UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

HealthSpring, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-1821898
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
9009 Carothers Parkway
Suite 501
Franklin, Tennessee		37067
(Address of Principal Executive Offices)		(Zip Code)

(615) 291-7000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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 þ            No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ            No o

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

Large accelerated Filer þ		Accelerated Filer o		Non-accelerated Filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

		Outstanding at October 27, 2010
Common Stock, Par Value $0.01 Per Share		57,239,061 Shares

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009			1
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009			2
Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2010 and 2009			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			30
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			34
Item 5. Other Information			34
Item 6. Exhibits			34
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I — FINANCIAL INFORMATION

Item 1: Financial Statements

HEALTHSPRING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

		September 30,				December 31,
		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	238,238			$	439,423
Accounts receivable, net			85,972				92,442
Investment securities available for sale			—				8,883
Investment securities held to maturity			—				13,965
Funds due for the benefit of members			4,847				4,028
Deferred income taxes			7,062				6,973
Prepaid expenses and other assets			8,788				9,586
Total current assets			344,907				575,300
Investment securities available for sale			267,099				13,574
Investment securities held to maturity			40,691				38,463
Property and equipment, net			30,015				30,316
Goodwill			624,507				624,507
Intangible assets, net			190,368				203,147
Restricted investments			21,553				16,375
Risk corridor receivable from CMS			7,008				—
Funds due for the benefit of members			21,499				—
Other assets			16,867				6,585
Total assets		$	1,564,514			$	1,508,267
Liabilities and Stockholders’ Equity
Current liabilities:
Medical claims liability		$	183,463			$	202,308
Accounts payable, accrued expenses and other			61,807				50,954
Risk corridor payable to CMS			2,921				2,176
Current portion of long-term debt			17,500				43,069
Total current liabilities			265,691				298,507
Long-term debt, less current portion			148,750				193,904
Deferred income taxes			73,762				80,434
Other long-term liabilities			5,189				5,966
Total liabilities			493,392				578,811
Stockholders’ equity:
Common stock, $.01 par value, 180,000,000 shares authorized, 61,293,809 issued and 57,239,510 outstanding at September 30, 2010, and 60,758,958 issued and 57,560,350 outstanding at December 31, 2009			613				608
Additional paid-in capital			556,003				548,481
Retained earnings			572,121				428,765
Accumulated other comprehensive income (loss), net			4,368				(1,044	)
Treasury stock, at cost, 4,054,299 shares at September 30, 2010, and 3,198,608 shares at December 31, 2009			(61,983	)			(47,354	)
Total stockholders’ equity			1,071,122				929,456
Total liabilities and stockholders’ equity		$	1,564,514			$	1,508,267

See accompanying notes to condensed consolidated financial statements.

HEALTHSPRING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue:
Premium revenue		$	712,658			$	649,795			$	2,218,378			$	1,955,842
Management and other fees			10,413				9,108				31,191				29,065
Investment income			2,151				877				4,574				3,532
Total revenue			725,222				659,780				2,254,143				1,988,439
Operating expenses:
Medical expense			561,823				519,478				1,779,275				1,607,481
Selling, general and administrative			67,664				65,851				210,410				200,408
Depreciation and amortization			7,513				7,782				22,810				22,948
Interest expense			3,150				3,762				15,375				12,014
Total operating expenses			640,150				596,873				2,027,870				1,842,851
Income before income taxes			85,072				62,907				226,273				145,588
Income tax expense			(31,292	)			(20,593	)			(82,917	)			(50,772	)
Net income		$	53,780			$	42,314			$	143,356			$	94,816
Net income per common share:
Basic		$	0.95			$	0.78			$	2.52			$	1.74
Diluted		$	0.95			$	0.77			$	2.51			$	1.73
Weighted average common shares outstanding:
Basic			56,482,679				54,518,162				56,872,071				54,502,081
Diluted			56,577,063				54,700,390				57,058,075				54,653,367

See accompanying notes to condensed consolidated financial statements.

HEALTHSPRING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net income		$	143,356			$	94,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			22,810				22,948
Amortization of deferred financing cost			1,407				1,785
Amortization on bond investments			2,187				749
Equity in earnings of unconsolidated affiliate			(277	)			(281	)
Share-based compensation			6,659				7,513
Deferred tax benefit			(9,883	)			(8,794	)
Write-off of deferred financing fees			5,079				—
Increase (decrease) in cash due to:
Accounts receivable			18,962				3,446
Prepaid expenses and other assets			(12,266	)			(2,231	)
Medical claims liability			(18,845	)			10,228
Accounts payable, accrued expenses, and other current liabilities			1,357				(6,766	)
Risk corridor payable to/receivable from CMS			(6,263	)			(7,298	)
Other			1,485				94
Net cash provided by operating activities			155,768				116,209
Cash flows from investing activities:
Additional consideration paid on acquisition			(610	)			(910	)
Proceeds received on disposition			—				297
Purchases of property and equipment			(9,120	)			(11,519	)
Purchases of investment securities			(341,081	)			(39,766	)
Maturities of investment securities			56,591				35,415
Sales of investment securities			55,898				—
Purchases of restricted investments			(43,182	)			(16,015	)
Maturities of restricted investments			37,973				11,346
Distributions received from unconsolidated affiliate			262				196
Net cash used in investing activities			(243,269	)			(20,956	)
Cash flows from financing activities:
Funds received for the benefit of the members			633,577				494,591
Funds withdrawn for the benefit of members			(655,895	)			(458,465	)
Proceeds received on issuance of debt			200,000				—
Payments on long-term debt			(270,722	)			(23,859	)
Excess tax benefit from stock options exercised			127				—
Proceeds from stock options exercised			867				6
Purchase of treasury stock			(14,304	)			—
Payment of debt issue costs			(7,334	)			—
Net cash (used in) provided by financing activities			(113,684	)			12,273
Net (decrease) increase in cash and cash equivalents			(201,185	)			107,526
Cash and cash equivalents at beginning of period			439,423				282,240
Cash and cash equivalents at end of period		$	238,238			$	389,766

