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TABLE OF CONTENTS
PART IV
UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

(Mark One)    

ý

 

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

For the fiscal year ended December 31, 2015

OR

o

 

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

For the transition period from                                  to                                 

Commission file Number: 001-35149



UNIVERSAL AMERICAN CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  27-4683816
(I.R.S. Employer
Identification No.)

44 South Broadway, Suite 1200, White Plains, New York 10601
(Address of principal executive offices and zip code)

(914) 934-5200
(Registrant's telephone number, including area code)

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

Title of Each Class   Name of Each Exchange On Which Registered
Common Stock, par value $.01 per share   New York Stock Exchange, Inc.

         Securities registered pursuant to Section 12(g) of the Act: None



         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

         The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $460 million (based on the closing sales price of the registrant's common stock on that date). As of March 8, 2016, 81,935,754 shares of the registrant's voting common stock and 3,300,000 shares of the registrant's non-voting common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         The information contained in Part III, Items 10-14 of this Annual Report on Form 10-K will be included in the Company's definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the U.S. Securities and Exchange Commission.

   


Table of Contents


TABLE OF CONTENTS

 
  Item   Description   Page

PART 1

  1  

Business

  4

  1A  

Risk Factors

  21

  1B  

Unresolved Staff Comments

  56

  2  

Properties

  56

  3  

Legal Proceedings

  56

  4  

Mine Safety Disclosures

  58

PART II

  5  

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  59

  6  

Selected Financial Data

  61

  7  

Management's Discussion and Analysis of Financial Condition and Results of Operations

  63

  7A  

Quantitative and Qualitative Disclosures about Market Risk

  105

  8  

Financial Statements and Supplementary Data

  106

  9  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  106

  9A  

Controls and Procedures

  106

  9B  

Other Information

  108

PART III

  10  

Directors, Executive Officers and Corporate Governance

  109

  11  

Executive Compensation

  109

  12  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  109

  13  

Certain Relationships and Related Transactions, and Director Independence

  109

  14  

Principal Accountant Fees and Services

  109

PART IV

  15  

Exhibits and Financial Statement Schedules

  110

     

Signatures

  114

2


Table of Contents

        As used in this Annual Report on Form 10-K, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation, and its subsidiaries.


DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

        This report, including, without limitation, the information set forth or incorporated by reference in Item 1 "Business," Item 1A "Risk Factors" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other risks and uncertainties set forth in this report and oral statements made from time to time by our executive officers contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. Statements in this report that are not historical facts are hereby identified as forward-looking statements and are intended to be covered by the safe harbor provisions of the PSLRA. They can be identified by the use of the words "believe," "expect," "predict," "project," "potential," "estimate," "anticipate," "should," "intend," "may," "will" and similar expressions or variations of such words, or by discussion of future financial results and events, strategy or risks and uncertainties, trends and conditions in the Company's business and competitive strengths, all of which involve risks and uncertainties.

        Where, in any forward-looking statement, we or our management expresses an expectation or belief as to future results or actions, there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Our actual results may differ materially from our expectations, plans or projections. We warn you that forward-looking statements are only predictions and estimates, which are inherently subject to risks, trends and uncertainties, many of which are beyond our ability to control or predict with accuracy and some of which we might not even anticipate. We give no assurance that we will achieve our expectations and we do not assume responsibility for the accuracy and completeness of the forward-looking statements. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements as a result of many factors, including the risk factors described or incorporated by reference in Part I, Item 1A of this report. We caution readers not to place undue reliance on these forward-looking statements that speak only as of the date made.

        We undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in these forward-looking statements are reasonable at the time made, any or all of the forward-looking statements contained in this report and in any other public statements that are made may prove to be incorrect. This may occur as a result of inaccurate assumptions as a consequence of known or unknown risks and uncertainties. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed or incorporated by reference under the caption "Risk Factors" under Part I, Item 1A of this report. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment that is highly complicated, regulated and competitive and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur. You should carefully read this report and the documents that we incorporate by reference in this report in its entirety. It contains information that you should consider in making any investment decision in any of our securities.

