASO		15,398		—		—		15,398		113,623		18,470		(173)		131,920
PBM, including dispensing		—		480,167		(44,817)		435,350		—		973,391		(8,442)		964,949
Medicare Part D		—		69,843		—		69,843		—		133,184		—		133,184
PBA		—		33,476		—		33,476		—		67,453		—		67,453
Formulary management		—		18,426		—		18,426		—		35,609		—		35,609
Other		—		419		—		419		—		1,011		—		1,011
Total net revenue	$	1,220,642	$	612,658	$	(44,964)	$	1,788,336	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

Type of Customer
Government	$	910,543	$	173,804	$	—	$	1,084,347	$	467,076	$	401,852	$	—	$	868,928
Non-government		310,099		438,854		(44,964)		703,989		585,859		827,266		(8,758)		1,404,367
Total net revenue	$	1,220,642	$	612,658	$	(44,964)	$	1,788,336	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	550,010	$	(44,817)	$	505,193	$	—	$	1,106,575	$	(8,442)	$	1,098,133
Transferred over time		1,220,642		62,648		(147)		1,283,143		1,052,935		122,543		(316)		1,175,162
Total net revenue	$	1,220,642	$	612,658	$	(44,964)	$	1,788,336	$	1,052,935	$	1,229,118	$	(8,758)	$	2,273,295

109

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

Six Months Ended June 30, 2019

Healthcare

Pharmacy Management

Elimination

Total
Major Service Lines

Behavioral & Specialty Health

Risk-based, non-EAP
$
762,399

$
—

$
(143)

$
762,256
EAP risk-based

176,913

—

—

176,913
ASO

113,198

18,470

(173)

131,495
Magellan Complete Care

Risk-based, non-EAP

1,301,933

—

—

1,301,933
ASO

30,452

—

—

30,452
PBM, including dispensing

—

973,392

(85,872)

887,520
Medicare Part D

—

133,183

—

133,183
PBA

—

67,453

—

67,453
Formulary management

—

35,609

—

35,609
Other

—

1,011

—

1,011
Total net revenue
$
2,384,895

$
1,229,118

$
(86,188)

$
3,527,825

Type of Customer

Government
$
1,799,036

$
401,852

$
—

$
2,200,888
Non-government

585,859

827,266

(86,188)

1,326,937
Total net revenue
$
2,384,895

$
1,229,118

$
(86,188)

$
3,527,825

Timing of Revenue Recognition

Transferred at a point in time
$
—

$
1,106,575

$
(85,872)

$
1,020,703
Transferred over time

2,384,895

122,543

(316)

2,507,122
Total net revenue
$
2,384,895

$
1,229,118

$
(86,188)

$
3,527,825


	Six Months Ended June 30, 2020
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	694,044	$	—	$	(182)	$	693,862
EAP risk-based		157,357		—		—		157,357
ASO		118,526		23,805		(168)		142,163
PBM, including dispensing		—		1,017,596		(9,398)		1,008,198
Medicare Part D		—		112,377		—		112,377
PBA		—		60,940		—		60,940
Formulary management		—		47,222		—		47,222
Other		—		335		—		335
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Type of Customer
Government	$	449,495	$	412,946	$	—	$	862,441
Non-government		520,432		849,329		(9,748)		1,360,013
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	1,129,973	$	(9,398)	$	1,120,575
Transferred over time		969,927		132,302		(350)		1,101,879
Total net revenue	$	969,927	$	1,262,275	$	(9,748)	$	2,222,454

Per Member Per Month (“PMPM”) Revenue. Almost all of the Healthcare revenue and a small portion of the Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of behavioral healthcare, specialty healthcare, pharmacy management, or fully integrated healthcare services. PMPM contracts generally have a term of one year or longer, with the exception of government contracts where the customer can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is entirely variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include adjustments for things such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using an expected value methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service. The remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership as a measure of progress.

Under certain government contracts, our risk scores are compared with the overall average risk scores for the relevant state and market pool. Generally, if our risk score is below the average risk score, we are required to make a risk adjustment payment into the risk pool, and if our risk score is above the average risk score, we will receive a risk adjustment payment from the risk pool. Risk adjustments can have a positive or negative retroactive impact to rates.

Pharmacy Benefit Management Revenue. The Company’s customers for PBM business, including pharmaceutical dispensing operations, are generally comprised of MCOs, employer groups and health plans. PBM relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed

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June 30, ~~2019~~2020

(Unaudited)

~~relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed~~ by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The acceptance of each individual claim creates enforceable rights and obligations for each party and represents a separate contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments and any associated administrative fees, when claims are adjudicated or the drugs are shipped. 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, controls the underlying service, 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~~collecting 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. For dispensing, 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.

Medicare Part D. The Company is contracted with CMS as a Prescription Drug Plan (“PDP”) to provide prescription drug benefits to Medicare beneficiaries. The accounting for Medicare Part D revenue is primarily the same as that for PBM, as previously discussed. However, there is certain variable consideration present only in Medicare Part D arrangements. The Company estimates the annual amount of variable consideration using a most likely amount methodology, which is allocated to each reporting period based upon actual utilization as a percentage of estimated utilization for the year. Amounts estimated throughout the year for interim reporting are substantially resolved and fixed as of December 31^st, the end of the plan year.

Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and other government sponsored programs. PBA contracts are generally multi-year arrangements but include language regarding early termination for convenience without material penalty provisions that results in enforceable rights and obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the claims processing activities, and has concluded that a time-based measure is appropriate for recognizing PBA revenue. For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of benefit of the material right, which generally ranges from 2 to 10 years.

Formulary Management Revenue. The Company administers formulary management programs 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. Formulary management contracts generally have a term of one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each ~~quarter,~~quarter; therefore the transaction price itself is variable. The Company uses the expected value methodology to estimate the total rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate revenue any rebates that are passed through to its clients.

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

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June 30, ~~2019~~2020

(Unaudited)

when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.

Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the provision of various managed care services, which are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a cost reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with the value to the customer of the Company’s performance completed to ~~date,~~date; therefore, the Company is utilizing the “right to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.

The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or services purchased by the customer, such as the operation of a counseling services group or call center. The performance obligation represents a series for the duration of the arrangement. The reimbursement rate is fixed per the contract; however, the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it relates has been provided (i.e. as the Company provides hours, counselors or units of service).

In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the Company’s PBM and Part D business, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. For the Company’s contracts that pertain to these exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily includes net PMPM fees associated with unspecified membership that fluctuates throughout the contract.

Accounts Receivable, Contract Assets and Contract Liabilities

Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except percentages):


	December 31,		June 30,						December 31,		June 30,
	2018		2019		$ Change		% Change		2019		2020		$ Change		% Change
Accounts receivable	$	786,395	$	854,715	$	68,320		8.7%	$	717,455	$	837,710	$	120,255		16.8%
Contract assets		4,647		12,891		8,244		177.4%		2,162		7,151		4,989		230.8%
Contract liabilities - current		16,853		7,809		(9,044)		(53.7%)		6,728		25,769		19,041		283.0%
Contract liabilities - long-term		13,441		12,187		(1,254)		(9.3%)		11,099		11,022		(77)		(0.7%)

Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by ~~$68.3~~$120.3 million, mainly due to timing of ~~receipts.~~receipts and HIF accrual. Contract assets, which are included in other current assets on the consolidated balance sheets, increased by ~~$8.2~~$5.0 million, mainly due to the timing of accrual of certain performance ~~incentives.~~incentives and annual settlements. Contract liabilities – current, which are included in accrued liabilities on the consolidated balance sheets, ~~decreased~~increased by ~~$9.0~~$19.0 million, mainly due to the ~~timing of receipts related to January 2019 revenues.~~HIF recognition in the current year period. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, ~~decreased by $1.3 million, mainly due to certain balances which became current.~~are consistent with prior year.

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June 30, ~~2019~~2020

(Unaudited)

During the three months ended June 30 ~~2019,~~2020, the Company recognized revenue of ~~$2.6~~$2.0 million that was included in current contract liabilities at March 31, ~~2019.~~2020. During the six months ended June 30, ~~2019,~~2020, the Company recognized revenue of ~~$14.2~~$4.0 million that was included in current contract liabilities atas December 31, ~~2018.~~2019. The estimated timing of recognition of amounts included in contract liabilities at June 30, ~~2019~~2020 are as follows: ~~2019—~~2020—$~~5.9~~24.0 million; ~~2020—~~2021—$3.6 million; ~~2021—~~2022—$~~3.0~~3.1 million; ~~2022~~2023 and ~~beyond—~~beyond—$~~7.5~~6.1 million. During the three and six months ended June 30, ~~2019,~~2020, the revenue the Company recognized related to performance obligations that were satisfied, or partially satisfied, in previous periods ~~were~~was not material.

The Company’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service, or within a few months thereafter. The timing of payments from customers from time to time ~~generate~~generates contract assets or contract liabilities; however, these amounts are immaterial.

The Company’s accounts receivable is net of an allowance for credit losses. The estimate of current expected credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each platform given the individual lines of business and market. Pooling was further disaggregated based on either geography or product type.

The Company leveraged historical write offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts through the use of an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses, giving consideration to the location and risks associated with the Company’s customers.

Significant Customers

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

The Company had no customers that exceeded ten percent of the Company’s net revenues from continuing operations. The following MCC customers, which are included in discontinued operations, previously exceeded ten percent of the Company’s consolidated net revenues.

The Company has contracts with the Commonwealth of Virginia (the “Virginia Contracts”). The Company began providing Medicaid managed long-term services and supports to enrollees in the Commonwealth Coordinated Care Plus (“CCC Plus”) program on August 1, 2017. The CCC Plus contract expires annually on December 31 and automatically renews annually on January 1 for a period of five calendar years, with potential of up to ~~five~~5 12-month extensions. The Commonwealth of Virginia has the right to terminate the CCC Plus contract with cause at any time and for convenience upon 90 days’ notice. On August 1, 2018, the Company began providing integrated healthcare services to Medicaid enrollees in the Commonwealth of Virginia under the Medallion 4.0/FAMIS Managed Care Program (“Medallion”). The initial term of the Medallion contract is from August 1, 2018 through June 30, 2019, with ~~six~~6 12-month renewal options. The Medallion contract has been renewed through June 30, ~~2020.~~2021. The Commonwealth of Virginia has the right to terminate the Medallion contract with cause at any time and for convenience upon 180 days’ notice. The Virginia Contracts generated net revenues of ~~$228.8~~$391.2 million and ~~$391.2~~$475.2 million for the six months ended June 30, ~~2018~~2019 and ~~2019, respectively.~~2020, respectively, which are reported as discontinued operations.

The Company had a contract with the State of New York (the “New York Contract”) to provide integrated managed care services to Medicaid and Medicare enrollees in the State of New York. The Company’s New York Contract terminated on December 31, 2016; however, the Company, along with other participating managed care plans in the state, continues to provide services while a new contract is being finalized. The Company began recognizing revenue in relation to the New York Contract on January 1, 2014 as a result of the acquisition of AlphaCare Holdings, Inc. The Company’s revenues under the New York Contracts increased starting on November 1, 2017 as a result of the acquisition of SWH Holdings, Inc. The New York Contracts generated net revenues of ~~$356.6~~$400.6 million and ~~$400.6~~$411.7 million for the six months ended June 30, ~~2018~~2019 and ~~2019, respectively.~~2020, respectively, which are reported as discontinued operations.

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(Unaudited)

The Company has contracts with the Commonwealth of Massachusetts and CMS (the “Massachusetts Contracts”) to provide integrated managed care services to Medicaid and Medicare enrollees in the Commonwealth of Massachusetts. Medicaid services are provided under a Senior Care Options contract (“SCO Contract”) which began on January 1, 2016 and extends through December 31, ~~2020,~~2021, with the potential for up to ~~five~~5 additional ~~one year~~one-year extensions. The Commonwealth of Massachusetts may terminate the contract with cause without prior notice and upon 180 days’ notice without cause. Medicare services are provided under a one-year contract with ~~the Center for Medicare and Medicaid Services (“CMS”).~~CMS. The CMS contract currently extends through December 31, ~~2019.~~2020. The Company began recognizing revenue in relation to the Massachusetts Contracts on November 1, 2017 as a result of the acquisition of SWH Holdings, Inc. The Massachusetts Contracts generated net revenues of ~~$330.9~~$360.9 million and ~~$360.9~~$359.7 million for the six months ended June 30, ~~2018~~2019 and ~~2019, respectively.~~2020, respectively, which are reported within discontinued operations.

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

Customers exceeding ten percent of segment net revenues

~~In addition to the Massachusetts Contract, New York Contract and Virginia Contract previously discussed, the~~The following customers generated in excess of ten percent of net revenues for the respective segment for the six months ended June 30, ~~2018~~2019 and ~~2019~~2020 (in thousands):

Segment

Term Date

2018

2019

Healthcare

Customer A

December 31, 2023

$
307,902

$
118,061
*

Pharmacy Management

Customer B

March 31, 2021

176,650

174,535

*

Segment

Term Date

2019

2020

Healthcare

Customer A

December 31, 2021

$
161,887

$
175,107

Pharmacy Management

Customer B

March 31, 2021

$
174,535

$
195,930

~~Revenue amount did not exceed 10 percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.~~

Concentration of Business

The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the “Pennsylvania Counties”) which are part of the Pennsylvania Medicaid program, with members under its contract with CMS and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled ~~$275.3~~$271.4 million and ~~$271.4~~$272.2 million for the six months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively. Net revenues from members in relation to its contracts with CMS in aggregate totaled ~~$205.1~~$133.2 million and ~~$133.2~~$112.3 million for the six months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively. As of December 31, ~~2018~~2019 and June 30, ~~2019,~~2020, the Company had ~~$131.0~~$117.4 million and ~~$131.7~~$114.3 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. In May 2020, the Company announced its decision to exit the Part D business at the end of 2020. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled ~~$165.8~~$156.7 million and ~~$156.7~~$136.1 million for the six months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively.

The Company’s contracts with customers typically have stated 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 30 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.

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June 30, ~~2019~~2020

(Unaudited)

Leases

The Company leases certain office space, distribution centers, land and equipment. We assess our contracts to determine if it contains a lease. This assessment is based on (i) the right to control the use of an identified asset; (ii) the right to obtain substantially all of the economic benefits from the use of the identified asset; and (iii) the right to use the identified asset. The Company elected the short-term lease practical expedient; thus, leases with an initial term of twelve months or less are not capitalized and the expense is recognized on a straight-line basis. Most leases include ~~one~~1 or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of renewal options are at the sole discretion of the Company. Renewal options that the Company is reasonably certain to accept are recognized as part of the ~~ROU~~right-of-use (“ROU”) asset.