Supplemental disclosures:
Cash paid for interest		$	7,609			$	10,454
Cash paid for taxes		$	88,893			$	62,992

See accompanying notes to condensed consolidated financial statements.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1) Organization and Basis of Presentation

HealthSpring, Inc., a Delaware corporation (the “Company”), was organized in October 2004 and began operations in March 2005 in connection with a recapitalization transaction accounted for as a purchase. The Company is a managed care organization whose primary focus is on Medicare, the federal government sponsored health insurance program for United States citizens aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease. Through its health maintenance organization (“HMO”) and regulated insurance subsidiaries, the Company operates Medicare Advantage health plans in the states of Alabama, Florida, Georgia, Illinois, Mississippi, Tennessee, and Texas and offers Medicare Part D prescription drug plans (“PDP”) on a national basis. The Company also provides management services to physician practices.

The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto of HealthSpring, Inc. as of and for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “SEC”) on February 11, 2010 (the “2009 Form 10-K”).

The accompanying unaudited condensed consolidated financial statements reflect the Company’s financial position as of September 30, 2010, the Company’s results of operations for the three and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009. Certain 2009 amounts have been reclassified to conform to the 2010 presentation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations applicable to interim financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normally recurring accruals) necessary to present fairly the Company’s financial position at September 30, 2010, its results of operations for the three and nine months ended September 30, 2010 and 2009, and its cash flows for the nine months ended September 30, 2010 and 2009.

The results of operations for the 2010 interim periods are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2010.

The preparation of the condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. The most significant item subject to estimates and assumptions is the actuarial calculation for obligations related to medical claims. Other significant items subject to estimates and assumptions include the Company’s estimated risk adjustment payments receivable from the Centers for Medicare & Medicaid Services (“CMS”), the valuation of goodwill and intangible assets, the useful life of definite-lived intangible assets, the valuation of debt securities carried at fair value, and certain amounts recorded related to the Company’s Part D operations, including risk corridor adjustments and rebates. Actual results could differ significantly from those estimates and assumptions.

The Company’s regulated insurance subsidiaries are restricted from making distributions without appropriate regulatory notifications and approvals or to the extent such distributions would cause non-compliance with statutory capital requirements. At September 30, 2010, $409.2 million of the Company’s $567.6 million of cash, cash equivalents, investment securities, and restricted investments were held by the Company’s insurance subsidiaries and subject to these restrictions.

Agreement to Acquire Bravo Health

On August 26, 2010, the Company entered into a definitive agreement to acquire all of the outstanding capital stock of Bravo Health, Inc. (“Bravo”), an operator of Medicare Advantage coordinated care plans in Pennsylvania, the Mid-Atlantic region, and Texas, and Medicare Part D stand-alone prescription drug plans in 43 states and the District of Columbia. As of September 30, 2010, Bravo had Medicare Advantage membership of 103,044 and stand-alone PDP membership of 293,920.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The Company will acquire Bravo, a privately held company, for approximately $545.0 million in cash, subject to adjustment. The Company has agreed with its existing lenders and certain additional lenders to amend its existing credit facility to provide for, among other things, the acquisition financing. As amended, the facility will provide for the following:

•

$355.0 million in term loan A indebtedness maturing in February 2015 comprised of:

	•		$175.0 million of term loan A indebtedness ($166.3 million of which is currently outstanding);
	•		$180.0 million of new term loan A indebtedness to be funded at the closing of the acquisition;

•

$175.0 million revolving credit facility (currently undrawn and maturing in February 2014); and

•

$200.0 million of new six-year term loan B indebtedness to be funded at the closing of the acquisition.

The additional term loan indebtedness, availability under the existing $175.0 million revolving credit facility, and cash on hand will be sufficient to fund the acquisition of Bravo. See Note 12 for additional information regarding the new indebtedness.

The remaining material conditions to the closing of the Bravo acquisition primarily relate to approvals by various state regulatory authorities.

(2) Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. The guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures, and eliminates the scope exclusion for qualifying special-purpose entities. The adoption of the new guidance on January 1, 2010 did not impact the Company’s financial statements.