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PART I

BUSINESS

        Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare and Medicaid. Our core strength is our ability to partner with primary care physicians to improve health outcomes while reducing cost in the Medicare population. We currently are focused on three main businesses:

    Medicare Advantage:  We currently serve the growing Medicare population by providing Medicare Advantage products to approximately 114,000 members. Approximately 32% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans; a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in Texas (especially Houston/Beaumont), upstate New York (especially the Syracuse area) and Maine, regions in which we have meaningful market positions.

    Medicare Accountable Care Organizations:  We believe there is a significant opportunity to address the high cost and lack of coordination of health care for the majority of the Medicare fee-for-service population and have joined with provider groups to operate Accountable Care Organizations, or ACOs, that participate in the Medicare Shared Saving Program, known as the MSSP. We currently operate twenty-one MSSP ACOs and one Next Generation ACO, including approximately 3,200 participating providers with approximately 236,000 assigned Medicare fee-for-service beneficiaries. In 2015, our Houston-based ACO was selected by CMS to participate in the Next Generation ACO model effective January 1, 2016.

    Medicaid:  We also own and operate the Total Care Medicaid health plan, currently serving approximately 39,000 members in upstate New York.

Healthy Collaboration® Strategy

        We have developed a successful primary care physician alignment strategy that we have branded as The Healthy Collaboration®. We work in collaboration with healthcare providers, especially primary care physicians, to help them assume and manage risk, in order to achieve measurably better quality and lower cost. Primary care is among the least expensive part of the overall care continuum. We believe that if given the right tools and incentives, primary care physicians can have significant leverage in improving the cost and quality of health care. Below are the key elements of the strategy:

    We align incentives through gain sharing arrangements so that providers are incented to assist members to achieve healthy outcomes;

    We provide actionable data and analytics to providers and employ enabling technology to ensure that the right care is delivered at the right time in the right setting; and

    We engage the people we serve to help them make informed choices about their healthcare.

Our Operating Segments

        We manage and report our business as follows:

    Medicare Advantage segment includes our Medicare Advantage businesses, which consists of 114,000 members.

    Management Services Organization, or MSO, segment supports our physician partnerships in the development of value-based healthcare models, such as ACOs, with a variety of capabilities and resources including technology, analytics, clinical care coordination, regulatory compliance and program administration. This includes approximately 17,000 Medicare beneficiaries in our new

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      Next Generation ACO in Houston, Texas and 219,000 beneficiaries in twenty-one ACOs that participate in the Medicare Shared Savings Program.

    Medicaid segment reflects the operations of our Medicaid business in upstate New York, which consists of approximately 39,000 members in the Total Care Medicaid plan centered in the Syracuse, New York area.

    Corporate & Other segment reflects the activities of our holding company.

    Discontinued Operations. In the first half of 2015, we completed the sale of our APS Healthcare businesses which provided services to Medicaid agencies. In addition, in October 2015, we entered into a definitive agreement to sell our Traditional Insurance business. The Traditional Insurance business includes our closed block of insurance products not offered through government programs, which includes Medicare supplement, long-term care, other senior health insurance, specialty health insurance and life insurance. This business is currently in run-off as we discontinued marketing and selling Traditional insurance products after June 1, 2012. In 2014, the Traditional business was a separate segment and the APS Healthcare business was reported in the Corporate and Other segment. These dispositions represent our strategic shift to focus on our core businesses.

    Medicare Advantage

        We believe that attractive growth opportunities exist in providing health insurance to the growing senior market. At present, approximately 57 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the Pew Research Center, more than 3.5 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65 and continue for nearly 20 years. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Medicare Advantage continues to grow its share of the overall Medicare market and we believe is likely to continue to gain positive acceptance with consumers.