Operating leases are included in other long-term assets, accrued liabilities and deferred credits and other long-term liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current debt, ~~capital~~finance lease deferred financing obligations and long-term debt, ~~capital~~finance lease and deferred financing obligations in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments per the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the rate implicit in most of our leases is not readily determinable, the Company used its incremental borrowing rate to determine the present value of lease payments.

The following table shows the components of lease expenses for the three and six months ended June 30, ~~2019~~2020 (in thousands):


	Three months ended June 30, 2019		Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Operating lease cost	$	4,657	$	2,503	$	4,604
Finance lease cost:
Amortization of right-of-use asset		1,018		1,046		2,378
Interest on lease liabilities		418		213		427
Total finance lease cost		1,436		1,259		2,805
Short-term lease cost		346		80		204
Variable lease cost		690		505		1,011
Total lease cost		7,129		4,347		8,624
Sublease income		(102)		(66)		(179)
Net lease cost	$	7,027	$	4,281	$	8,445

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

The following table shows the components of the lease assets and liabilities as of June 30, 2020 (in thousands):


	June 30, 2020
Operating leases:
Other long-term assets	$	20,832

Accrued liabilities	$	23,959
Deferred credits and other long-term liabilities		9,661
Total operating lease liabilities	$	33,620

Finance leases:
Property and equipment, net	$	13,489

Current debt, finance lease and deferred financing obligations	$	4,989
Long-term debt, finance lease and deferred financing obligations		14,024
Total finance lease liabilities	$	19,013

The maturity dates of the Company’s leases as of June 30, 2020 are summarized below (in thousands):


	June 30, 2020
2020	$	8,201
2021		13,819
2022		12,518
2023		9,295
2024		7,927
2025 and beyond		2,581
Total lease payments		54,341
Less interest		(1,708)
Present value of lease liabilities	$	52,633

The following table shows the weighted average remaining lease term and discount rate as of June 30, 2020:


	June 30, 2020
Weighted average remaining lease term
Operating leases		3.96
Finance leases		4.08
Weighted average discount rate
Operating leases		4.79%
Finance leases		4.39%

Supplemental cash flow information relating to leases is as follows (in thousands):


	Six months ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,196
Operating cash flows from finance leases		2,815
Financing cash flows from finance leases		427
Right-of-use asset obtained in exchange for new lease obligation
Operating leases		902
Finance leases		3,599

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

~~The following table shows the components of lease expenses for the six months ended June 30, 2019 (in thousands):~~

Six months ended June 30, 2019

Operating lease cost
$
9,382

Finance lease cost:

Amortization of right-of-use asset

1,958

Interest on lease liabilities

634

Total finance lease cost

2,592

Short-term lease cost

664

Variable lease cost

1,564

Total lease cost

14,202

Sublease income

(200)

Net lease cost
$
14,002

~~The following table shows the components of the lease assets and liabilities as of June 30, 2019 (in thousands):~~

June 30, 2019
Operating leases:

Other long-term assets
$
52,862

Accrued liabilities
$
13,334
Deferred credits and other long-term liabilities

47,773
Total operating lease liabilities
$
61,107

Finance leases:

Property and equipment, net
$
14,670

Current debt, finance lease and deferred financing obligations
$
4,250
Long-term debt, finance lease and deferred financing obligations

15,846
Total finance lease liabilities
$
20,096

~~The maturity dates of the Company’s leases as of June 30, 2019 are summarized below (in thousands):~~

June 30, 2019
2019
$
9,446
2020

17,034
2021

16,423
2022

15,403
2023

11,426
2024 and beyond

13,758
Total lease payments

83,490
Less interest

(2,287)
Present value of lease liabilities
$
81,203

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~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

~~The following table shows the weighted average remaining lease term and discount rate as of June 30, 2019:~~


	~~June 30, 2019~~
~~Weighted average remaining lease term~~
~~Operating leases~~		~~4.70~~
~~Finance leases~~		~~5.14~~
~~Weighted average discount rate~~
~~Operating leases~~		~~4.79%~~
~~Finance leases~~		~~4.52%~~

~~Supplemental cash flow information relating to leases is as follows (in thousands):~~

Six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
$
8,852
Operating cash flows from finance leases

2,068
Financing cash flows from finance leases

427
Right-of-use asset obtained in exchange for new lease obligation

Operating leases

937
Finance leases

—

Fair Value Measurements

The Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

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

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

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

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s assets and liabilities that are required to be measured at fair value as of December 31, 2019 and June 30, 2020 (in thousands):


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	111,085	$	—	$	111,085
Investments:
U.S. Government and agency securities		30,775		—		—		30,775
Corporate debt securities		—		69,581		—		69,581
Certificates of deposit		—		1,305		—		1,305
Total assets held at fair value	$	30,775	$	181,971	$	—	$	212,746
								��


	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (2)	$	—	$	132,038	$	—	$	132,038
Investments:
U.S. Government and agency securities		32,174		—		—		32,174
Corporate debt securities		—		42,192		—		42,192
Certificates of deposit		—		1,305		—		1,305
Total assets held at fair value	$	32,174	$	175,535	$	—	$	207,709

(1)	Excludes $4.7 million of cash held in bank accounts by the Company.

(2)	Excludes $28.4 million of cash held in bank accounts by the Company.

For the six months ended June 30, 2020, 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 fair value of the Notes (as defined below) of $366.2 million as of June 30, 2020 was determined based on quoted market prices and would be classified within Level 1 of the fair value hierarchy. The estimated fair value of the Company’s term loan of $271.9 million as of June 30, 2020 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy. The estimated fair

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

December 31, 2018


Level 1

Level 2

Level 3

Total

Assets

Cash and cash equivalents (1)

$
—

$
263,462

$
—

$
263,462

Investments:

U.S. Government and agency securities

67,815

—

—

67,815

Obligations of government-sponsored enterprises (2)

—

5,229

—

5,229

Corporate debt securities

—

292,049

—

292,049

Certificates of deposit

—

20,650

—

20,650

Total assets held at fair value

$
67,815

$
581,390

$
—

$
649,205

Liabilities

Contingent consideration

$
—

$
—

$
10,124

$
10,124

Total liabilities held at fair value

$
—

$
—

$
10,124

$
10,124

June 30, 2019


Level 1

Level 2

Level 3

Total

Assets

Cash and cash equivalents (3)

$
—

$
256,083

$
—

$
256,083

Investments:

U.S. Government and agency securities

110,361

—

—

110,361

Obligations of government-sponsored enterprises (4)

—

1,501

—

1,501

Corporate debt securities

—

257,507

—

257,507

Certificates of deposit

—

25,150

—

25,150

Total assets held at fair value

$
110,361

$
540,241

$
—

$
650,602

Liabilities

Contingent consideration

$
—

$
—

$
119

$
119

Total liabilities held at fair value

$
—

$
—

$
119

$
119

~~(1)~~

~~Excludes $8.8 million of cash held in bank accounts by the Company.~~

~~(2)~~

~~Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal National Mortgage Association.~~

~~(3)~~

~~Excludes $4.3 million of cash held in bank accounts by the Company.~~

~~(4)~~

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

~~For the six months ended June 30, 2019, the Company has not transferred any assets between fair value measurement levels.~~

The carrying values of financial instruments, including accounts receivable, accounts payable and revolving loan borrowings, approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of $399.0 million as of June 30, 2019 was determined based on quoted market prices and would be classified within Level 1 of the fair value hierarchy. The estimated fair value of the Company’s term loan of $319.4 million as of June 30, 2019 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.

As of the balance sheet date, the fair value of contingent consideration is determined based on probabilities of payment, projected payment dates, discount rates, projected operating income, member engagement and new contract

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

execution. The Company used a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. 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 unobservable inputs used in the fair value measurement include the discount rate, probabilities of payment and projected payment dates.

As of December 31, 2018 and June 30, 2019, the Company estimated undiscounted future contingent payments of $10.6 million and $0.1 million, respectively. As of June 30, 2019, the aggregate amount of the future potential contingent consideration payment is $0.1 million which is projected to be paid in 2020.

As of December 31, 2018, the fair value of the short-term and long-term contingent consideration was $8.0 million and $2.1 million, respectively, and is included in short-term contingent consideration and long-term contingent consideration, respectively, in the consolidated balance sheets. As of June 30, 2019, the fair value of the short-term contingent consideration was $0.1 million and is included in short-term contingent consideration in the consolidated balance sheets.

The change in the fair value of the contingent consideration was $0.1 million and $0.3 million for the three and six months ended June 30, 2018, respectively, and $(2.1) million and $(2.0) million for the three and six months ended June 30, 2019, respectively, which were recorded as direct service costs and other operating expenses in the consolidated statements of comprehensive income.

~~The following table summarizes the Company’s liability for contingent consideration for the six months ended June 30, 2019 (in thousands):~~

June 30,

2019

Balance as of beginning of period

$
10,124

Changes in fair value

(2,005)

Payments

(8,000)

Balance as of end of period

$
119

Cash and Cash Equivalents

Cash equivalents are short-term, highly liquid interest-bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. ~~Bank~~Book overdrafts are reflected within accounts payable on the balance sheets. ~~There were no bank overdrafts at December 31, 2018.~~ At June 30, ~~2019, the Company had $3.9 million in bank overdrafts. At June 30, 2019,~~2020, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries of ~~$73.0~~approximately $29 million are included in cash and cash equivalents.

Investments

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

As of December 31, ~~2018~~2019 and June 30, ~~2019,~~2020, there were no material unrealized losses that the Company determined to be other-than-temporary. NoNaN realized gains or losses were recorded for the three months or six months ended June 30, 2019 or 2020. The following is a summary of short-term and long-term investments at December 31, 2019 and June 30, 2020 (in thousands):


	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	30,742	$	38	$	(5)	$	30,775
Corporate debt securities		69,552		40		(11)		69,581
Certificates of deposit		1,305		—		—		1,305
Total investments at December 31, 2019	$	101,599	$	78	$	(16)	$	101,661


	June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	32,066	$	108	$	—	$	32,174
Corporate debt securities		42,129		71		(8)		42,192
Certificates of deposit		1,305		—		—		1,305
Total investments at June 30, 2020	$	75,500	$	179	$	(8)	$	75,671

2018

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

~~June 30, 2018 or 2019. The following is a summary of short-term and long-term investments at December 31, 2018 and June 30, 2019 (in thousands):~~

December 31, 2018

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated


Cost

Gains

Losses

Fair Value

U.S. Government and agency securities

$
67,870

$
17

$
(72)

$
67,815

Obligations of government-sponsored enterprises (1)

5,257

—

(28)

5,229

Corporate debt securities

292,392

6

(349)

292,049

Certificates of deposit

20,650

—

—

20,650

Total investments at December 31, 2018

$
386,169

$
23

$
(449)

$
385,743

June 30, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated


Cost

Gains

Losses

Fair Value

U.S. Government and agency securities

$
110,209

$
158

$
(6)

$
110,361

Obligations of government-sponsored enterprises (2)

1,503

—

(2)

1,501

Corporate debt securities

257,112

396

(1)

257,507

Certificates of deposit

25,150

—

—

25,150

Total investments at June 30, 2019

$
393,974

$
554

$
(9)

$
394,519

~~(1)~~

~~Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.~~

~~(2)~~

~~Includes investment in notes issued by the Federal Home Loan Bank.~~

The maturity dates of the Company’s investments as of June 30, ~~2019~~2020 are summarized below (in thousands):


	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
2019	$	226,389	$	226,537
2020		167,071		167,464	$	63,787	$	63,901
2021		514		518		11,713		11,770
Total investments at June 30, 2019	$	393,974	$	394,519
Total investments at June 30, 2020					$	75,500	$	75,671

Income Taxes

The Company’s effective income tax rates from continuing operations were ~~16.0~~163.0 percent and ~~36.7~~(197.6) percent for the six months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively. These rates differ from the applicable federal statutory income tax rate primarily due to state income taxes, permanent differences between book and tax income, and ~~changes~~a discrete adjustment for the recognition of a $38.9 million nonrecurring tax benefit in the current year for tax basis in excess of net book value for certain assets to ~~recorded tax contingencies.~~be included in the MCC Sale. The Company also accrues interest and penalties related to uncertain tax positions in its provision for income taxes. The ~~effective income tax rate for the six months ended June 30, 2018 is lower than the~~significant effective income tax rate for the six months ended June 30, 2019 is primarily due to ~~permanent differences~~the impact of the discrete adjustment for recognized stock compensation expense in excess of tax deductions relative to the reduced level of earnings for the period. The significant negative effective income tax rate for the six months ended June 30, 2020 is primarily due to the discrete adjustment for the nonrecurring tax benefit related to ~~stock compensation expense.~~the divestiture recognized in the current year.

The Company files a consolidated federal income tax return with its eighty-percent or more controlled subsidiaries. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions.

~~During 2018,~~On March 27, 2020, the ~~Internal Revenue Service~~Coronavirus Aid, Relief, and Economic Security Act (“~~IRS”~~CARES Act”) ~~began examinations~~was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations. The CARES Act includes several significant provisions related to taxes. As of June 30, 2020, the Company has not utilized any of the ~~following federal consolidated income tax returns: (i)~~provisions that would result in a material impact on its results. However, the Company ~~for~~continues to evaluate the ~~year ended December 31, 2015, (ii) SWH Holdings, Inc. for~~relief options available under the ~~year ended December 31, 2016,~~CARES Act, as well as other emergency relief initiatives and ~~(iii) AlphaCare Holdings for~~stimulus packages instituted by the year ended December 31, 2016. During 2018, the IRS concluded its review of the Company’s 2015 return. In resolution of that examination, the Company paid federal taxes of $0.3 million in the quarter ended September 30, 2018. On April, 18, 2019, the Company received a “no change” letter regarding the AlphaCare Holdings examination. And on June 29, 2019, the IRS verbally indicated a “no change” letter is being processed regarding the SWH Holdings examination.

~~Table of Contents~~Federal Government.

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

Net Operating Loss Carryforwards

The Company has ~~$27.7~~$16.2 million of federal net operating loss carryforwards (“NOLs”) available to reduce consolidated taxable income in ~~2019~~2020 and subsequent years. These NOLs ~~(including $27.1 million~~were incurred by AlphaCare prior to its membership in the Magellan consolidated ~~group)~~group and will expire in ~~2019~~2032 through 2035 if not used and are subject to examination and adjustment by the IRS. In addition, the Company’s utilization of these NOLs is subject to limitations under the Internal Revenue Code as to the timing and use. At this time, the Company does not believe these limitations will restrict the Company’s ability to use any federal NOLs before they expire. However, upon completion of the MCC Sale, any federal NOL carryovers that remain at that time will be assumed by Molina. As such, the deferred tax asset related to these net operating loss carryforwards is netted within deferred tax liabilities included in current portion of liabilities held for sale in the consolidated balance sheets.