Effective January 1, 2010, the Company adopted the FASB’s updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The adoption of the updated guidance for Levels 1 and 2 fair value measurements did not have an impact on the Company’s consolidated results of operations or financial condition.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(3) Accounts Receivable

Accounts receivable at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Medicare premium receivables		$	21,519			$	48,524
Rebates			49,286				34,879
Due from providers			15,264				10,320
Other			3,665				2,400
			89,734				96,123
Allowance for doubtful accounts			(3,762	)			(3,681	)
Total		$	85,972			$	92,442

Medicare premium receivables at September 30, 2010 and December 31, 2009 include $18.6 million and $44.1 million, respectively, of receivables from CMS related to the accrual of retroactive risk adjustment payments. Accounts receivable relating to unpaid health plan enrollee premiums are recorded during the period the Company is obligated to provide services to enrollees and do not bear interest. The Company does not have any off-balance sheet credit exposure related to its health plan enrollees.

Rebates for drug costs represent estimated rebates owed to the Company from prescription drug companies. The Company has entered into contracts with certain drug manufacturers that provide for rebates to the Company based on the utilization of specific prescription drugs by the Company’s members. Due from providers primarily includes management fees receivable as well as amounts owed to the Company for the refund of certain medical expenses paid by the Company under risk sharing agreements.

(4) Investment Securities

Investment securities, which consist primarily of debt securities, have been categorized as either available for sale or held to maturity. Held to maturity securities are those securities that the Company does not intend to sell, nor expect to be required to sell, prior to maturity. The Company holds no trading securities. At September 30, 2010, investment securities are classified as non-current assets based on the Company’s intention to reinvest such assets upon sale or maturity and to not use such assets in current operations. At December 31, 2009, the Company classified its investment securities based upon maturity dates. Restricted investments include U.S. Government securities, money market fund investments, deposits and certificates of deposit held by the various state departments of insurance to whose jurisdiction the Company’s subsidiaries are subject. These restricted assets are recorded at amortized cost and classified as long-term regardless of the contractual maturity date because of the restrictive nature of the states’ requirements.

Available for sale securities are recorded at fair value. Held to maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses (net of applicable deferred taxes) on available for sale securities are included as a component of stockholders’ equity and comprehensive income until realized from a sale or other than temporary impairment. Realized gains and losses from the sale of securities are determined on a specific identification basis. Purchases and sales of investments are recorded on their trade dates. Dividend and interest income are recognized when earned.

There were no available for sale securities classified as current assets as of September 30, 2010. Available for sale securities classified as current assets at December 31, 2009 were as follows (in thousands):

December 31, 2009

Gross

Gross

Unrealized

Unrealized

Amortized

Holding

Holding

Estimated

Cost

Gains

Losses

Fair Value

Municipal bonds

$

8,691

192

—

8,883

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Available for sale securities classified as non-current assets were as follows (in thousands):

		September 30, 2010																December 31, 2009
						Gross				Gross												Gross				Gross
						Unrealized				Unrealized												Unrealized				Unrealized
		Amortized				Holding				Holding				Estimated				Amortized				Holding				Holding				Estimated
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Government obligations		$	10,196				187				—				10,383			$	—				—				—				—
Agency obligations			3,230				69				—				3,299				—				—				—				—
Corporate debt securities			88,784				3,279				—				92,063				—				—				—				—
Mortgage-backed securities (Residential)			64,582				1,353				—				65,935				—				—				—				—
Other structured securities			13,343				489				—				13,832				—				—				—				—
Municipal bonds			80,135				1,466				(14	)			81,587				13,407				176				(9	)			13,574
		$	260,270				6,843				(14	)			267,099			$	13,407				176				(9	)			13,574

There were no held to maturity securities classified as current assets at September 30, 2010. Held to maturity securities classified as current assets at December 31, 2009 were as follows (in thousands):

						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding				Estimated
		Cost				Gains				Losses				Fair Value
Government obligations		$	1,154				1				—				1,155
Agency obligations			3,225				16				—				3,241
Corporate debt securities			6,416				74				—				6,490
Municipal bonds			3,170				20				—				3,190
		$	13,965				111				—				14,076

Held to maturity securities classified as non-current assets were as follows (in thousands):

		September 30, 2010																December 31, 2009
						Gross				Gross												Gross				Gross
						Unrealized				Unrealized												Unrealized				Unrealized
		Amortized				Holding				Holding				Estimated				Amortized				Holding				Holding				Estimated
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Government obligations		$	1,414				3				—				1,417			$	—				—				—				—
Agency obligations			3,146				38				—				3,184				1,610				12				—				1,622
Corporate debt securities			13,375				306				—				13,681				13,505				325				—				13,830
Mortgage-backed securities (Residential)			—				—				—				—				1,575				6				—				1,581
Municipal bonds			22,756				828				—				23,584				21,773				546				(1	)			22,318
		$	40,691				1,175				—				41,866			$	38,463				889				(1	)			39,351

Realized gains or losses related to investment securities for the three and nine months ended September 30, 2010 and 2009 were immaterial.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Maturities of investments were as follows at September 30, 2010 (in thousands):

		Available for sale								Held to maturity
		Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value
Due within one year		$	9,646				9,677			$	15,254				15,430
Due after one year through five years			133,708				137,740				23,379				24,209
Due after five years through ten years			29,497				30,377				2,058				2,227
Due after ten years			9,494				9,538				—				—
Mortgage and asset-backed securities			77,925				79,767				—				—
		$	260,270				267,099			$	40,691				41,866

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010, were as follows (in thousands):

Less Than

More Than

12 Months

12 Months

Total

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Losses

Value

Losses

Value

Losses

Value

Municipal bonds

$

(14

)

6,255

—

—

(14

)

6,255

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009, were as follows (in thousands):

Less Than

More Than

12 Months

12 Months

Total

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Losses

Value

Losses

Value

Losses

Value

Municipal bonds

$

(10

)

1,920

—

—

(10

)

1,920

The Company reviews fixed maturities and equity securities with a decline in fair value from cost for impairment based on criteria that include duration and severity of decline; financial viability and outlook of the issuer; and changes in the regulatory, economic and market environment of the issuer’s industry or geographic region.