        Over the past several years, we made a strategic decision to offer Medicare Advantage plans only in markets where we believe we can positively impact the cost and quality of healthcare through collaboration with providers. Accordingly, we now offer plans in only three states (Texas, New York and Maine). In the Houston/Beaumont region, we currently maintain the leading market position with strong brand awareness and committed and aligned physician groups with whom we share risk. In upstate New York, we are in the process of converting this historically fee-for-service market into a more value-based system by introducing pay for performance to the primary care physicians in the region.

        The chart below details our current Medicare Advantage membership:

 
  January 31,
2016
  December 31,
2015
 
 
  (in thousands)
 

Houston/Beaumont

    65.7     63.0  

Dallas

    3.1     3.6  

SETX dSNP

    0.1      

Texas

    68.9     66.6  

Upstate New York/Maine

    45.1     40.5  

Medicare Advantage

    114.0     107.1  

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        Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. Plans that achieve a 4-Star rating or better are entitled to additional bonus payments and higher rebate percentages from CMS which enables the plans to enhance their product offering to members and prospective members through reduced premiums, reduced member cost sharing amounts, and/or additional benefits. A summary of these ratings is presented below:

Contract
  Plan Name   Location   Members
(000's)
  2016
Star
Rating
 

H4506

  Texan Plus HMO   Southeast Texas—Houston/Beaumont     65.7     4.0  

H2816

  Today's Options Network PFFS   Northeast—New York & Maine     32.4     4.0  

H2775

  Today's Options PPO   Northeast—New York & Maine     12.7     4.0  

H0174

  Texan Plus D-SNP   Southeast Texas     0.1     4.0  

H5656

  Texan Plus HMO   North Texas—Dallas     3.1     3.0  

            114.0        

        Medicare Advantage—Texas:    Universal American's largest Medicare Advantage market is Texas, primarily the Houston/Beaumont region and North Texas. We market our products using the TexanPlus® brand. The products provided in our Texas markets include only HMO plans, although we introduced a special needs plan for dual eligibles (dSNP) in 2016 which currently has nominal membership. Enrollment in this market is generally supported by career agents.

    Our HMO plans are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. We built this coordinated care product around contracted networks of providers who, in cooperation with the health plan, coordinate an active care management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.

    In connection with the HMOs, we operate separate Medicare Advantage Management Service Organizations that manage that business and affiliated Independent Physician Associations or IPAs through gain sharing arrangements. We participate in the net results derived from these affiliated IPAs.

        Medicare Advantage—Northeast:    Universal American's second largest market is upstate New York, primarily the ten counties that are considered part of the Syracuse market. Universal American markets its Medicare Advantage products using the Todays Options® brand. Enrollment in this market is generally supported by independent agents.

        The products provided in our Northeast market include PPO, Network PFFS, and our new HMO plan that was introduced in 2016. The HMO plan in upstate New York currently has nominal membership.

    Our HMO and PPO plans are provided under the brand Today's Options® HMO and Today's Options® PPO, respectively. They are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. This coordinated care product is built around contracted networks of providers who, in cooperation with the health plan, coordinate an active care management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.

    Our Network PFFS plans, which are provided under the brand Today's Options® are offered under contracts with CMS and provide enhanced health care benefits compared to traditional Medicare, subject to cost sharing and other limitations. Even though these plans allow the

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      members more flexibility in the delivery of their health care services than other Medicare Advantage plans, we actively coordinate care for these members in a similar manner to our PPO and HMO plans. Some of these products include a defined prescription drug benefit. In addition to a fixed monthly payment per member from CMS, individuals in these plans may be required to pay a monthly premium in selected counties or for selected enhanced products.

    MSSP—Accountable Care Organizations

        The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the ACA established Medicare Shared Savings ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service, or FFS, program, which covers the majority of the Medicare-eligible population. The MSSP covers nearly eight million FFS beneficiaries comprising approximately 430 ACOs. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. The MSSP is designed to improve beneficiary outcomes and increase value of care by:

    promoting accountability for the care of Medicare FFS beneficiaries;

    fostering better coordination of care for items and services provided under Medicare FFS; and

    encouraging investment in infrastructure and redesigned care processes.