The Company and its subsidiaries also have ~~$88.2~~$89.0 million of NOLs available to reduce state and local taxable income at certain subsidiaries in ~~2019~~2020 and subsequent years. Most of these NOLs will expire in ~~2019~~2020 through 2038 if not used and are subject to examination and adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and use. Other than those considered in determining the valuation allowances discussed below, the Company does not believe these limitations will restrict the Company’s ability to use any of these state and local NOLs before they expire. However, $17.1 million of these state and local NOLs will, to the extent not utilized beforehand, be assumed by Molina upon completion of the MCC Sale. As such, the deferred tax asset related to these net operating loss carryforwards is netted within deferred tax liabilities included in current portion of liabilities held for sale in the consolidated balance sheets.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Deferred tax assets as of December 31, ~~2018~~2019 and June 30, ~~2019~~2020 are shown net of valuation allowances of ~~$1.5~~$2.1 million. These valuation allowances mostly relate to uncertainties regarding the eventual realization of certain state NOLs. Reversals of valuation allowances are recorded in the period they occur, typically as reductions to income tax expense. Determination of the amount of deferred tax assets considered realizable requires significant judgment and estimation regarding the forecasts of future taxable income which are consistent with the plans and estimates the Company uses to manage the underlying businesses. Although consideration is also given to potential tax planning strategies which might be available to improve the realization of deferred tax assets, none were identified which were both prudent and reasonable. The Company believes taxable income expected to be generated in the future will be sufficient to support realization of the Company’s deferred tax assets, as reduced by valuation allowances. This determination is based upon earnings history and future earnings expectations.

Health Care Reform

The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposes a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company has obtained rate adjustments from customers which the Company expects will cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax purposes. To the extent the Company has such a customer that does not renew, there may be some impact due to taxes paid where the timing and amount of recoupment of these additional costs is uncertain. In the event the Company is unable to obtain rate adjustments to cover the financial impact of the annual fee, the fee may have a material impact on the Company. On January 23, 2018, the United States Congress passed the Continuing Resolution which imposed a one-year moratorium on the HIF fee, suspending its application for 2019. For ~~2018~~2020 the HIF fee ~~was $29.9~~is expected to be $36.2 million, of which ~~was paid~~$12.4 million and $23.8 million is included in ~~2018.~~accrued liabilities and current portion of liabilities held for sale, respectively, in the consolidated balance sheets.

Stock Compensation

At December 31, ~~2018~~2019 and June 30, ~~2019,~~2020, 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, ~~2018,~~2019, which was filed with the SEC on February 28, ~~2019.~~2020. The Company recorded stock compensation expense of ~~$10.4~~$5.4 million and ~~$18.1~~$15.0 million, of which $0.2 million and $0.4 million is included in discontinued operations, for the three and six months ended June 30, ~~2018,~~2019, respectively, and ~~$5.4~~$7.0 million and ~~$15.0~~$13.0 million, of which $0.4 million and $0.6 million is included in discontinued operations, for the three and six months ended June 30, ~~2019,~~2020, respectively. Stock compensation expense recognized in the consolidated statements of comprehensive income for the three and six months ended June 30, ~~2018~~2019 and ~~2019~~2020 has been reduced for forfeitures, estimated at between ~~zero~~0 and ~~four~~4 percent for all periods.

The weighted average grant date fair value of all stock options granted during the six months ended June 30, ~~2019~~2020 was ~~$20.62~~$18.55 as estimated using the Black-Scholes-Merton option pricing model, which also assumed an expected volatility of ~~35.07~~35.56 percent based on the historical volatility of the Company’s stock price.

For the six months ended June 30, ~~2018~~2019 and 2020, the ~~benefit~~tax expense for deficiencies included in continuing operations (net of the tax deductions in excess of recognized stock compensation expense) was $1.6 million and $1.7 million, respectively, which was included as an increase to income tax expense. The net tax expense to discontinued operations for the six months ended June 30, 2019 and 2020 was insignificant.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

compensation expense (net of deficiencies) was $4.9 million and was included as a reduction of tax expense. For the six months ended June 30, 2019 the tax on deficiencies (net of the tax deductions in excess of recognized stock compensation expense) was $1.6 million and was included as an increase to income tax expense.

Summarized information related to the Company’s stock options for the six months ended June 30, ~~2019~~2020 is as follows:


		Weighted			Weighted
		Average			Average
		Exercise			Exercise
	Options	Price		Options	Price
Outstanding, beginning of period	2,352,609	$	68.10	2,125,861	$	69.22
Granted	412,624		66.06	63,771		62.93
Forfeited	(43,672)		82.28	(23,638)		83.80
Exercised	(389,268)		60.31	(541,148)		58.22
Outstanding, end of period	2,332,293	$	68.77	1,624,846	$	72.42
Vested and expected to vest at end of period	2,313,024	$	68.74	1,617,751	$	72.43
Exercisable, end of period	1,498,260	$	64.40	1,287,233	$	72.52

All of the Company’s options granted during the six months ended June 30, ~~2019~~2020 vest ratably on each anniversary date over the three years subsequent to grant and have a ten year life.

Summarized information related to the Company’s nonvested restricted stock awards (“RSAs”) for the six months ended June 30, ~~2019~~2020 is as follows:



		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	11,795	$	89.05	39,761	$	65.40
Awarded	20,152		66.93	16,976		70.70
Vested	(13,939)		85.99	(18,008)		66.66
Forfeited	—		—	—		—
Outstanding, ending of period	18,008		66.66	38,729		67.14

Summarized information related to the Company’s nonvested restricted stock units (“RSUs”) for the six months ended June 30, ~~2019~~2020 is as follows:



		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	156,750	$	86.68	256,430	$	74.12
Awarded	186,325		66.57	316,495		61.07
Vested	(68,993)		81.95	(100,416)		74.93
Forfeited	(14,288)		82.76	(12,096)		72.70
Outstanding, ending of period	259,794		73.73	460,413		65.01

Grants of RSAs vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant.

2321

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

Summarized information related to the Company’s nonvested restricted performance stock units (“PSUs”) for the six months ended June 30, ~~2019~~2020 is as follows:


		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding, beginning of period	209,019	$	103.38	248,559	$	104.27
Awarded	83,087		100.31	133,752		75.65
Vested	(43,109)		97.12	(52,861)		76.24
Forfeited	(12,157)		97.12	(31,793)		79.22
Outstanding, end of period	236,840		103.76	297,657		99.06

The weighted average estimated fair value of the PSUs granted in the six months ended June 30, ~~2019~~2020 was ~~$100.31,~~$75.65, which was derived from a Monte Carlo simulation. Significant assumptions utilized in estimating the value of the awards granted include an expected dividend yield of 0%, a risk free rate of ~~2.51%~~0.68%, and expected volatility of ~~19%~~20% to ~~82%~~70% (average of ~~36%~~35%). The PSUs granted in the six months ended June 30, ~~2019,~~2020, will entitle the grantee to receive a number of shares of the Company’s common stock determined over a three-year performance period ending on December 31, ~~2021~~2022 and vesting on March 5, ~~2022,~~2023, the settlement date, provided the grantee remains in the service of the Company on the settlement date. The Company expenses the cost of these awards ratably over the requisite service period. The number of shares for which the PSUs will be settled is calculated as a percentage of the award target and will depend on the Company’s total shareholder return (as defined below), expressed as a percentile ranking of the Company’s total shareholder return as compared to the Company’s peer group (as defined below). The number of shares for which the PSUs will be settled varies from ~~zero~~0 to 200 percent of the shares specified in the grant. Total shareholder return is determined by dividing the average share value of the Company’s common stock over the 30 trading days preceding January 1, ~~2022~~2023 by the average share value of the Company’s common stock over the 30 trading days beginning on January 1, ~~2019,~~2020, with a deemed reinvestment of any dividends declared during the performance period. The Company’s peer group includes 48 companies which comprise the S&P Health Care Services Industry Index, which was selected by the compensation committee of the Company’s board of directors and includes a range of healthcare companies operating in several business segments.

Goodwill

At June 30, 2020, we evaluated whether changes in facts and circumstances would rise to an impairment indicator that it was more likely than not that any of our reporting units were impaired. The evaluation included whether our forecast for 2020 and beyond would have changed from what was used in our annual test performed as of October 1, 2019 test. We also considered the impact of economic and market volatility caused by the novel coronavirus (“COVID-19”) pandemic in the first six months of 2020. Based on our evaluation we do not believe that as of June 30, 2020 it was more likely than not that any of our reporting units were impaired. We do believe however, that while the fair value of the Pharmacy Management reporting unit continues to be in excess of its carrying value, the margin by which the fair value exceeds the carrying value has decreased. While the reporting unit was not determined to be impaired at this time, the Pharmacy Management reporting unit goodwill of $395.6 million is at risk of future impairment in the event of significant unfavorable changes in the Company’s forecasted future results and cash flows. In addition, market factors utilized in the impairment analysis, including long-term growth rates or discount rates, could negatively impact the fair value of our reporting units. For testing purposes, management's best estimates of the expected future results are the primary driver in determining the fair value. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill test will prove to be an accurate prediction of the future.

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in membership or rates or customer attrition and increase in costs that could significantly impact our immediate and long-range results, unfavorable working capital changes and an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession); and (iii)

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average cost of capital.

Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These facts and circumstances are subject to change and may impact future analyses.

While historical performance and current expectations have resulted in fair values of our reporting units and indefinite-lived intangible assets in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future.

Long-Term Debt and Finance Lease Obligations

Senior Notes

On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture, dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee, as supplemented by a first supplemental indenture, dated as of September 22, 2017 (the “First Supplemental Indenture” together with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. During the year ended December 31, 2019 and six months ended June 30, 2020, the Company purchased and subsequently retired $11.1 million and $28.9 million of its Notes, respectively, which resulted in a loss on retirement of $0.3 million and $0.7 million, respectively, that is included in interest expense. The Notes were issued at a discount and had a carrying value of ~~$399.3~~$388.4 million ~~as of~~and $359.6 million at December 31, ~~2018~~2019 and June 30, ~~2019.~~2020, respectively.

The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year, commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit rating events. The Notes mature on September 22, 2024. The Indenture provides that the Notes are redeemable at the Company’s option, in whole or in part, at any time on or after July 22, 2024, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

The Indenture also contains certain covenants which restrict the Company’s ability to, among other things, create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation, merger or sale of assets.

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

Credit Agreement

On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower (the “2017 Credit Agreement”). On August 13, 2018, the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was necessary in order for us to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, 2023.

Under the 2017 Credit Agreement, the annual interest rate on the loan borrowing is equal to (i) in the case of base rate loans, the sum of an initial borrowing margin of 0.500 percent plus the higher of the prime rate, ~~one-half~~one-half of one percent in excess of the overnight “federal funds” rate, or the Eurodollar rate for one month plus 1.000 percent, or (ii) in the case of Eurodollar rate loans, the sum of an initial borrowing margin of 1.500 percent plus the Eurodollar rate for the selected interest period. The borrowing margin is subject to adjustment based on the Company’s debt rating as provided by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. The commitment commission on the revolving credit facility under the 2017 Credit Agreement is 0.200

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

percent of the unused revolving credit commitment, which rate shall be subject to adjustment based on the Company’s debt rating as provided by certain rating agencies. For the six months ended June 30, ~~2019,~~2020, the weighted average interest rate was approximately ~~4.2875~~3.3217 percent.

In August 2019, the Company made voluntary term loan repayments of $30.0 million. As of June 30, ~~2019,~~2020, the contractual maturities, totaling $271.9 million of the term loan under the 2017 Credit Agreement were as follows: ~~2019—$8.8 million;~~ 2020—$~~17.5~~0.0 million; 2021—$~~17.5~~0.0 million; 2022—$~~17.5~~13.8 million; and 2023—$258.1 million. Due to the timing of working capital needs, the Company will periodically borrow from the revolving loan under the 2017 Credit Agreement. At December 31, ~~2018 and June 30,~~ 2019, the Company had no0 revolving loan borrowings. At June 30, ~~2019,~~2020 the Company had a revolving loan of $80.0 million, with a borrowing capacity of ~~$400.0~~$320.0 million under the 2017 Credit Agreement. Included in long-term debt, ~~capital~~finance lease and deferred financing obligations are deferred loan and bond issuance costs as of December 31, ~~2018~~2019 and June 30, ~~2019~~2020 of ~~$5.9~~$5.7 million and ~~$6.5~~$4.9 million, respectively.

Letter of Credit Agreement

On August 22, 2017, the Company entered into a Continuing Agreement for Standby Letters of Credit with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as issuer (the “L/C Agreement”), under which BTMU, at its sole discretion, may provide stand-by letter of credit to the Company. The Company had letters of credit outstanding under the L/C Agreement as of December 31, ~~2018~~2019 and June 30, ~~2019~~2020 of ~~$66.1~~$66.4 million and ~~$66.4~~$32.1 million, respectively.