All issuers of securities the Company owned in an unrealized loss as of September 30, 2010 remain current on all contractual payments. The unrealized losses on investments were caused by an increase in investment yields as a result of a widening of credit spreads. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The Company determined that it did not intend to sell these investments and that it was not more-likely-than-not to be required to sell these investments prior to their recovery, thus these investments are not considered other-than-temporarily impaired.

(5) Fair Value Measurements

The Company’s 2010 third quarter condensed consolidated balance sheet includes the following financial instruments: cash and cash equivalents, accounts receivable, investment securities, restricted investments, accounts payable, medical claims liabilities, funds due from CMS for the benefit of members, and long-term debt. The carrying amounts of accounts receivable, funds due from CMS for the benefit of members, accounts payable, and medical claims liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. The fair value of the Company’s long-term debt (including the current portion) was $162.9 million at September 30, 2010 and consisted solely of bank debt.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Cash and cash equivalents consist of such items as certificates of deposit, money market funds, and certain U.S. Government securities with an original maturity of three months or less. The original cost of these assets approximates fair value due to their short-term maturity. In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the related credit agreement. See Note 8 — “Derivatives” and Note 12 — “Debt”. The fair value of the Company’s interest rate swaps at December 31, 2009 reflected a liability of approximately $2.1 million and was included in other long term liabilities in the accompanying condensed consolidated balance sheet. The fair values of available for sale securities is determined by quoted market prices or pricing models developed using market data provided by a third party vendor.

The following are the levels of the hierarchy as and a brief description of the type of valuation information (“inputs”) that qualifies a financial asset for each level:

Level Input		Input Definition
Level I		Inputs are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II		Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

When quoted prices in active markets for identical assets are available, the Company uses these quoted market prices to determine the fair value of financial assets and classifies these assets as Level I. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, the Company obtains the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level II. In the event quoted market prices were not available, the Company would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level III even though there could be some significant inputs that may be readily available.

There were no transfers to or from Levels I and II during the nine months ended September 30, 2010. The following tables summarize fair value measurements by level at September 30, 2010 and December 31, 2009 for assets and liabilities measured at fair value on a recurring basis (in thousands):

		September 30, 2010
		Level I				Level II				Level III				Total
Assets
Cash and cash equivalents		$	238,238			$	—			$				$	238,238
Investments: available for sale securities:
Government obligations		$	8,488			$	1,895			$	—			$	10,383
Agency obligations			—				3,299				—				3,299
Corporate debt securities			—				92,063				—				92,063
Mortgage-backed securities (Residential)			—				65,935				—				65,935
Other structured securities			—				13,832				—				13,832
Municipal securities			—				81,587				—				81,587
		$	8,488			$	258,611			$				$	267,099

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		December 31, 2009
		Level I				Level II				Level III				Total
Assets
Cash and cash equivalents		$	439,423			$	—			$	—			$	439,423
Investments: available for sale securities:
Municipal securities		$	—				22,457				—				22,457
Liabilities
Derivative — interest rate swaps		$	—			$	2,066			$	—			$	2,066

(6) Medical Liabilities

The Company’s medical liabilities at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Incurred but not reported liabilities		$	121,629			$	121,782
Pharmacy liabilities			32,015				45,648
Provider incentives and other medical payments			26,129				31,683
Other medical liabilities			3,690				3,195
		$	183,463			$	202,308

(7) Medicare Part D

Total Part D related net assets (excluding medical claims payable) of $1.9 million at December 31, 2009 all relate to the 2009 CMS plan year. The Company’s Part D related assets and liabilities (excluding medical claims payable) at September 30, 2010 were as follows (in thousands):

		Related to the				Related to the
		2009 plan year				2010 plan year				Total
Current assets (liabilities):
Funds due for the benefit of members		$	4,847			$	—			$	4,847
Risk corridor payable to CMS		$	(2,921	)		$	—			$	(2,921	)
Non-current assets:
Funds due for the benefit of members		$	—			$	21,499			$	21,499
Risk corridor receivable from CMS		$	—			$	7,008			$	7,008

Balances associated with Part D related assets and liabilities are expected to be settled in the second half of the year following the year to which they relate. Current year Part D amounts are routinely updated in subsequent periods as a result of retroactivity.

(8) Derivatives

In October 2008, the Company entered into two interest rate swap agreements in a total notional amount of $100.0 million, relating to the floating interest rate component of the term loan agreement under its previous credit facility (collectively, the “2007 Credit Agreement”). In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the 2007 Credit Agreement. See Note 12 — “Debt”. The interest rate swap agreements were classified as cash flow hedges. See Note 5 — “Fair Value Measurements”.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

All derivatives were recognized on the balance sheet at their fair value. To the extent that the cash flow hedges were effective, changes in their fair value were recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction (e.g. until periodic settlements of a variable asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivatives differ from changes in the fair value of the hedged instrument) was recorded in current-period earnings. As a result of terminating the interest rate swap agreements, the Company settled the swap obligations with the counterparties for approximately $2.0 million and reclassified such amount from other comprehensive income to interest expense during the first quarter of 2010.