The MSSP will reward ACOs that lower their health care costs while surpassing a minimum savings rate and meeting quality of care performance standards. Cost savings below the benchmark provided by CMS will be shared at least 50% with the ACOs. The minimum savings rate set by CMS varies depending on the number of beneficiaries assigned to the ACO, starting at 3.9% for ACOs with assigned beneficiaries totaling 5,000 and grading to 2.0% for ACOs with assigned beneficiaries totaling 60,000 or more.

        Universal American currently sponsors 21 MSSP ACOs in ten States and one Next Generation ACO operating in Houston, Texas, which include 3,200 participating providers and approximately 236,000 Medicare FFS beneficiaries covering more than $2.5 billion of medical spend. Certain of our ACOs overlap a portion of our Medicare Advantage footprint (Houston, Dallas and New York) and Medicaid footprint (Syracuse) which capitalizes on our existing relationship with providers. The other ACOs have no overlap with existing operations, offering an opportunity for expansion into other products and services. For example, in 2016, we launched a Medicare Advantage PPO plan in Westchester County, NY in collaboration with CareMount Medical, formerly known as Mt. Kisco Medical Group, one of our existing ACO partners. In addition, in 2016, we also launched a new Medicare Advantage HMO plan in the Syracuse NY area in collaboration with the largest primary care group in the region, one our ACO partners.

        In June 2015, the MSSP rules were revised in several important ways that we believe demonstrates an ongoing commitment by CMS to maintain participation in the MSSP. For example, Medicare ACOs now have more options under the MSSP, such as:

    MSSP Track 1:  One-sided risk (upside only); up to 50% shared savings; retrospective attribution

    MSSP Track 2:  Two-sided risk; up to 60% shared savings; retrospective attribution

    MSSP Track 3:  Two-sided risk; up to 75% shared savings; prospective attribution

        Additionally, the CMS Center for Medicare and Medicaid Innovation, or CMMI, launched the Next Generation ACO Model, a new value-based payment model that encourages providers to assume greater risk and reward in coordinating the healthcare of Medicare fee-for-service beneficiaries. The Next Generation ACO model provides ACOs with additional tools not found in the MSSP but used in

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the Medicare Advantage program to improve quality and lower cost, including preferred networks, negotiated discounts and beneficiary incentives. The Next Generation ACO model offers two risk arrangements with prospectively assigned beneficiaries under which a Next Generation ACO can share up to 80% or 100% of savings (losses) generated in each performance year depending on the financial arrangement selected by the ACO. Our Houston-based ACO was selected by CMS to participate in the Next Generation ACO model effective January 1, 2016.

        In 2016, six of our MSSP ACOs elected Track 2 with the balance of MSSP ACOs remaining on Track 1.

        We provide our ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare FFS beneficiaries. We employ local market staff (operations and clinical) to drive physician and their staff engagement and care coordination improvements. Over the past few years, we have reduced the number of our active ACOs based on a variety of factors, including the level of engagement by the physicians in the ACO and the likelihood of the ACO achieving shared savings. We may make further reductions in the future. For additional information regarding the MSSP, see Regulation—Accountable Care Organizations.

    Medicaid Program

        Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level. Historically, children have represented the largest eligibility group. Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from approximately $544 billion in 2015 to approximately $890 billion by 2024.

        A portion of Medicaid members are dual eligibles, low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS, industry analyst and Kaiser Family Foundation data, we estimate there are approximately 10 million dual eligible enrollees with annual spending of approximately $400 billion. Only a small portion of the total spending on dual eligibles is administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues.

        Total Care NY Medicaid Plan—On December 1, 2013, we acquired the Total Care Medicaid health plan. Total Care provides Medicaid managed care services to approximately 39,000 members in three counties in upstate New York that overlap with our existing Medicare Advantage footprint. Roughly 80% of its members are located in Onondaga County. In addition to the Medicaid program, Total Care also participates in the Child Health Plus program for low-income, uninsured children.