Finance Lease and Deferred Financing Obligations

There were ~~$21.7~~$18.1 million and ~~$20.1~~$19.0 million of finance lease ~~obligations at December 31, 2018~~ and ~~June 30, 2019, respectively. There were $9.5 million and $1.3 million of~~ deferred financing obligations at December 31, ~~2018~~2019 and June 30, ~~2019,~~2020, respectively. The Company’s finance lease and deferred financing obligations represent amounts due under leases for certain properties, computer software (acquired prior to the prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. The recorded gross cost of finance lease assets was ~~$51.9~~$56.0 million and ~~$55.7~~$61.6 million at December 31, ~~2018~~2019 and June 30, ~~2019,~~2020, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

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

The following table reconciles 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) for the three and six months ended June 30:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2018		2019		2018		2019		2019		2020		2019		2020
Numerator:
Net income (loss) from continuing operations									$	7,215	$	47,108	$	(976)	$	46,038
Income from discontinued operations, net of tax										6,398		36,397		15,020		55,717
Net income	$	13,551	$	13,613	$	25,003	$	14,044	$	13,613	$	83,505	$	14,044	$	101,755
Denominator:
Weighted average number of common shares outstanding—basic		24,569		24,101		24,460		24,024		24,101		25,054		24,024		24,891
Common stock equivalents—stock options		669		153		738		132		153		31		132		46
Common stock equivalents—RSAs		33		7		28		7		7		28		7		25
Common stock equivalents—RSUs		23		18		50		19		18		46		19		48
Common stock equivalents—PSUs		111		130		232		127		130		118		127		59
Common stock equivalents—employee stock purchase plan		2		7		2		6		7		1		6		5
Weighted average number of common shares outstanding—diluted		25,407		24,416		25,510		24,315		24,416		25,278		24,315		25,074
Net income per common share—basic	$	0.55	$	0.56	$	1.02	$	0.58
Net income per common share—diluted	$	0.53	$	0.56	$	0.98	$	0.58
Net income (loss) per common share—basic:
Continuing operations									$	0.30	$	1.88	$	(0.04)	$	1.85
Discontinued operations										0.26		1.45		0.62		2.24
Consolidated operations									$	0.56	$	3.33	$	0.58	$	4.09
Net income (loss) per common share—diluted:
Continuing operations									$	0.30	$	1.86	$	(0.04)	$	1.84
Discontinued operations										0.26		1.44		0.62		2.22
Consolidated operations									$	0.56	$	3.30	$	0.58	$	4.06

The weighted average number of common shares outstanding for the three and six months ended June 30, ~~2018~~2019 and ~~2019~~2020 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 months ended June 30, ~~2018~~2019 and ~~2019~~2020 represent stock options to purchase shares of the Company’s common stock, RSAs, RSUs, PSUs and stock purchased under the Employee Stock Purchase Plan.

The Company had additional potential dilutive securities outstanding representing ~~0.5 million and 0.3 million options for the three and six months ended June 30, 2018, respectively, and~~ 1.1 million and 1.1 million options for the three and six months ended June 30, 2019, respectively, and 1.3 million and 1.4 million options for the three and six months ended June 30, 2020, 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.

NOTE C—Business Segment Information

The accounting policies of the Company’s segments are the same as those described in Note A—“General.” The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes (“Segment Profit”). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As ~~such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company’s segments are defined in Note A—“General.”~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company’s segments are defined in Note A—“General.”

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


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2019
Managed care and other revenue	$	546,113	$	62,648	$	(147)	$	608,614
PBM revenue		—		550,010		(4,335)		545,675
Cost of care		(408,911)		—		—		(408,911)
Cost of goods sold		—		(505,203)		4,122		(501,081)
Direct service costs and other		(98,314)		(78,776)		(18,817)		(195,907)
Stock compensation expense (1)		2,237		2,124		846		5,207
Segment Profit (Loss)	$	41,125	$	30,803	$	(18,331)	$	53,597


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Three Months Ended June 30, 2020
Managed care and other revenue	$	481,021	$	67,867	$	(177)	$	548,711
PBM revenue		—		556,195		(4,831)		551,364
Cost of care		(321,831)		—		—		(321,831)
Cost of goods sold		—		(532,685)		4,618		(528,067)
Direct service costs and other		(100,450)		(80,082)		(19,224)		(199,756)
Stock compensation expense (1)		2,102		1,939		2,551		6,592
Segment Profit (Loss)	$	60,842	$	13,234	$	(17,063)	$	57,013


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2019
Managed care and other revenue	$	1,052,935	$	122,543	$	(316)	$	1,175,162
PBM revenue		—		1,106,575		(8,442)		1,098,133
Cost of care		(778,008)		—		—		(778,008)
Cost of goods sold		—		(1,035,410)		8,015		(1,027,395)
Direct service costs and other (1)		(198,424)		(158,411)		(41,372)		(398,207)
Stock compensation expense (1)		3,780		3,796		7,031		14,607
Segment Profit (Loss)	$	80,283	$	39,093	$	(35,084)	$	84,292

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

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

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Three Months Ended June 30, 2018

Managed care and other revenue

$
1,154,888

$
60,603

$
(151)

$
1,215,340

PBM revenue

—

642,794

(47,211)

595,583

Cost of care

(935,814)

—

—

(935,814)

Cost of goods sold

—

(603,951)

45,532

(558,419)

Direct service costs and other

(177,990)

(70,941)

(10,221)

(259,152)

Stock compensation expense (1)

2,742

1,408

6,289

10,439

Changes in fair value of contingent consideration (1)

70

—

—

70

Segment Profit (Loss)

$
43,896

$
29,913

$
(5,762)

$
68,047

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Three Months Ended June 30, 2019

Managed care and other revenue

$
1,220,642

$
62,648

$
(147)

$
1,283,143

PBM revenue

—

550,010

(44,817)

505,193

Cost of care

(1,001,886)

—

—

(1,001,886)

Cost of goods sold

—

(505,203)

44,016

(461,187)

Direct service costs and other

(177,948)

(78,776)

(9,710)

(266,434)

Stock compensation expense (1)

2,444

2,124

846

5,414

Changes in fair value of contingent consideration (1)

(2,149)

—

—

(2,149)

Segment Profit (Loss)

$
41,103

$
30,803

$
(9,812)

$
62,094

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Six Months Ended June 30, 2018

Managed care and other revenue

$
2,312,489

$
122,910

$
(296)

$
2,435,103

PBM revenue

—

1,274,992

(94,095)

1,180,897

Cost of care

(1,864,475)

—

—

(1,864,475)

Cost of goods sold

—

(1,208,864)

90,780

(1,118,084)

Direct service costs and other

(364,236)

(146,527)

(17,466)

(528,229)

Stock compensation expense (1)

5,692

2,893

9,500

18,085

Changes in fair value of contingent consideration (1)

303

—

—

303

Segment Profit (Loss)

$
89,773

$
45,404

$
(11,577)

$
123,600

Corporate


Pharmacy

and


Healthcare

Management

Elimination

Consolidated

Six Months Ended June 30, 2019

Managed care and other revenue

$
2,384,895

$
122,543

$
(316)

$
2,507,122

PBM revenue

—

1,106,575

(85,872)

1,020,703

Cost of care

(1,943,847)

—

—

(1,943,847)

Cost of goods sold

—

(1,035,410)

84,430

(950,980)

Direct service costs and other

(357,138)

(158,411)

(22,809)

(538,358)

Stock compensation expense (1)

4,194

3,796

7,031

15,021

Changes in fair value of contingent consideration (1)

(2,005)

—

—

(2,005)

Segment Profit (Loss)

$
86,099

$
39,093

$
(17,536)

$
107,656

~~Table of Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~


					Corporate
			Pharmacy		and
	Healthcare		Management		Elimination		Consolidated
Six Months Ended June 30, 2020
Managed care and other revenue	$	969,927	$	132,302	$	(350)	$	1,101,879
PBM revenue		—		1,129,973		(9,398)		1,120,575
Cost of care		(670,939)		—		—		(670,939)
Cost of goods sold		—		(1,070,259)		8,951		(1,061,308)
Direct service costs and other (1)		(206,386)		(161,948)		(35,663)		(403,997)
Stock compensation expense (1)		3,863		4,046		4,480		12,389
Segment Profit (Loss)	$	96,465	$	34,114	$	(31,980)	$	98,599

(1)

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

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2018		2019		2018		2019		2019		2020		2019		2020
Income before income taxes	$	18,375	$	21,219	$	29,752	$	22,189
Income from continuing operations before income taxes									$	12,950	$	10,780	$	1,550	$	15,472
Stock compensation expense		10,439		5,414		18,085		15,021		5,207		6,592		14,607		12,389
Changes in fair value of contingent consideration		70		(2,149)		303		(2,005)
Depreciation and amortization		33,848		33,490		64,255		64,198		28,191		23,888		53,608		47,246
Interest expense		8,678		9,141		17,044		18,248		9,070		7,995		18,107		16,953
Interest and other income		(3,363)		(5,021)		(5,839)		(9,995)		(1,821)		(551)		(3,580)		(1,770)
Segment Profit	$	68,047	$	62,094	$	123,600	$	107,656
Special charges										—		8,309		—		8,309
Segment Profit from continuing operations									$	53,597	$	57,013	$	84,292	$	98,599

NOTE D—Commitments and Contingencies

Legal

The Company’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients ~~whose~~for whom the Company provides managed care ~~is being managed by the Company.~~services. 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.~~practices including employment practices, and privacy and data protection.

The Company maintains a program of insurance coverage against a broad range of risks in the Company’s business, including certain of the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 28, 2020. The Company has recorded reserves that, in the opinion of management, 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.

Table of Contents

A Pharmacy Management segment network provider and the Company are currently in dispute regarding pricing and associated calculations pertaining to network reconciliations for a multi-year period. Depending upon the resolution of the dispute, the Company could incur liability to this provider. The unrecorded, potential loss related to these network reconciliations is estimated to range from $0 to $20 million. The ultimate resolution of this matter, if unfavorable, could be material to the Company’s results of operations.MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Regulatory Issues

The managed healthcare industry is subject to numerous laws and regulations. The subjects of such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers. Entities that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

~~Table~~The Company is subject to various federal, state and other laws and rules regarding the use, storage, protection and disclosure of ~~Contents~~

~~MAGELLAN HEALTH, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~June 30, 2019~~

~~(Unaudited)~~

confidential member and protected personal or health information, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) and other applicable laws. The Company has experienced data security incidents resulting in disclosure of confidential or protected personal or health information. We have notified government agencies as appropriate and are cooperating with investigations and requests for information. Noncompliance with any applicable privacy or data security laws and regulations could result in enforcement actions, fines, penalties, and reputational and financial harm to the Company.

In addition, regulators of certain of the Company’s subsidiaries may exercise certain discretionary rights under regulations including increasing their supervision of such entities, requiring additional restricted cash or other security or seizing or otherwise taking control of the assets and operations of such subsidiaries.

The Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, ~~AFSC,~~Armed Forces Services Corporation (“AFSC”), conducts business with federal agency customers and federal contractors to such agencies. The Company is investigating, with the assistance of outside counsel, matters relating to compliance by AFSC with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors and has reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was disclosed to Magellan prior to its acquisition of AFSC. The Company is voluntarily responding to government requests for further information regarding the Company’s investigation. In June 2020, the United States Attorney’s Office for the Eastern District of Virginia informed the Company of a civil investigation regarding the Company and AFSC related to potential violations of the False Claims Act and/or the Anti-Kickback Act in connection with the matters self-disclosed by the Company. Contingencies, if any, arising from the results of ~~this investigation~~these investigations and self-reporting could require us to record balance sheet liabilities or accrue expenses, the amount of which we are not able to currently estimate. While the Company believes that it has responded appropriately by self-reporting findings regarding matters that incepted prior to its acquisition of AFSC in order to mitigate the risk of adverse consequences, should the SBA, Department of Defense and/or other federal agencies seek to hold the Company or AFSC responsible for the reported conduct, we may be required to pay damages and/or penalties and AFSC could be suspended or debarred from government contracting. AFSC generated approximately 2%3.0% and 2.5% of the Company’s total revenue from continuing operations for the year ended December 31, ~~2018~~2019 and six months ended June 30, ~~2019.~~2020, respectively.

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

Stock Repurchases

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

On October 26, 2015, the Company’s board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 26, 2017 (the “2015 Repurchase Program”). On July 26, 2017, the Company’s board of directors approved an extension of the 2015 Repurchase Program through October ~~26,~~22, 2018. On May 24, 2018, the Company’s board of directors approved an increase of $200 million to the current $200 million stock repurchase plan which will now authorize the Company to purchase up to $400 million of its outstanding common stock under the 2015 Repurchase Program. As of June 30, ~~2019,~~2020, the remaining capacity under the 2015 Repurchase Program was $186.3 million. The board also extended the program from October 22, 2018 to October 22, 2020. Stock repurchases under the programs may be carried out 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 the 2015 Stock Repurchase Program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):


	Total Number	Average
	of Shares	Price Paid		Aggregate
Period	Purchased	per Share		Cost
October 26, 2015 - December 31, 2015	345,044	$	53.46	$	18.4
January 1, 2016 - December 31, 2016	1,828,183		58.40		106.8
January 1, 2017 - December 31, 2017	280,140		77.67		21.8
January 1, 2018 - December 31, 2018	844,872		74.59		63.0
January 1, 2019 - December 31, 2019	60,901		61.15		3.7
January 1, 2020 - June 30, 2020	—		—		—
	3,359,140			$	213.7

The Company made 0 share repurchases from July 1, 2020 through July 24, 2020.

NOTE E—Discontinued Operations

Magellan Complete Care – Stock and Asset Purchase Agreement

As discussed in Note A— “General”, on April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell its MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business.

The consummation of the MCC Sale is subject to customary closing conditions, including: (i) the expiration of the waiting period applicable to the Purchase Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the absence of any law or governmental order prohibiting the MCC Sale, (iii) obtaining all required

Table of Contents

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, ~~2019~~2020

(Unaudited)

~~Pursuant~~consents, authorizations, permits and approvals under Health Regulatory Laws (as defined in the Purchase Agreement), (iv) no material adverse effect on the Company having occurred since the signing of the Purchase Agreement, and (v) the accuracy of the representations and warranties of each party (subject to materiality qualifiers) in the Purchase Agreement and the compliance by each party with its covenants in all material respects. The consummation of the MCC Sale is not subject to any financing contingency.

In connection with the MCC Sale, the Company and Molina are entering into commercial agreements for certain behavioral health, utilization management and related services to be provided by the Company to Molina and the MCC business. In addition, the parties will enter into a transition services agreement pursuant to which the Company and certain of its affiliates will provide, or cause third parties to provide, certain services to accommodate the transition of the MCC business to Molina.

The foregoing description of the Purchase Agreement and the MCC Sale does not purport to be complete and is qualified in its entirety by the terms and conditions of the Purchase Agreement, which was filed as Exhibit 2.1 to the ~~2015 Stock Repurchase Program,~~Company’s Quarterly Report on Form 10-Q which was filed with the ~~Company made purchases~~SEC on May 11, 2020, and any related agreements.

The accounting requirements for reporting a business to be divested as ~~follows (aggregate cost excludes broker commissions~~a discontinued operation were met during the second quarter of 2020. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as a discontinued operation.