The Company had no derivative financial instruments outstanding at September 30, 2010. A summary of the aggregate notional amounts, balance sheet location and estimated fair values of derivative financial instruments at December 31, 2009 was as follows (in thousands):

Notional

Estimated Fair Value

Hedging instruments

Amount

Balance Sheet Location

Asset

(Liability)

Interest rate swaps

$

100,000

Other noncurrent liabilities

—

(2,066

)

A summary of the effect of cash flow hedges on the Company’s financial statements for the periods presented is as follows (in thousands):

Effective Portion

Ineffective Portion

Hedge Gain

Income Statement

(Loss)

Pretax Hedge

Location of Gain

Reclassified

Gain (Loss)

(Loss) Reclassified

from

Income

Recognized in

from Accumulated

Accumulated

Statement

Other

Other

Other

Location of

Hedge Gain

Comprehensive

Comprehensive

Comprehensive

Gain (Loss)

(Loss)

Type of Cash Flow Hedge

Income

Income

Income

Recognized

Recognized

For the three months ended September 30, 2010:

Interest rate swaps

$

—

Interest Expense

$

—

None

$

—

For the three months ended September 30, 2009:

Interest rate swaps

$

137

Interest Expense

$

—

None

$

—

For the nine months ended September 30, 2010:

Interest rate swaps

$

38

Interest Expense

$

(1,253

)

None

$

—

For the nine months ended September 30, 2009:

Interest rate swaps

$

725

Interest Expense

$

—

None

$

—

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(9) Intangible Assets

A breakdown of the identifiable intangible assets and their assigned value and accumulated amortization at September 30, 2010 is as follows (in thousands):

		Gross Carrying				Accumulated
		Amount				Amortization				Net
Trade name		$	24,497			$	—			$	24,497
Noncompete agreements			800				800				—
Provider network			137,679				29,317				108,362
Medicare member network			93,620				37,122				56,498
Management contract right			1,555				544				1,011
		$	258,151			$	67,783			$	190,368

Amortization expense on identifiable intangible assets for the three months ended September 30, 2010 and 2009 was approximately $4.5 million. Amortization expense on identifiable intangible assets for the nine months ended September 30, 2010 and 2009 was approximately $13.4 million and $13.8 million, respectively.

(10) Share-Based Compensation

In May 2010, the Company’s stockholders approved an amendment and restatement of the 2006 Equity Incentive Plan. Among other items, the amendments increased the number of shares available for issuance under the plan by 3,250,000 shares.

Stock Options

The Company granted options to purchase 550,712 shares of common stock pursuant to the 2006 Equity Incentive Plan during the nine months ended September 30, 2010. Options to purchase 366,862 shares of common stock either were forfeited or expired during the nine months ended September 30, 2010. Options to purchase 3,997,120 shares of common stock were outstanding under this plan at September 30, 2010. The outstanding options vest and become exercisable based on time, generally over a four-year period, and expire ten years from their grant dates.

Restricted Stock

During the nine months ended September 30, 2010, the Company granted 420,945 shares of restricted stock to employees pursuant to the 2006 Equity Incentive Plan, the restrictions of which generally lapse over a four-year period. Additionally, 35,043 shares were purchased by certain executives pursuant to the Management Stock Purchase Plan (the “MSPP”). The restrictions on shares purchased under the MSPP generally lapse on the second anniversary of the grant date. Unvested restricted stock at September 30, 2010 totaled 733,252 shares.

During the nine months ended September 30, 2010, the Company awarded 40,683 shares of restricted stock to certain of its directors pursuant to the 2006 Equity Incentive Plan, all of which were outstanding at September 30, 2010. The restrictions relating to the restricted stock awarded to non-employee directors in 2010 generally lapse one year from the grant date. In the event a director resigns or is removed prior to the lapsing of the restriction, or if the director fails to attend 75% of the board and applicable committee meetings during the one-year period, shares will be forfeited unless resignation or failure to attend is caused by death or disability.

Stock Repurchase Program

In May 2010, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $100.0 million of the Company’s common stock through June 30, 2011. The program authorizes purchases of common stock from time to time in either the open market or through private transactions, in accordance with SEC and other applicable legal requirements. The timing, prices, and sizes of purchases depends upon prevailing stock prices, general economic and market conditions, and other considerations. Funds for the repurchase of shares have, and are expected to, come primarily from unrestricted cash on hand and unrestricted cash generated from operations. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the repurchase program may be suspended at any time at the Company’s discretion. As of September 30, 2010, the Company had repurchased 837,634 shares of its common stock under the program in open market transactions for approximately $14.3 million, or at an average cost of $17.10 per share, and had approximately $85.7 million in remaining repurchase authority under the program.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(11) Net Income Per Common Share

The following table presents the calculation of the Company’s net income per common share — basic and diluted (in thousands, except share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Numerator:
Net income		$	53,780			$	42,314			$	143,356			$	94,816
Denominator:
Weighted average common shares outstanding — basic			56,482,679				54,518,162				56,872,071				54,502,081
Dilutive effect of stock options			—				77,250				58,676				75,857
Dilutive effect of unvested restricted shares			94,384				104,978				127,328				75,429
Weighted average common shares outstanding — diluted			56,577,063				54,700,390				57,058,075				54,653,367
Net income per common share:
Basic		$	0.95			$	0.78			$	2.52			$	1.74
Diluted		$	0.95			$	0.77			$	2.51			$	1.73

Diluted earnings per share (“EPS”) reflects the potential dilution that could occur from outstanding equity plan awards, including unexercised stock options and unvested restricted shares. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. Options with respect to 4.2 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three months ended September 30, 2010 and 2009. Options with respect to 4.1 million shares and 4.2 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the nine months ended September 30, 2010 and 2009, respectively.

(12) Debt

Long-term debt at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Credit agreement		$	166,250			$	236,973
Less: current portion of long-term debt			(17,500	)			(43,069	)
Long-term debt less current portion		$	148,750			$	193,904

On February 11, 2010, the Company entered into a $350.0 million credit agreement (the “New Credit Agreement”), which, subject to the terms and conditions set forth therein, provides for a five-year $175.0 million term loan credit facility and a four-year $175.0 million revolving credit facility (the “New Credit Facilities”). Proceeds from the New Credit Facilities, together with cash on hand, were used to fund the repayment of $237.0 million in term loans outstanding under the 2007 Credit Agreement as well as transaction expenses related thereto.

Borrowings under the New Credit Agreement accrue interest on the basis of either a base rate or a LIBOR rate plus, in each case, an applicable margin depending on the Company’s debt-to-EBITDA leverage ratio (275 basis points for LIBOR borrowings at September 30, 2010). The Company also pays a commitment fee of 0.375% on the actual daily unused portions of the New Credit Facilities. The revolving credit facility under the New Credit Agreement matures, the commitments thereunder terminate, and all amounts then outstanding thereunder will be payable on February 11, 2014. As of September 30, 2010, the revolving credit facility was undrawn.

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The term loans under the New Credit Agreement are payable in equal quarterly principal installments aggregating 10% of the aggregate initial principal amount of the term loans in the first year, with the remaining outstanding principal balance of the term loans being payable in equal quarterly installments aggregating 10%, 10%, 15%, and 55% in the second, third, fourth, and fifth years, respectively. The net proceeds from certain asset sales, casualty/condemnation events, and certain incurrences of indebtedness (subject, in the cases of asset sales and casualty/condemnation events, to certain reinvestment rights), and a portion of the net proceeds from equity issuances and, under certain circumstances, the Company’s excess cash flow, are required to be used to make prepayments in respect of loans outstanding under the New Credit Facilities. The term loans made under the New Credit Agreement mature, and all amounts then outstanding thereunder will be payable on February 11, 2015.

In connection with entering into the New Credit Agreement, the Company wrote-off unamortized deferred financing costs of approximately $5.1 million incurred in connection with the 2007 Credit Agreement. The Company also terminated its outstanding interest rate swap agreements, which resulted in a payment of approximately $2.0 million to the swap counterparties. Such amounts are reflected as interest expense in the financial results of the Company for the nine months ending September 30, 2010.

In connection with the acquisition of Bravo (which is expected to close in the fourth quarter of 2010), the Company has agreed with its existing lenders and certain additional lenders to amend the New Credit Agreement to provide for, among other things, the acquisition financing. As amended, the facility will provide for the following:

•

$355.0 million in term loan A indebtedness maturing in February 2015 comprised of:

	•		$175.0 million of term loan A indebtedness ($166.3 million of which is currently outstanding);
	•		$180.0 million of new term loan A indebtedness to be funded at the closing of the acquisition;

•

$175.0 million revolving credit facility (currently undrawn and maturing in February 2014); and

•

$200.0 million of new six-year term loan B indebtedness to be funded at the closing of the acquisition.

Maturities of principal amounts under the new term A borrowings will mirror the maturities of the existing term loan A borrowings. The Company currently expects that outstanding loans under the new credit facility will bear interest at a spread over LIBOR (initially 375 basis points for term loan A indebtedness and 450 basis points for term loan B indebtedness), and will step down depending on the Company’s total leverage ratio. With respect to the term loan B indebtedness, the terms of the facility include a contractual minimum LIBOR of 1.5%. See “— Agreement to Acquire Bravo Health” included above in Note 1 for additional information related thereto.

As of September 30, 2010, the Company had incurred $8.8 million in debt issue costs associated with the amended credit facility. Such amounts are included in other non-current assets on the Company’s balance sheet at September 30, 2010.