The following table summarizes the major classes of assets and ~~is reflected~~liabilities held for sale that were included in ~~millions)~~the Company’s consolidated balance sheets as of December 31, 2019 and June 30, 2020 (in thousands):

Total Number

Average

of Shares

Price Paid

Aggregate

Period

Purchased

per Share

Cost

October 26, 2015 - December 31, 2015

345,044

$
53.46

$
18.4

January 1, 2016 - December 31, 2016

1,828,183

58.40

106.8

January 1, 2017 - December 31, 2017

280,140

77.67

21.8

January 1, 2018 - December 31, 2018

844,872

74.59

63.0

January 1, 2019 - June 30, 2019

60,901

61.15

3.7

3,359,140

$
213.7


	December 31,		June 30,
	2019		2020
Assets Held For Sale
Cash and cash equivalents ($95,202 and $69,971 restricted at December 31, 2019 and June 30, 2020, respectively)	$	209,497	$	235,873
Accounts receivable, net		209,496		163,216
Short-term and long-term investments ($243,496 and $343,348 restricted at December 31, 2019 and June 30, 2020, respectively)		243,496		398,741
Property and equipment, net		6,710		7,477
Goodwill		211,735		211,735
Other intangible assets, net		85,669		76,628
Other current and long-term assets ($2,387 and $2,387 restricted at December 31, 2019 and June 30, 2020, respectively)		32,386		52,234
Total Assets Held For Sale		998,989		1,145,904
Less: current portion		663,276		1,145,904
Total Assets Held For Sale, Less Current Portion	$	335,713	$	—

Liabilities Held For Sale
Accounts payable	$	4,625	$	3,449
Accrued liabilities		92,170		145,558
Medical claims payable		281,419		271,998
Other medical liabilities		31,769		50,384
Deferred income taxes		15,063		13,910
Tax contingencies		5,388		5,462
Deferred credits and other long-term liabilities		16,850		13,698
Total Liabilities Held For Sale		447,284		504,459
Less: current portion		409,983		504,459
Total Liabilities Held For Sale, Less Current Portion	$	37,301	$	—

~~The Company made no share repurchases from July 1, 2019 through July 26, 2019.~~30

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MAGELLAN HEALTH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2020

(Unaudited)

The following table summarizes the components of income from discontinued operations that is included in the Company’s consolidated income statements for the three and six months ended June 30, 2019 and 2020 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Managed care and other revenue	$	674,760	$	735,357	$	1,332,385	$	1,455,391
Costs and expenses:
Cost of care		592,975		573,374		1,165,839		1,175,908
Direct service costs and other operating expenses (1)(2)(3)		71,346		92,078		141,591		176,575
Depreciation and amortization		5,299		5,379		10,590		10,705
Interest expense		71		18		141		89
Interest and other income		(3,200)		(1,478)		(6,415)		(4,018)
Total costs and expenses		666,491		669,371		1,311,746		1,359,259
Income from discontinued operation before income taxes		8,269		65,986		20,639		96,132
Provision for income taxes		1,871		29,589		5,619		40,415
Net income from discontinued operations	$	6,398	$	36,397	$	15,020	$	55,717

(1)	Includes stock compensation expense of $207 and $366 for the three months ended June 30, 2019 and 2020, respectively, and $414 and $626 for the six months ended June 30, 2019 and 2020, respectively.

(2)	Includes changes in fair value of contingent consideration of $(2,149) and $(2,005) for the three and six months ended June 30, 2019, respectively.

(3)	Includes divestiture related expenses of $3,353 and $3,958 for the three and six months ended June 30, 2020, respectively.

The Company has retained corporate overhead expenses previously allocated to MCC of $8.5 million and $7.0 million for the three months ended June 30, 2019 and 2020, respectively, and $17.5 million and $13.7 million for the six months ended June 30, 2019 and 2020, respectively.

At June 30, 2020, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries is approximately $160 million which are included in assets held for sale.

NOTE F—Special Charges

In 2020, the Company established a transformation office which has an initiative (the “Transformation Initiative”) to lower our operating costs and reinvest in our business by improving and automating processes, leveraging technology, consolidating platforms and reducing any friction our customers, providers and members experience when doing business with us. As part of the Transformation Initiative, the Company is reevaluating its current office lease footprint. Recoverability of existing operating right-of-use lease assets, and the related fixed assets held at the office locations, to be held and used are measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any lease terminations or abandonments initiated as a result of the Transformation Initiative that result in an impairment of such right-of-use assets and the location’s related fixtures will be reported as special charges. For the three and six months ended June 30, 2020, lease terminations and abandonments resulted in the recognition of non-cash pre-tax impairment of $8.3 million within special charges in the consolidated statement of operations. The impairment charge reduced the carrying value of these assets to their estimated fair value. Outstanding liabilities of approximately $9.6 million related to the Transformation Initiative are included in the accompanying June 30, 2020 consolidated balance sheet in accrued liabilities and deferred credits and other long-term liabilities. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs.

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

Business Overview

The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, TPAs, consultants and brokers. The Company’s business is divided into three segments, based on the services it provides and/or the customers that it serves. See Item 1—“Business” for more information on the Company’s business segments.

Results of Operations

The following table summarizes, for the periods indicated, ~~consolidated~~ operating results from continuing operations (in thousands):


	Three Months Ended					Six Months Ended						Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change		June 30,				Change	June 30,				Change
Consolidated Results	2018		2019		'18 vs '19	2018		2019		'18 vs '19
Continuing Operations												2019		2020		'19 vs '20	2019		2020		'19 vs '20
Statement of Operations Data:
Net revenue	$	1,810,923	$	1,788,336	(1.2%)	$	3,616,000	$	3,527,825	(2.4%)		$	1,154,289	$	1,100,075	(4.7%)	$	2,273,295	$	2,222,454	(2.2%)
Cost of Care		935,814		1,001,886	7.1%		1,864,475		1,943,847	4.3%			408,911		321,831	(21.3%)		778,008		670,939	(13.8%)
Cost of goods sold		558,419		461,187	(17.4%)		1,118,084		950,980	(14.9%)			501,081		528,067	5.4%		1,027,395		1,061,308	3.3%
Direct service costs and other operating expenses ~~(2)~~(1)		259,152		266,434	2.8%		528,229		538,358	1.9%			195,907		199,756	2.0%		398,207		403,997	1.5%
Depreciation and amortization		33,848		33,490	(1.1%)		64,255		64,198	(0.1%)			28,191		23,888	(15.3%)		53,608		47,246	(11.9%)
Interest expense		8,678		9,141	5.3%		17,044		18,248	7.1%			9,070		7,995	(11.9%)		18,107		16,953	(6.4%)
Interest and other income		(3,363)		(5,021)	49.3%		(5,839)		(9,995)	71.2%			(1,821)		(551)	(69.7%)		(3,580)		(1,770)	(50.6%)
Special charges													-		8,309	N/A		-		8,309	N/A
Income before income taxes		18,375		21,219	15.5%		29,752		22,189	(25.4%)			12,950		10,780	(16.8%)		1,550		15,472	898.2%
(Benefit) provision for income taxes		4,824		7,606	57.7%		4,749		8,145	71.5%	��
Net income	$	13,551	$	13,613	0.5%	$	25,003	$	14,044	(43.8%)
Provision (benefit) for income taxes													5,735		(36,328)	(733.4%)		2,526		(30,566)	(1310.1%)
Net income (loss) from continuing operations												$	7,215	$	47,108	552.9%	$	(976)	$	46,038	(4817.0%)

(1)	Includes stock compensation expense of ~~$10,439~~$5,207 and ~~$5,414~~$6,592 for the three months ended June 30, ~~2018~~2019 and ~~2019,~~2020, respectively, and ~~$18,085~~$14,607 and ~~$15,021~~$12,389 for the six months ended June 30, ~~2018~~2019 and ~~2019, respectively.~~

~~(2)~~

Includes changes in fair value of contingent consideration of $70 and $(2,149) for the three months ended June 30, 2018 and 2019, respectively, and $303 and $(2,005) for the six months ended June 30, 2018 and 2019,2020, respectively.

Quarter ended June 30, ~~2019~~2020 (“Current Year Quarter”) compared to Quarter ended June 30, ~~2018~~2019 (“Prior Year Quarter”)

Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses

Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.

Depreciation and amortization

Depreciation and amortization expense decreased by ~~1.1~~15.3 percent or ~~$0.4~~$4.3 million from the Prior Year Quarter to the Current Year Quarter, primarily due to ~~retirements and~~asset maturities, partially offset by normal asset additions after the Prior Year Quarter.

Interest expense

Interest expense ~~increased~~decreased by ~~$0.5~~11.9 percent or $1.1 million from the Prior Year Quarter to the Current Year Quarter primarily due to ~~higher~~lower interest rates.

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Interest and other income

Interest income ~~increased~~decreased by ~~$1.7~~$1.3 million from the Prior Year Quarter to the Current Year Quarter primarily due to ~~higher yields.~~a reduction in rates.

Special charges

Special charges increased by $8.3 million from the Prior Year Quarter to the Current Year Quarter due to recognition of the special charges in the Current Year Quarter, see Note F—“Special Charges” for further discussion.

Income taxes

The Company’s effective income tax rates from continuing operations were ~~26.3~~44.3 percent and ~~35.8~~(337.0) percent for the Prior Year Quarter and Current Year Quarter, respectively. The effective income tax rate for the Prior Year Quarter ~~is lower than~~differs from the effective income tax rate for the Current Year Quarter primarily due to recognition of the nonrecurring tax benefit related to the divestiture in the Current Year Quarter. The effective income tax rate for the Current Year Quarter ~~mainly due to permanent differences related to stock compensation expense. The effective income tax rate for the Current Year Quarter is higher than~~differs from the federal and state statutory rates ~~primarily~~primary due to ~~recognized stock compensation expense~~the recognition of the nonrecurring tax benefit related to the divestiture that was recorded in ~~excess of tax deductions.~~the Current Year Quarter.

Six months ended June 30, ~~2019~~2020 (“Current Year Period”) compared to six months ended June 30, ~~2018~~2019 (“Prior Year Period”)

Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses

Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow.

Depreciation and amortization

Depreciation and amortization expense ~~was consistent with~~decreased by 11.9 percent or $6.4 million from the Prior Year Period, primarily due to asset maturities, partially offset by normal asset additions after the Prior Year Period.

Interest expense

Interest expense ~~increased~~decreased by $1.2 million from the Prior Year Period to the Current Year Period primarily due to ~~higher~~lower interest rates.

Interest and other income

Interest income ~~increased~~decreased by ~~$4.2~~$1.8 million from the Prior Year Period to the Current Year Period primarily due to ~~higher yields.~~a reduction in rates.

Special charges

Special charges increased by $8.3 million from the Prior Year Period to the Current Year Period due to recognition of special charges in the Current Year Period, see Note F—“Special Charges” for further discussion.

Income taxes

The Company’s effective income tax rates from continuing operations were ~~16.0~~163.0 percent and ~~36.7~~(197.6) percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Prior Year Period ~~is lower than~~differs from theeffective income tax rate for the Current Year Period ~~mainly~~primarily due to ~~permanent differences~~the recognition of the nonrecurring tax benefit related to ~~stock compensation expense.~~the divestiture in the Current Year Period. The effective income tax rate for the Current Year Period ~~is higher than~~differs from the federal and state statutory rates primarily due to ~~recognized stock compensation expense~~the recognition of the nonrecurring tax benefit related to the divestiture recorded in ~~excess of tax deductions.~~the Current Year Period.

Segment Results

The Company manages and measures operational performance through three segments: Healthcare, Pharmacy Management and Corporate. 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,

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

~~Table of Contents~~

Healthcare

The Healthcare segment includes the Company’s: (i) management of behavioral healthcare services and EAP services and (ii) management of other specialty areas including diagnostic imaging and musculoskeletal ~~management, and (iii) the integrated management of physical, behavioral and pharmaceutical healthcare for special populations, delivered through Magellan Complete Care.~~management. The Healthcare ~~segment’s Behavioral & Specialty Health division~~segment provides management services to health plans, accountable care organizations, employers, state Medicaid agencies, the United States military and various federal government agencies for whom Magellan provides carve-out management services for behavioral health, employee assistance plans, and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac, and physical medicine. ~~The MCC division contracts with state Medicaid agencies and CMS to manage care for beneficiaries under various Medicaid and Medicare programs.~~

The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in thousands):


	Three Months Ended					Six Months Ended					Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change	June 30,				Change	June 30,				Change
Healthcare Segment Results	2018		2019		'18 vs '19	2018		2019		'18 vs '19	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Behavioral & Specialty Health revenue
Risk-based, non-EAP	$	378,076	$	400,591	6.0%	$	751,127	$	762,399	1.5%	$	400,591	$	344,199	(14.1%)	$	762,399	$	694,044	(9.0%)
EAP risk-based		91,276		87,296	(4.4%)		185,933		176,913	(4.9%)		87,296		77,419	(11.3%)		176,913		157,357	(11.1%)
ASO		61,275		57,995	(5.4%)		123,915		113,198	(8.6%)
Magellan Complete Care revenue
Risk-based, non-EAP		610,358		659,362	8.0%		1,224,188		1,301,933	6.4%
ASO		13,903		15,398	10.8%		27,326		30,452	11.4%		58,226		59,403	2.0%		113,623		118,526	4.3%
Managed care and other revenue		1,154,888		1,220,642	5.7%		2,312,489		2,384,895	3.1%		546,113		481,021	(11.9%)		1,052,935		969,927	(7.9%)
Cost of care		935,814		1,001,886	7.1%		1,864,475		1,943,847	4.3%		408,911		321,831	(21.3%)		778,008		670,939	(13.8%)
		219,074		218,756	(0.1%)		448,014		441,048	(1.6%)		137,202		159,190	16.0%		274,927		298,988	8.8%
Direct service costs and other		177,990		177,948	(0.0%)		364,236		357,138	(1.9%)		98,314		100,450	2.2%		198,424		206,386	4.0%
		41,084		40,808	(0.7%)		83,778		83,910	0.2%		38,888		58,740	51.0%		76,503		92,602	21.0%
Stock compensation expense		2,742		2,444	(10.9%)		5,692		4,194	(26.3%)		2,237		2,102	(6.0%)		3,780		3,863	2.2%
Changes in fair value of contingent consideration		70		(2,149)			303		(2,005)
Segment Profit	$	43,896	$	41,103	(6.4%)	$	89,773	$	86,099	(4.1%)	$	41,125	$	60,842	47.9%	$	80,283	$	96,465	20.2%

Direct service cost as % of revenue		15.4%		14.6%			15.8%		15.0%			18.0%		20.9%			18.8%		21.3%
MLR Behavioral & Specialty Health risk		86.7%		87.3%			86.8%		86.7%			87.3%		78.3%			86.7%		81.0%
MLR Behavioral & Specialty Health EAP risk		69.2%		67.8%			69.1%		66.3%			67.8%		67.9%			66.3%		69.5%
MLR Magellan Complete Care risk		89.2%		89.9%			88.6%		89.5%
																	.
Membership
Behavioral & Specialty Health
Risk (1)							12,258		12,155	(0.8%)							12,155		10,601	(12.8%)
EAP risk							14,890		14,719	(1.1%)							14,719		13,836	(6.0%)
ASO							27,064		26,119	(3.5%)							26,119		25,386	(2.8%)
Magellan Complete Care
Risk							132		147	11.4%
ASO							22		24	9.1%
							54,366		53,164	(2.2%)							52,993		49,823	(6.0%)

(1)

May include some duplicate count of membership for customers that contract with Magellan for both behavioral and other specialty management services.