(13) Comprehensive Income

The following table presents details supporting the determination of comprehensive income for the three and nine months ended September 30, 2010 and 2009 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	53,780			$	42,314			$	143,356			$	94,816
Net unrealized gain on available for sale investment securities, net of tax			2,144				51				4,136				189
Net gain on interest rate swaps, net of tax			—				84				23				478
Reclass of accumulated other comprehensive income on interest rate swap termination (1)			—				—				1,253				—
Comprehensive income, net of tax		$	55,924			$	42,449			$	148,768			$	95,483

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(14) Segment Information

The Company reports its business in three segments: Medicare Advantage, stand-alone PDP, and Corporate. Medicare Advantage (“MA-PD”) consists of Medicare-eligible beneficiaries receiving healthcare benefits, including prescription drugs, through a coordinated care plan qualifying under Part C and Part D of the Medicare Program. Stand-alone PDP (“PDP”) consists of Medicare-eligible beneficiaries receiving prescription drug benefits on a stand-alone basis in accordance with Medicare Part D. The Corporate segment consists primarily of corporate expenses not allocated to the other reportable segments. These segment groupings are also consistent with information used by the Company’s chief executive officer in making operating decisions.

The accounting policies of each segment are the same and are described in Note 1 to the 2009 Form 10-K. The results of each segment are measured and evaluated by earnings before interest expense, depreciation and amortization expense, and income taxes (“EBITDA”). The Company does not allocate certain corporate overhead amounts (classified as selling, general and administrative expenses, or “SG&A”) or interest expense to the segments. The Company evaluates interest expense, income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.

Revenue includes premium revenue, management and other fee income, and investment income.

Asset and equity details by reportable segment have not been disclosed, as the Company does not internally report such information.

Financial data by reportable segment for the three and nine months ended September 30 is as follows (in thousands):

		MA-PD				PDP				Corporate				Total
Three months ended September 30, 2010
Revenue		$	631,758			$	93,452			$	12			$	725,222
EBITDA			91,593				11,938				(7,796	)			95,735
Depreciation and amortization expense			6,166				14				1,333				7,513
Three months ended September 30, 2009
Revenue		$	590,720			$	69,044			$	16			$	659,780
EBITDA			75,721				8,039				(9,309	)			74,451
Depreciation and amortization expense			6,330				20				1,432				7,782
Nine months ended September 30, 2010
Revenue		$	1,915,782			$	338,323			$	38			$	2,254,143
EBITDA			273,415				11,337				(20,294	)			264,458
Depreciation and amortization expense			18,596				45				4,169				22,810
Nine months ended September 30, 2009
Revenue		$	1,739,239			$	249,158			$	42			$	1,988,439
EBITDA			191,961				10,295				(21,706	)			180,550
Depreciation and amortization expense			19,052				60				3,836				22,948

HEALTHSPRING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

As of January 1, 2010, the Company revised its methodology for allocating SG&A expenses within its prescription drug operations to its MA-PD and PDP segments, which resulted in allocating a greater share of such expenses to its PDP segment. As a result of these revisions, the segment EBITDA amounts for the 2009 period include reclassification adjustments between segments such that the periods presented are comparable.

The Company uses segment EBITDA as an analytical indicator for purposes of assessing segment performance, as is common in the healthcare industry. Segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles and segment EBITDA, as presented, may not be comparable to other companies.

A reconciliation of reportable segment EBITDA to net income included in the consolidated statements of income for the three and nine months ended September 30 is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
EBITDA		$	95,735			$	74,451			$	264,458			$	180,550
Income tax expense			(31,292	)			(20,593	)			(82,917	)			(50,772	)
Interest expense			(3,150	)			(3,762	)			(15,375	)			(12,014	)
Depreciation and amortization			(7,513	)			(7,782	)			(22,810	)			(22,948	)
Net Income		$	53,780			$	42,314			$	143,356			$	94,816

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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2009, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 11, 2010 (the “2009 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements that the company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements.

The company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

In evaluating any forward-looking statement, you should specifically consider the information set forth under the captions “Special Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in the 2009 Form 10-K and the information set forth under “Cautionary Statement Regarding Forward-Looking Statements” in our earnings and other press releases, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in Part II, “Item 1A. Risk Factors” below and “Critical Accounting Policies and Estimates.” We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Overview

General

HealthSpring, Inc. (the “company” or “HealthSpring”) is one of the country’s largest coordinated care plans whose primary focus is Medicare, the federal government-sponsored health insurance program for U.S. citizens aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease. We operate Medicare Advantage plans in Alabama, Florida, Georgia, Illinois, Mississippi, Tennessee, and Texas and offer Medicare Part D prescription drug plans on a national basis. The company also provides management services to physician practices. We sometimes refer to our Medicare Advantage plans, including plans providing prescription drug benefits, or “MA-PD,” collectively as “Medicare Advantage” plans and our stand-alone prescription drug plan as our “PDP.” For purposes of additional analysis, the company provides membership and certain financial information, including premium revenue and medical expense, for our Medicare Advantage (including MA-PD) and PDP plans.

Medicare premiums, including premiums paid to our PDP, account for substantially all of our revenue. As a consequence, our profitability is dependent on government funding levels for Medicare programs. The Centers for Medicare and Medicaid Services (“CMS”) is the federal agency responsible for overseeing the Medicare program. The company’s Tennessee Medicare Advantage plan was selected by CMS for a RADV Audit of the 2006 risk adjustment data used to determine 2007 premium rates (sometimes referred to as “RADV Audits”). In February 2010, the company responded to the RADV Audit information request, including retrieving and providing medical records that support diagnosis codes and risk scores relating to 2006 dates of service and 2007 plan premiums. The company is currently unable to predict the outcome of the RADV Audit, or to predict the amount of premiums, if any, that may be subject to repayment by the Tennessee plan to CMS.