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

~~Table of Contents~~

Net revenue ~~increased~~decreased by ~~5.7~~11.9 percent or ~~$65.8~~$65.1 million from the Prior Year Quarter to the Current Year Quarter. The ~~increase~~decrease in revenue is primarily due to ~~new~~terminated contracts ~~implemented after (or during) the Prior Year Quarter~~ of ~~$105.4~~$33.1 million, ~~program changes of $24.8 million,~~decreased membership partially offset by favorable rate changes ~~partially offset by decreased membership~~ of ~~$23.6~~$21.0 million, favorable retroactive program changes in the ~~Current~~Prior Year Quarter of $9.6 million, the revenue impact of program changes of $9.0 million, the revenue impact of favorable ~~retroactive rate and membership adjustments~~prior period care development recorded in the Current Year Quarter of ~~$5.7~~$4.3 million, ~~and unfavorable~~favorable retroactive rate and membership adjustments in the Prior Year Quarter of ~~$1.8 million. These increases were partially offset by terminated contracts of $95.6 million, net revenue recorded for HIF fees in the Prior Year Quarter of $7.2~~$3.1 million, the revenue impact of net favorable prior period medical claims development recorded in the ~~Current~~Prior Year Quarter of ~~$1.5~~$2.3 million and other net unfavorable variances of ~~$0.8~~$0.2 million. These decreases were partially offset by new contracts implemented after (or during) the Prior Year Quarter of $13.9 million and net revenue recorded for HIF fees in the Current Year Quarter of $3.6 million.

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Cost of care

Cost of care ~~increased~~decreased by ~~7.1~~21.3 percent or ~~$66.1~~$87.1 million from the Prior Year Quarter to the Current Year Quarter. The ~~increase~~decrease is primarily due to terminated contracts of $24.3 million, decreased membership of $23.8 million, unfavorable retroactive program changes in the Prior Year Quarter of $8.9 million, favorable prior period care development recorded in the Current Year Quarter of $8.5 million, program changes of $8.2 million and care trends and other favorable variances of $21.0 million. These decreases were partially offset by care cost ~~for~~of new contracts implemented after (or during) the Prior Year Quarter of ~~$78.2~~$6.9 million ~~program changes of $19.7 million,~~and net favorable prior period medical claims development recorded in the Prior Year Quarter of ~~$9.5 million, retroactive program changes in the Current Year Quarter of $8.9 million and care trends and other net unfavorable variances of $52.3~~$0.7 million. These increases were partially offset by terminated contracts of $78.2 million, net favorable prior period medical claims development recorded in the Current Year Quarter of $13.4 million and decreased membership of $10.9 million. For our behavioral specialty health contracts, costCost of care as a percentage of risk revenue (excluding EAP business) ~~increased~~decreased from ~~86.7~~87.3 percent in Prior Year Quarter to ~~87.3~~78.3 percent in the Current Year Quarter mainly due to the impact of prior period care development, decreased utilization and business mix. For our MCC contracts, cost of care increased as a percentage of risk revenue from 89.2 percent in the Prior Year Quarter to 89.9 percent in the Current Year Quarter mainly due to net revenue recorded for HIF fees in the Prior Year Quarter.

Direct service costs and other

Direct service costs ~~remained consistent~~increased 2.2 percent or $2.1 million from the Prior Year Quarter to the Current Year Quarter ~~at $178.0 million, and decreased~~primarily due to HIF fees in the Current Year Quarter. Direct services costs increased as a percentage of revenue from ~~15.4~~18.0 percent in the Prior Year Quarter to ~~14.6~~20.9 percent in the Current Year Quarter primarily due to ~~increased~~the previously discussed revenue ~~from program changes and favorable rate changes.~~decreases as well as HIF fees in the Current Year Quarter.

Current Year Period compared to the Prior Year Period

Managed care and other revenue

Net revenue ~~increased~~decreased by ~~3.1~~7.9 percent or ~~$72.4~~$83.0 million from the Prior Year Period to the Current Year Period. The ~~increase~~decrease in revenue is primarily due to terminated contracts of $70.7 million, decreased membership partially offset by favorable rate changes of $23.9 million, the revenue impact of program changes of $18.0 million and the revenue impact of favorable period care development recorded in the Current Year Period of $4.9 million. These decreases were partially offset by new contracts implemented after (or during) the Prior Year Period of $196.4 million, program changes of $48.0 million, favorable rate changes partially offset by decreased membership of $35.4 million and unfavorable retroactive membership and rate adjustments in the Prior Year Period of $2.6 million. These increases were partially offset by terminated contracts of $190.0$22.7 million, net revenue recorded for HIF fees in the ~~Prior Year Period of $15.0 million, the revenue impact of net favorable prior period medical claims development recorded in the~~ Current Year Period of ~~$2.1~~$7.9 million and other net ~~unfavorable~~favorable variances of ~~$2.9~~$3.9 million.

Cost of care

Cost of care ~~increased~~decreased by ~~4.3~~13.8 percent or ~~$79.4~~$107.1 million from the Prior Year Period to the Current Year Period. The ~~increase~~decrease is primarily due to terminated contracts of $48.4 million, decreased membership of $35.3 million, program changes of $16.5 million, favorable prior period care development recorded in the Current Year Period of $6.3 million and care trends and other favorable variances of $23.5 million. These decreases were partially offset by care cost ~~for~~of new contracts implemented after (or during) the Prior Year Period of $154.2 million, program changes of $40.1 million, net favorable prior period medical claims recorded in the Prior Year Period of $7.2 million and care trends and other net unfavorable variances of $85.5 million. These increases were partially offset by terminated contracts of $152.1 million, decreased membership of $32.8$11.9 million and net favorable prior period medical claims development recorded in the ~~Current~~Prior Year Period of ~~$22.7~~$11.0 million. ~~For our behavioral specialty health contracts, cost~~Cost of care as a percentage of risk revenue (excluding EAP business) decreased ~~slightly~~ from ~~86.8~~86.7 percent in the Prior Year Period to ~~86.7 percent in the Current Year Period. For our MCC contracts, cost of care as a percentage of risk revenue increased from 88.6 percent in the Prior Year Period to 89.5~~81.0 percent in the Current Year Period, mainly due to ~~net revenue recorded for HIF fees in~~ the ~~Prior Year Period~~impact of prior period care development, decreased utilization and business mix.

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Direct service costs and other

Direct service costs ~~decreased~~increased by ~~1.9~~4.0 percent or ~~$7.1~~$8.0 million from the Prior Year Period to the Current Year Period primarily due to HIF fees in the ~~Prior~~Current Year ~~Period and terminated contracts, partially offset by new business growth.~~Period. Direct service costs ~~decreased~~increased as a percentage of revenue from ~~15.8~~18.8 percent in the Prior Year Period to ~~15.0~~21.3 percent in the Current Year Period, primarily due to the previously discussed revenue decreases as well as HIF fees in the ~~Prior~~Current Year ~~Period,~~Period.

MCC Stock and ~~increased revenue from program changes~~Asset Purchase Agreement

On April 30, 2020, the Company and ~~favorable rate changes.~~Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell its MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. See Note E— “Discontinued Operations” for additional information.

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Pharmacy Management

The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management’s services include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs; and (vi) programs for the integrated management of specialty drugs. Pharmacy Management’s services are provided under contracts with health plans, employers, state Medicaid programs, Medicare Part D and other government agencies.

The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):


	Three Months Ended					Six Months Ended					Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change	June 30,				Change	June 30,				Change
Pharmacy Segment Results	2018		2019		'18 vs '19	2018		2019		'18 vs '19	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Formulary management	$	18,348	$	18,426	0.4%	$	38,725	$	35,609	(8.0%)	$	18,426	$	25,061	36.0%	$	35,609	$	47,222	32.6%
PBA and other		42,255		44,222	4.7%		84,185		86,934	3.3%		44,222		42,806	(3.2%)		86,934		85,080	(2.1%)
Managed care and other revenue		60,603		62,648	3.4%		122,910		122,543	(0.3%)		62,648		67,867	8.3%		122,543		132,302	8.0%
PBM, including dispensing		536,131		480,167	(10.4%)		1,069,923		973,392	(9.0%)		480,167		499,484	4.0%		973,392		1,017,596	4.5%
Medicare Part D		106,663		69,843	(34.5%)		205,069		133,183	(35.1%)		69,843		56,711	(18.8%)		133,183		112,377	(15.6%)
PBM revenue		642,794		550,010	(14.4%)		1,274,992		1,106,575	(13.2%)		550,010		556,195	1.1%		1,106,575		1,129,973	2.1%
Total net revenue		703,397		612,658	(12.9%)		1,397,902		1,229,118	(12.1%)		612,658		624,062	1.9%		1,229,118		1,262,275	2.7%
Cost of goods sold		603,951		505,203	(16.4%)		1,208,864		1,035,410	(14.3%)		505,203		532,685	5.4%		1,035,410		1,070,259	3.4%
		99,446		107,455	8.1%		189,038		193,708	2.5%		107,455		91,377	(15.0%)		193,708		192,016	(0.9%)
Direct service costs and other		70,941		78,776	11.0%		146,527		158,411	8.1%		78,776		80,082	1.7%		158,411		161,948	2.2%
		28,505		28,679	0.6%		42,511		35,297	(17.0%)		28,679		11,295	(60.6%)		35,297		30,068	(14.8%)
Stock compensation expense		1,408		2,124	50.9%		2,893		3,796	31.2%		2,124		1,939	(8.7%)		3,796		4,046	6.6%
Segment Profit	$	29,913	$	30,803	3.0%	$	45,404	$	39,093	(13.9%)	$	30,803	$	13,234	(57.0%)	$	39,093	$	34,114	(12.7%)

Direct service cost as % of revenue		10.1%		12.9%			10.5%		12.9%			12.9%		12.8%			12.9%		12.8%
COGS as % of PBM revenue		94.0%		91.9%			94.8%		93.6%			91.9%		95.8%			93.6%		94.7%

Pharmacy Operational Statistics
Adjusted commercial network claims							15,097		13,900								13,900		11,661
Adjusted PBA claims							35,515		39,508								39,508		34,530
Total adjusted claims							50,612		53,408								53,408		46,191

Generic dispensing rate							87.6%		87.3%								87.3%		88.1%
Commercial PBM covered lives							2,036		1,863								1,863		1,876
Medical pharmacy covered lives							13,733		12,569								12,569		15,833
Total states and DC that participate in PBA							27		27								27		26

Current Year Quarter compared to the Prior Year Quarter

Managed care and other revenue

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Managed care and other revenue increased by ~~3.4~~8.3 percent or ~~$2.0~~$5.2 million from the Prior Year Quarter to the Current Year Quarter primarily due to ~~performance incentives.~~increased formulary management revenue of $6.6 million mainly due to utilization, and increased medical pharmacy revenue of $3.7 million mainly due to increased membership. The increase is partially offset by terminated contracts of $4.4 million and other net unfavorable variances of $0.7 million.

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PBM revenue

PBM revenue ~~decreased~~increased by ~~14.4~~1.1 percent or ~~$92.8~~ $6.2 million from the Prior Year Quarter to the Current Year Quarter. The ~~decrease~~increase is primarily due to ~~lower revenue from terminated contracts of $84.0 million and net decreased~~an increase in membership and utilization of ~~$35.4 million. These decreases were~~$8.8 million partially offset by ~~new business of $23.2 million, a network guarantee penalty in the Prior Year Quarter of $1.5 million and~~ other net ~~favorable~~unfavorable variances of ~~$1.9 million.~~$2.6 million, mainly related to higher customer settlements related to prior periods.

Cost of goods sold

Cost of goods sold ~~decreased~~increased by ~~16.4~~5.4 percent or ~~$98.7~~$27.5 million from the Prior Year Quarter to the Current Year Quarter. This ~~decrease~~increase is primarily due to ~~terminated contracts of $82.9 million, net decreased~~an increase in membership and utilization of ~~$41.0~~$20.8 million and other net ~~favorable~~unfavorable variances of ~~$0.7 million. These decreases were partially offset by new contracts of $22.0 million and a network guarantee penalty in the Prior Year Quarter of $3.9~~$6.7 million. As a percentage of the portion of net revenue that relates to PBM, cost of goods sold ~~decreased~~increased from ~~94.0~~91.9 percent in the Prior Year Quarter to ~~91.9~~95.8 percent in the Current Year Quarter, mainly ~~attributable~~due to ~~network guarantee penalties in the Prior Year Quarter~~higher utilization and business mix.

Direct service costs and other

Direct service costs increased by ~~11.0~~1.7 percent or ~~$7.8~~$1.3 million from the Prior Year Quarter to the Current Year Quarter primarily due to ~~higher discretionary benefits.~~start-up costs associated with a new contract implementation. Direct service costs ~~increased~~decreased slightly as a percentage of revenue from ~~10.1~~12.9 percent in the Prior Year Quarter to ~~12.9~~12.8 percent in the Current Year ~~Quarter primarily due to a net decrease in revenue and an increase in discretionary benefits.~~Quarter.

Current Year Period compared to Prior Year Period

Managed care and other revenue

Managed care and other revenue ~~decreased~~increased by ~~0.3~~8.0 percent or ~~$0.4~~$9.8 million from the Prior Year Period to the Current Year Period primarily due to ~~decreased~~increased formulary management revenue ~~for~~of $11.6 million due to utilization, increased medical pharmacy management revenue of $7.2 million due to increased membership, and increased government pharmacy revenue of $2.5 million. These increases were partially offset by terminated ~~contracts.~~contracts of $8.9 million and other net unfavorable variances of $2.6 million.

PBM revenue

PBM revenue ~~decreased~~increased by ~~13.2~~2.1 percent or ~~$168.4~~ $23.4 million from the Prior Year Period to the Current Year Period. The ~~decrease~~increase is primarily due to ~~lower revenue from terminated contracts of $166.3 million and net decreased~~increase in membership and utilization of ~~$49.8 million. These decreases were~~$26.0 million partially offset by ~~new business of $45.4 million, a network guarantee penalty in the Prior Year Period of $1.1 million and~~ other net ~~favorable~~unfavorable variances of ~~$1.2 million.~~$2.6 million, mainly related to higher customer settlements related to prior periods.

Cost of goods sold

Cost of goods sold ~~decreased~~increased by ~~14.3~~3.4 percent or ~~$173.5~~$34.8 million from the Prior Year Period to the Current Year Period. This ~~decrease~~increase is primarily due to ~~terminated contracts of $164.5 million, net decreased~~an increase in membership and utilization of ~~$53.3~~$30.8 million and other net ~~favorable~~unfavorable variances of ~~$0.2 million. These decreases were partially offset by new contracts of $43.1 million and network guarantee penalties in the Current Year Period of $1.4~~$4.0 million. As a percentage of the portion of net revenue that relates to PBM, cost of goods sold ~~decreased~~increased from ~~94.8~~93.6 percent in the Prior Year Period to ~~93.6~~94.7 percent in the Current Year Period, mainly due to higher utilization and business mix.

Direct service costs and other

Direct service costs increased by ~~8.1~~2.2 percent or ~~$11.9~~$3.5 million from the Prior Year Period to the Current Year Period primarily due to ~~higher discretionary benefits and corporate allocations.~~start-up costs associated with a new contract implementation. Direct service costs ~~increased~~decreased slightly as a percentage of revenue from ~~10.5~~12.9 percent in the Prior Year Period to ~~12.9~~12.8 percent in the Current Year ~~Period mainly due to a net decrease in revenue and an increase in discretionary benefits.~~Period.

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Corporate Segment

The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.

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The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):


	Three Months Ended					Six Months Ended					Three Months Ended					Six Months Ended
	June 30,				Change	June 30,				Change	June 30,				Change	June 30,				Change
Corporate Segment & Eliminations	2018		2019		'18 vs '19	2018		2019		'18 vs '19	2019		2020		'19 vs '20	2019		2020		'19 vs '20
Managed care and other revenue	$	(151)	$	(147)	(2.6%)	$	(296)	$	(316)	6.8%	$	(147)	$	(177)	20.4%	$	(316)	$	(350)	10.8%
PBM revenue		(47,211)		(44,817)	(5.1%)		(94,095)		(85,872)	(8.7%)		(4,335)		(4,831)	11.4%		(8,442)		(9,398)	11.3%
Cost of goods sold		45,532		44,016	(3.3%)		90,780		84,430	(7.0%)		4,122		4,618	12.0%		8,015		8,951	11.7%
		(1,830)		(948)	(48.2%)		(3,611)		(1,758)	(51.3%)		(360)		(390)	8.3%		(743)		(797)	7.3%
Direct service costs and other		10,221		9,710	(5.0%)		17,466		22,809	30.6%		18,817		19,224	2.2%		41,372		35,663	(13.8%)
		(12,051)		(10,658)	(11.6%)		(21,077)		(24,567)	16.6%		(19,177)		(19,614)	2.3%		(42,115)		(36,460)	(13.4%)
Stock compensation expense		6,289		846	(86.5%)		9,500		7,031	(26.0%)		846		2,551	201.5%		7,031		4,480	(36.3%)
Segment Loss	$	(5,762)	$	(9,812)	70.3%	$	(11,577)	$	(17,536)	51.5%	$	(18,331)	$	(17,063)	(6.9%)	$	(35,084)	$	(31,980)	(8.8%)

Current Year Quarter compared to the Prior Year Quarter

The Corporate segment loss ~~increased~~decreased by ~~70.3~~6.9 percent or ~~$4.1~~$1.3 million from the Prior Year Quarter to the Current Year ~~Quarter primarily due to higher discretionary benefits.~~Quarter. As a percentage of revenue, the Corporate segment loss ~~increased~~decreased slightly from ~~0.3~~1.6 percent in the Prior Year Quarter to ~~0.5 percent~~1.5% in the Current Year ~~Quarter primarily due to net decreased revenue, mainly from terminated contracts, and higher discretionary benefits.~~Quarter.

Current Year Period compared to the Prior Year Period

The Corporate segment loss ~~increased~~decreased by ~~51.5~~8.8 percent or ~~$6.0~~$3.1 million from the Prior Year Period to the Current Year Period primarily due to ~~higher discretionary benefits.~~lower stock compensation. As a percentage of revenue, the Corporate segment loss ~~increased~~decreased slightly from ~~0.3~~1.5 percent in the Prior Year Period to ~~0.5~~1.4 percent in the Current Year ~~Period primarily due to net decreased revenue, mainly from terminated contracts, and higher discretionary benefits.~~Period.

Inter segment revenues and expenses

MCC subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain MCC customers. The Company will continue to provide these services post transition, thus the associated revenues, cost of goods sold and direct service costs related to these arrangements are reflected within both continuing operations and discontinued operations.

Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain ~~of Healthcare’s~~Healthcare customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated within the Corporate segment.

Non-GAAP Measures

The Company reports its financial results in accordance with GAAP; however, the Company’s management also assesses business performance and makes business decisions regarding the Company’s operations using certain non-GAAP measures.

In addition to Segment Profit, as defined above, the Company also uses adjusted net income ~~attributable to Magellan~~from continuing operations (“Adjusted Net ~~Income”~~Income from Continuing Operations”) and adjusted net income from continuing operations per common share ~~attributable to Magellan~~ on a diluted basis (“Adjusted EPS”). Adjusted Net Income from Continuing Operations and Adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition ~~intangibles.~~intangibles, special charges and any impact related to the sale of MCC. The Company believes these non-GAAP measures provide a more useful comparison of the Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures disclosed, such as Segment Profit, Adjusted Net Income from Continuing Operations and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2018		2019		2018		2019		2019		2020		2019		2020
Income before income taxes	$	18,375	$	21,219	$	29,752	$	22,189
Income from continuing operations before income taxes									$	12,950	$	10,780	$	1,550	$	15,472
Stock compensation expense		10,439		5,414		18,085		15,021		5,207		6,592		14,607		12,389
Changes in fair value of contingent consideration		70		(2,149)		303		(2,005)
Depreciation and amortization		33,848		33,490		64,255		64,198		28,191		23,888		53,608		47,246
Interest expense		8,678		9,141		17,044		18,248		9,070		7,995		18,107		16,953
Interest and other income		(3,363)		(5,021)		(5,839)		(9,995)		(1,821)		(551)		(3,580)		(1,770)
Segment Profit	$	68,047	$	62,094	$	123,600	$	107,656
Special charges										—		8,309		—		8,309
Segment Profit from continuing operations									$	53,597	$	57,013	$	84,292	$	98,599

The following table reconciles net income from continuing operations to Adjusted Net Income ~~to net income~~from continuing operations (in thousands):


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2018		2019		2018		2019		2019		2020		2019		2020
Net income	$	13,551	$	13,613	$	25,003	$	14,044
Adjusted for acquisitions starting in 2013
Stock compensation expense		268		—		530		—
Changes in fair value of contingent consideration		70		(2,149)		303		(2,005)
Net income (loss) from continuing operations									$	7,215	$	47,108	$	(976)	$	46,038
Adjustments
Amortization of acquired intangibles		12,726		12,272		24,597		24,545		7,749		9,573		15,501		19,259
Special charges										—		8,309		—		8,309
Tax impact		(3,344)		(2,675)		(6,357)		(5,957)		(2,047)		(4,808)		(4,097)		(7,413)
Adjusted Net Income	$	23,271	$	21,061	$	44,076	$	30,627
Nonrecurring tax benefit - divestiture										—		(38,907)		—		(38,907)
Adjusted Net Income from continuing operations									$	12,917	$	21,275	$	10,428	$	27,286

The following table reconciles ~~Adjusted EPS to~~ net income from continuing operations per common share—~~diluted:~~

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2019

2018

2019

Net income per common share—diluted

$
0.53

$
0.56

$
0.98

$
0.58

Adjusted for acquisitions starting in 2013

Stock compensation expense

0.01

—

0.02

—

Changes in fair value of contingent consideration

—

(0.09)

0.01

(0.08)

Amortization of acquired intangibles

0.51

0.50

0.97

1.01

Tax impact

(0.13)

(0.11)

(0.25)

(0.25)

Adjusted EPS

$
0.92

$
0.86

$
1.73

$
1.26

~~The Company believes these non-GAAP measures provide a useful comparison of the Company’s underlying business performance from period~~diluted to ~~period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures we disclose, such as Segment Profit, Adjusted Net Income and~~ Adjusted EPS ~~should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.~~from continuing operations:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2020		2019		2020
Net income (loss) from continuing operations per common share—diluted	$	0.30	$	1.86	$	(0.04)	$	1.84
Adjustments
Amortization of acquired intangibles		0.32		0.38		0.64		0.77
Special charges		—		0.33		—		0.33
Tax impact		(0.09)		(0.19)		(0.17)		(0.30)
Nonrecurring tax benefit - divestiture		—		(1.54)		—		(1.55)
Adjusted EPS from continuing operations	$	0.53	$	0.84	$	0.43	$	1.09

Outlook—Results of Operations

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

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pharmacy revenues, including rebates and Medicare Part D; and (ix) changes in the estimates of contingent consideration.

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

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 the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes isare subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of June 30, ~~2019,~~2020, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company’s future earnings and cash outflows.

Historical—Liquidity and Capital Resources

Operating Activities. The Company reported net cash provided by operating activities of ~~$21.1~~$29.4 million and ~~$29.4~~$170.8 million for the Prior Year Period and Current Year Period, respectively. The ~~$8.3~~$141.4 million increase in operating cash flows from the Prior Year Period is mainly attributable to ~~lower tax payments,~~higher segment profit from continuing and discontinued operations, and favorable working capital changes, partially offset by increased tax payments and lower ~~segment profit.~~interest income collected.

The net ~~unfavorable~~favorable impact of working capital changes between periods totaled ~~$0.2~~$51.8 million. For the Prior Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$57.9~~$67.4 million, ~~largely~~mainly attributable to ~~timing related to receivables and payables partially offset by discretionary benefits.~~an increase in accounts receivable. For the Current Year Period, operating cash flows were impacted by net unfavorable working capital changes of ~~$58.1~~$15.6 million, mainly attributable to ~~an increase in accounts receivable.~~

~~Tax payments for~~ the ~~Current Year Period decreased $26.3 million from the Prior Year Period. Segment Profit for the Current Year Period decreased $15.9 million from the Prior Year Period.~~timing of receivables and payables.

Investing Activities. The Company utilized ~~$37.1~~$27.8 million and ~~$27.8~~$38.3 million during the Prior Year Period and the Current Year Period, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized software for the Prior Year Period were ~~$12.4~~$7.6 million and ~~$24.7~~$20.2 million, respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of ~~$7.6~~$11.1 million and ~~$20.2~~$27.2 million, respectively.

During the Prior Year Period and the Current Year Period the Company used ~~$106.8~~$7.5 million and ~~$7.5~~$129.6 million, respectively, for the net purchase of "available-for-sale" securities.

Financing Activities. During the Prior Year Period, the Company paid $31.2 million on debt obligations, $14.3 million for the repurchase of treasury stock under the Company’s share repurchase program, $2.7 million on finance lease and deferred financing obligations and had other net unfavorable items of $3.1 million. In addition, the Company received $21.5 million from the exercise of stock options.

~~During the Current Year Period, the Company paid~~ $10.0 million on debt obligations, $6.2 million for payments on contingent consideration, ~~$5.5 million on finance lease and deferred financing obligations,~~ $4.1 million for the repurchase of treasury stock under the Company's share repurchase program, $5.5 million on finance lease obligations and had other net unfavorable items of $0.5 million. In addition, the Company received $20.6 million from the exercise of stock options.

During the Current Year Period, the Company received $80.0 million from the issuance of debt and $29.8 million from the exercise of stock options. In addition, the Company paid $37.7 million on debt obligations, $2.6 million on finance lease obligations and had other net unfavorable items of $1.1 million.

Outlook—Liquidity and Capital Resources

Liquidity. The Company may draw on the 2017 Credit Agreement (discussed further below) as required to meet working capital needs associated with the timing of receivables and payables, fund share repurchases or support acquisition activities. The Company currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. At June 30, 2020, the Company had a revolving loan of $80.0 million with the remaining $320.0 million of the revolving credit facility still available to the Company for additional drawdown. 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 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 the

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Company will not experience any such losses in the future.

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Stock Repurchases. On October 26, 2015, the Company’s board of directors approved a stock repurchase plan which authorized the Company to purchase up to $200 million of its outstanding common stock through October 26, 2017. On July 26, 2017, the Company’s board of directors approved an extension of the 2015 Repurchase Program through October ~~26,~~22, 2018. On May 24, 2018, the Company’s board of directors approved an increase of $200 million to the current $200 million stock repurchase plan which will now authorize the Company to purchase up to $400 million of its outstanding common stock. The board also extended the program from October 22, 2018 to October 22, 2020. As of June 30, ~~2019,~~2020, the remaining capacity under the 2015 Repurchase Program was $186.3 million. See ~~Note D~~—Part II, Item 2—“~~Commitments~~Unregistered Sales of Equity Securities and ~~Contingencies”~~Use of Proceeds” for more information on the Company’s share repurchase program.

Off-Balance Sheet Arrangements. As of June 30, ~~2019,~~2020, the Company ~~has~~had no material off-balance sheet arrangements.

Credit Agreement. On September 22, 2017, the Company entered into the 2017 Credit Agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower. On August 13, 2018, the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was necessary in order for the Company to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, 2023. See Note A—“~~General~~”General” for more information on the 2017 Credit Agreement.

Restrictive Covenants in Debt Agreements. The 2017 Credit Agreement contains covenants that potentially limit management’s discretion in operating the Company’s business by, in certain circumstances, restricting or limiting the Company’s ability, among other things, to:

●

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

●

pay dividends and make other distributions;

●

repurchase equity interests;

●

make certain advances, investments and loans;

●

enter into sale and leaseback transactions;

●

create liens;

●

sell and otherwise dispose of assets;

●

acquire or merge or consolidate with another company; and

●

enter into some types of transactions with affiliates.

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

The 2017 Credit Agreement also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2017 Credit Agreement pursuant to its terms, or amended, would result in an event of default under the 2017 Credit Agreement. As of June 30, ~~2019,~~2020, the Company was in compliance with all covenants, including financial covenants, under the 2017 Credit Agreement.

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Critical Accounting Policies and Estimates

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amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under ASC 606 which are explained in more detail in Note A—“General – Revenue Recognition.” Actual results could differ from those estimates. Except as noted above, the Company’s critical accounting policies are summarized in the Company’s Annual Report on Form 10-K, filed with the SEC on February 28, ~~2019.~~2020.