Recent health insurance reform, as embodied in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “PPACA”) signed by the President into law in March 2010, is projected to result in a significant reduction in federal spending on the Medicare Advantage program. In addition to Medicare Advantage funding cuts, PPACA reduces enrollment periods, establishes medical loss ratio, or “MLR,” minimum levels, ties certain rate and rebate benefits to quality ratings, and imposes federal premium taxes. These changes may have a significant adverse impact on our business, including member growth prospects and financial results. Most of the provisions of PPACA that are material to our business phase in over a number of years and regulations defining and implementing key provisions of PPACA applicable to us are not yet developed. Consequently, we are currently unable to predict with any reasonable certainty or otherwise quantify the likely impact of PPACA on our business model, financial condition, or results of operations.

We report our business in three segments: Medicare Advantage; PDP; and Corporate. The following discussion of our results of operations includes a discussion of revenue and certain expenses by reportable segment. See “— Segment Information” below for additional information related thereto.

Agreement to Acquire Bravo Health

On August 26, 2010, the company entered into a definitive agreement to acquire all of the outstanding capital stock of Bravo Health, Inc. (“Bravo”), an operator of Medicare Advantage coordinated care plans in Pennsylvania, the Mid-Atlantic region, and Texas, and Medicare Part D stand-alone prescription drug plans in 43 states.

The company will acquire Bravo, a privately held company, for approximately $545.0 million in cash, subject to adjustment. The company has agreed with its existing lenders and certain additional lenders to amend its existing credit facility to provide for, among other things, the acquisition financing. As amended, the facility will provide for the following:

•

$355.0 million in term loan A indebtedness maturing in February 2015 comprised of:

•

$175.0 million of term loan A indebtedness ($166.3 million of which is currently outstanding);

•

$180.0 million of new term loan A indebtedness to be funded at the closing of the acquisition;

•

$175.0 million revolving credit facility (currently undrawn and maturing in February 2014); and

•

$200.0 million of new six-year term loan B indebtedness to be funded at the closing of the acquisition.

The additional term loan indebtedness, availability under the existing $175.0 million revolving credit facility, and cash on hand will be sufficient to fund the acquisition of Bravo. See “— Indebtedness”.

The remaining material conditions to the closing of the Bravo acquisition primarily relate to approvals by various state regulatory authorities.

Other than financing commitments accounted for as interest expenses, Bravo-related transaction expenses were insignificant for the 2010 third quarter. Assuming the transaction closes in 2010, the company expects to incur approximately $8.5 million, or $0.11 per share, of transaction expenses in 2010. As of September 30, 2010, Bravo had Medicare Advantage membership of 103,044 and stand-alone PDP membership of 293,920. Based upon recent data released by CMS, Bravo estimates it will have approximately 390,000-400,000 PDP members as of January 1, 2011.

Recently Issued Accounting Pronouncements

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In September 2010, the Emerging Issues Task Force issued EITF Issue 09-G, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“EITF Issue 09-G”), which modifies the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts. The Task Force reached a final consensus that requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts to be capitalized as a deferred acquisition cost. EITF Issue 09-G is effective for the company beginning with its interim period ended March 31, 2012 with either prospective or retrospective application permitted. Early adoption is permitted. We are currently evaluating the impact that EITF Issue 09-G will have on our consolidated financial statements.

Results of Operations

The consolidated results of operations include the accounts of HealthSpring and its subsidiaries. The following table sets forth the consolidated statements of income data expressed in dollars (in thousands) and as a percentage of total revenue for each period indicated:

		Three Months Ended September 30,
		2010								2009
Revenue:
Premium revenue		$	712,658				98.3	%		$	649,795				98.5	%
Management and other fees			10,413				1.4				9,108				1.4
Investment income			2,151				0.3				877				0.1
Total revenue			725,222				100.0	%			659,780				100.0	%
Operating expenses:
Medical expense			561,823				77.5				519,478				78.7
Selling, general and administrative			67,664				9.3				65,851				10.0
Depreciation and amortization			7,513				1.0				7,782				1.2
Interest expense			3,150				0.5				3,762				0.6
Total operating expenses			640,150				88.3				596,873				90.5
Income before income taxes			85,072				11.7				62,907				9.5
Income tax expense			(31,292	)			(4.3	)			(20,593	)			(3.1	)
Net income		$	53,780				7.4	%		$	42,314				6.4	%

		Nine Months Ended September 30,
		2010								2009
Revenue:
Premium revenue		$	2,218,378				98.4	%		$	1,955,842				98.3	%
Management and other fees			31,191				1.4				29,065				1.5
Investment income			4,574				0.2				3,532				0.2
Total revenue			2,254,143				100.0	%			1,988,439				100.0	%
Operating expenses:
Medical expense			1,779,275				78.9				1,607,481				80.8
Selling, general and administrative			210,410				9.3				200,408				10.1
Depreciation and amortization			22,810				1.0				22,948				1.2
Interest expense			15,375				0.8				12,014				0.6
Total operating expenses			2,027,870				90.0				1,842,851				92.7
Income before income taxes			226,273				10.0				145,588				7.3
Income tax expense			(82,917	)			(3.6	)			(50,772	)			(2.5	)
Net income		$	143,356				6.4	%		$	94,816				4.8	%