Forward-Looking Statements

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

●

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

●

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

●

risks relating to the Company’s proposed sale of the MCC business to Molina, including the ability of the Company to realize the expected benefits of the transaction, the ability of the Company to obtain regulatory approvals for the transaction and to satisfy other closing conditions, and the ability of the parties to close the transaction in the anticipated timeframe;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

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●

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

●

restrictive covenants in the Company’s debt instruments;

●

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

●

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

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●

the impact of healthcare reform legislation;

●

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

●

government regulation;

●

proposed changes to current Federal law and regulations;

●

noncompliance with regulations;

●

the Company’s participation in Medicare Part D is subject to government regulation;

●

failure to maintain satisfactory Medicare and Medicaid quality performance measures;

●

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

●

a breach or failure in the Company’s operational security systems or infrastructure, or those of third parties with which it does business;

●

risk associated with outsourcing services and functions to third parties;

●

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

●

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

●

pending or future actions or claims for professional liability;

●

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

●

class action suits and other legal proceedings;

●

negative publicity;

●

the impact of governmental investigations;

●

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

●

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

●

the Company’s ability to successfully implement its margin improvement initiatives and plans;

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●

tax matters, including changes in corporate tax rates, disagreements with taxing authorities and imposition of new taxes; ~~and~~

●

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

●

the impact of an epidemic or health crisis such as the COVID-19 pandemic, natural disasters, political disruptions, acts of war or terrorism, cybersecurity attacks or other data breaches or intrusions and other extraordinary events.

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, ~~2018.~~2019 and in Item 1A of this Quarterly Report on Form 10-Q. 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

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required by law.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes is subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of June 30, ~~2019,~~2020, a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company’s future earnings and cash outflows.

Item 4. Controls and Procedures

a)The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of June 30, ~~2019.~~2020. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of June 30, ~~2019.~~2020.

b)Under the supervision and with the participation of management, including the Company’s principal executive and principal financial officers, the Company has determined that there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarter ended June 30, ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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~~practices including employment practices, and privacy and data protection.

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The Company maintains a program of insurance coverage against a broad range of risks in the ~~opinion~~Company’s business, including certain of ~~management,~~ the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 28, 2020. The Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard.

Item 1A. Risk Factors.

~~There has~~Other than the risk factors below, there have been no material ~~change~~changes in ~~our~~the risk factors as disclosed in Part I—Item 1A—“Risk Factors” of the Company’s Annual Report on Form ~~10-K~~10 K for the year ended December 31, ~~2018,~~2019, which was filed with the SEC on February 28, ~~2019.~~2020:

The Company faces risks related to unauthorized disclosure of sensitive or confidential member and other protected personal or health information.

As part of its normal operations, the Company collects, processes and retains confidential member and protected personal or health information making the Company subject to various federal and state laws and rules regarding the use and disclosure of confidential member and protected personal or health information, including HIPAA. The Company also maintains other confidential information related to its business and operations. Despite our security measures, the Company is subject to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. For example, we have experienced data security breaches resulting in disclosure of confidential or protected personal or health information. Noncompliance with any privacy or security laws and regulations (including, but not limited to, state and federal laws and international regulations, such as GDPR) or any security incident or breach, whether by the Company or by its vendors, could result in enforcement actions, material fines and penalties, reputational and financial harm to the Company, and could also subject the Company to litigation.

IT Systems – The Company’s ability to effectively maintain and upgrade its information systems is critical to its business.

The Company’s operations are dependent on effective information systems. Our information systems require routine maintenance, enhancements and upgrades in order to meet operational needs and regulatory requirements. The maintenance, upgrade and enhancement of our information systems requires significant economic resources. If the Company encounters difficulties in its information systems, or with the transition to or from its information systems, or does not appropriately maintain, enhance and upgrade its information systems, such events could adversely impact the Company’s operations materially. In addition, our ability to manage effectively our information systems could be impacted by events outside of our control, including acts of nature, such as floods, earthquakes, fires, pandemics, or acts of terrorism or war.

Cyber-Security—The Company faces risks related to a breach or failure in our operational security systems or infrastructure, or those of third parties with which we do business.

Our business requires us to securely store, process and transmit confidential, proprietary and other information in our operations, including protected personal or health information. Security incidents or breaches may arise from, among other things, computer hackers penetrating our systems or approaching our employees to obtain personal information for financial gain, attempting to cause harm to our operations, or intending to obtain competitive, confidential or protected personal or health information. It is widely reported that the healthcare industry, including providers, plans and pharmacies, are increasingly prime targets for cyber-attacks. Our data assets and systems continue to be subject to attack by viruses, worms, phishing attempts and other malicious software programs on a regular basis, and we routinely identify attempts to gain unauthorized access to our systems.

We maintain a comprehensive system of preventive and detective controls through our security programs; however given the rapidly evolving nature and proliferation of cyber threats, our controls may not prevent or identify all

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such attacks in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations, and we cannot eliminate the risk of human error or employee or vendor malfeasance. For example, we were the target of a criminal ransomware attack on our computer network recently, which resulted in a temporary systems outage and the exfiltration of certain confidential company and personal information as well as protected health information of certain members. We are investigating the incident with forensic experts, notifying our customers, employees, impacted individuals, and appropriate government agencies, as applicable, and working with law enforcement authorities.

Any costs that we incur as a result of a data security incident or breach, including costs to update our security protocols to mitigate such an incident or breach could be significant. Any breach or failure in our operational security systems can result in loss of data or an unauthorized disclosure of or access to sensitive or confidential member or protected personal or health information and could result in significant penalties or fines, litigation, loss of customers, significant damage to our reputation and business, and other losses, which could adversely impact the Company’s financial condition and results of operations materially.

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with third party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Some of these third parties also have direct access to our systems. Our arrangements with third party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data or the protected personal or health information and data relating to our members or customers. We are also at risk of a data security incident or breach involving a vendor or third party, which could result in a breakdown of such third party’s data protection processes or cyber-attackers gaining access to our infrastructure through the third party, or can result in loss of data or an unauthorized disclosure of or access to sensitive or confidential member or protected personal or health information.

To the extent that a vendor or third party suffers a security incident or breach that compromises its operations, we could incur significant costs and possible service interruption, which could have an adverse effect on our business, operations and reputation. In addition, we may have disagreements with third party vendors and service providers regarding relative responsibilities for any such failures or security incidents or breaches under applicable business associate agreements or other applicable outsourcing agreements.

Any contractual remedies and/or indemnification obligations we may have for vendor or service provider failures or security incidents or breaches may not be adequate to fully compensate us for any losses suffered as a result of any vendor’s failure to satisfy its obligations to us or under applicable law. Further, we may not be adequately indemnified against all possible losses through the terms and conditions of our contracts with third party vendors and service providers. Our outsourcing arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial condition or other matters outside of our control.

If we fail to adequately monitor and regulate the performance of our third-party vendors and service providers, we could be subject to additional risk, including significant cybersecurity risk. Violations of, or noncompliance with, laws and/or regulations governing our business (including, but not limited to, state and federal laws and international regulations, such as GDPR) or noncompliance with contract terms by third-party vendors and service providers could increase our exposure to liability to our members, providers, or other third parties, or sanctions and/or fines from the regulators that oversee our business, as well as litigation. In turn, this could increase the costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur significant costs and/or disruption to our operations in connection with any such vendor or service provider transition. As a result, we may not be able to meet the full demands of our members or customers and, in turn, our business, financial condition, or results of operations may be harmed materially. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third party vendors and service providers, as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the third party, vendor or service provider noncompliance with contract terms or violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or financial problems that could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

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Extraordinary Events—Extraordinary events, including the COVID-19 pandemic, could adversely affect the Company’s business, financial condition and results of operations.

The Company’s operations could be subject to an epidemic or health crisis such as the COVID-19 pandemic, natural disasters, political disruptions, acts of war or terrorism and other such extraordinary events. These events could cause significant disruptions in the Company’s operations and its ability to serve its members. If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial position and cash flows could be materially adversely affected. Such events could also impact the Company’s utilization, which could have a favorable or unfavorable impact to its medical loss ratios. In addition, such events could impact the financial markets, which could adversely impact the Company’s investment portfolio and its ability to access the credit markets.

In 2020, the spread of the COVID-19 pandemic has caused significant financial market volatility and economic uncertainty, and is currently impacting countries, communities and workforces around the world. The effects of the COVID-19 pandemic on the Company and the duration of any such effects, including any impact on the Company’s medical loss ratios (which could increase or decrease), are not known and are not quantifiable at this time. To date, other than the transition of our employees to a work at home environment, the Company has not experienced any significant interruptions to normal business activities and has not experienced any disruptions in its services. In addition, the Company does not expect the valuation of its investments to be materially affected. No effect from the subsequent events associated with the COVID-19 pandemic has been recorded within the accompanying financial statements.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition are dependent on future developments for which there is significant uncertainty at this time and cannot be predicted, such as the scope, duration and severity of the pandemic, the extent and effectiveness of containment actions, any actions that may be taken by various governmental authorities in response to the outbreak, the possible impact on the global economy and local economies in which we operate and the resumption of normal economic conditions. The long-term financial and economic impacts of the COVID-19 pandemic may continue for a significant period of time and cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

Risks Associated with the Intended Sale of the MCC Business to Molina.

On April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell the MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business. The Company has also agreed to provide certain transition services to Molina following the closing.

There are numerous risks associated with the MCC Sale, including but not limited to the ability of the Company to obtain regulatory approvals for the MCC Sale and to satisfy other closing conditions; the anticipated timing of the closing of the MCC Sale; the benefits to the Company of the commercial agreements entered into in connection with the MCC Sale; the ability of the Company to use the proceeds of the MCC Sale to fund future growth initiatives or otherwise create value for the Company, the ability of the Company to strategically focus on enhancing its behavioral and specialty health business, as well as the continued growth of its pharmacy business; the ability of the Company to achieve our strategic and growth goals; any disruption that may result from the announcement or pendency of the MCC Sale, including potential adverse reactions by customers, employees, suppliers, regulators, or federal or state legislators, making it more difficult to maintain business and operational relationships; any disruption to our operations that may result from the diversion of management’s attention from our day-today operations and efforts to grow our other businesses due to the significant resources that the separation of the MCC business from the rest of the Company’s business will require; unexpected costs are incurred in connection with the completion and/or divestiture of the MCC business; and the possibility that we will be required to perform under the indemnification obligations that we provided to Molina under the Purchase Agreement in a manner that has a material adverse effect on our business, results of operations and financial condition. Any of the foregoing risks could have an adverse effect on our business, financial condition, cash flows, or results of operations.

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

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accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

See Exhibit Index.

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Exhibit Index


Exhibit Number		Description of Exhibit
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 ~~SarbanesOxley~~Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the ~~SarbanesOxley~~Sarbanes-Oxley Act of 2002 (furnished).
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the ~~SarbanesOxley~~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 30, ~~2019~~2020 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the cover page, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes.
104		Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES

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


Date: July ~~30, 2019~~29, 2020	Magellan Health, Inc. (Registrant)

	By:	/s/ Jonathan N. Rubin
		Jonathan N. Rubin
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

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	Balance at December 31, 2018		Adjustments Due to ASC 842		Balance at January 1, 2019
Assets
Deferred income taxes	$	3,411	$	52	$	3,463
Other long-term assets		24,530		59,820		84,350
Total Assets		2,979,056		59,872		3,038,928

Liabilities and Stockholders' Equity
Accrued liabilities		231,356		13,018		244,374
Total Current Liabilities		898,893		13,018		911,911
Deferred credits and other long-term liabilities		36,483		46,999		83,482
Total Liabilities		1,693,753		60,017		1,753,770
Retained earnings		1,419,449		(145)		1,419,304
Total Stockholders' Equity		1,285,303		(145)		1,285,158
Total Liabilities and Stockholders' Equity		2,979,056		59,872		3,038,928


	As Reported		Adjustments		Balance Without ASC 842 Adoption
Assets
Other long-term assets	$	107,431	$	(52,862)	$	54,569
Total Assets		3,077,791		(52,862)		3,024,929

Liabilities and Stockholders' Equity
Accrued liabilities		260,980		(11,700)		249,280
Total Current Liabilities		925,127		(11,700)		913,427
Deferred credits and other long-term liabilities		76,482		(41,398)		35,084
Total Liabilities		1,743,521		(53,098)		1,690,423
Retained earnings		1,433,348		236		1,433,584
Total Stockholders' Equity		1,334,270		236		1,334,506
Total Liabilities and Stockholders' Equity		3,077,791		(52,862)		3,024,929


Segment	Term Date	2018		2019
Healthcare
Customer A	December 31, 2023	$	307,902	$	118,061	*

Pharmacy Management
Customer B	March 31, 2021		176,650		174,535


	Six months ended June 30, 2019
Operating lease cost	$	9,382
Finance lease cost:
Amortization of right-of-use asset		1,958
Interest on lease liabilities		634
Total finance lease cost		2,592
Short-term lease cost		664
Variable lease cost		1,564
Total lease cost		14,202
Sublease income		(200)
Net lease cost	$	14,002


	June 30, 2019
Operating leases:
Other long-term assets	$	52,862

Accrued liabilities	$	13,334
Deferred credits and other long-term liabilities		47,773
Total operating lease liabilities	$	61,107

Finance leases:
Property and equipment, net	$	14,670

Current debt, finance lease and deferred financing obligations	$	4,250
Long-term debt, finance lease and deferred financing obligations		15,846
Total finance lease liabilities	$	20,096


	June 30, 2019
2019	$	9,446
2020		17,034
2021		16,423
2022		15,403
2023		11,426
2024 and beyond		13,758
Total lease payments		83,490
Less interest		(2,287)
Present value of lease liabilities	$	81,203


	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	263,462	$	—	$	263,462
Investments:
U.S. Government and agency securities		67,815		—		—		67,815
Obligations of government-sponsored enterprises (2)		—		5,229		—		5,229
Corporate debt securities		—		292,049		—		292,049
Certificates of deposit		—		20,650		—		20,650
Total assets held at fair value	$	67,815	$	581,390	$	—	$	649,205

Liabilities
Contingent consideration	$	—	$	—	$	10,124	$	10,124
Total liabilities held at fair value	$	—	$	—	$	10,124	$	10,124


	June 30,
	2019
Balance as of beginning of period	$	10,124
Changes in fair value		(2,005)
Payments		(8,000)
Balance as of end of period	$	119