    Traditional Insurance—Discontinued Operations

        On October 8, 2015, we entered into a definitive agreement to sell our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. ("Nassau"). Our Traditional Insurance business includes Medicare supplement, long-term care, disability, life, and other ancillary insurance products, all of which have been in run-off since 2012. Under the terms of the agreement, Nassau will acquire Constitution Life Insurance Company and The Pyramid Life Insurance Company, and reinsure the Traditional Insurance business written by American Progressive Life & Health Insurance Company of New York through a 100% quota share coinsurance agreement. The closing of the transaction is subject

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to customary closing conditions, including regulatory approval from the Texas, Kansas and New York insurance departments and third party reinsurer consents. We expect the closing to occur in the first half of 2016.

Healthcare Reform

        The ACA was signed into law in March 2010 and legislates broad-based changes to the U.S. health care system. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance, and gradual implementation, the impact of the health reform legislation remains difficult to predict and quantify. In addition, we believe that any impact from the health reform legislation could potentially be mitigated by certain actions we may take in the future including modifying future Medicare Advantage bids to compensate for such changes. For example, the anticipation of additional revenues from Star bonuses or reduced CMS reimbursement rates are factored into the anticipated level of benefits included in our Medicare Advantage bids for the upcoming year.

        The provisions of these new laws include the following key points, which are discussed further below:

    reduced Medicare Advantage reimbursement rates, beginning in 2012;

    implementation of a quality bonus for Star ratings, beginning in 2012;

    accountable care organizations, beginning in 2012;

    stipulated minimum medical loss ratios, beginning in 2014;

    non-deductible health insurance industry fee, beginning in 2014;

    coding intensity adjustments, with mandatory minimums, beginning in 2014; and

    limitation on the federal tax deductibility of compensation earned by individuals for certain types of companies, beginning in 2013.

        For further discussion, please see "Healthcare Reform" under Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.

Competition

        The health insurance industry is highly competitive. In the Medicare Advantage business, we compete with numerous other health insurance companies and managed care organizations on a national, regional and local market basis, including United Healthcare, Humana, Cigna, Aetna and WellCare, as well as other health maintenance organizations, provider-sponsored organizations, preferred provider organizations, and other health care-related companies. Most of our competitors have larger memberships and/or greater financial resources. Consolidation within the industries in which we operate, as well as the acquisition of our competitors by larger companies (e.g., Anthem's pending acquisition of Cigna and Aetna's pending acquisition of Humana), may lead to increased competition.

        In our ACO business, we compete with hospitals, health systems, sophisticated provider groups, other payors, and management service organizations, among other groups. In our Medicaid market, our primary competitors are United Healthcare and Fidelis. Our ability to sell our products and to retain customers may be influenced by such factors as those described in the section entitled "Risk Factors" in this report.

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Marketing and Distribution

        We distribute our Medicare Advantage products through multiple channels including our career agency, independent agents, as well as through telephonic and Internet enrollment. Our Total Care Medicaid product is marketed through employed facilitated enrollers, independent state navigators and state sponsored enrollment web portal. Our ACOs do not have a sales requirement as beneficiaries are attributed to an ACO based on the provider from which they receive a plurality of services.

Geographical Distribution of Business

        Through our insurance subsidiaries, we are licensed to market our Medicare and insurance products in all 50 states and the District of Columbia.

        The following table shows the geographical distribution of net premiums for our Medicare Advantage and Total Care businesses (in millions), as reported in accordance with generally accepted accounting principles, known as GAAP, for the years ended December 31, 2015 and 2014:

 
  2015   2014  
State/Region
  Medicare
Advantage
  Medicaid   Total   % of
Premium
  Medicare
Advantage
  Medicaid   Total   % of
Premium
 

Texas

  $ 844.6   $   $ 844.6     58.8 % $ 791.1   $   $ 791.1     50.3 %

New York

    372.7     190.2     562.9     39.2 %   289.4     178.3     467.7     29.8 %

Maine

    25.8         25.8     1.8 %   12.9         12.9     0.8 %

Subtotal

    1,243.1     190.2     1,433.3     99.8 %   1,093.4     178.3     1,271.7     80.9 %

All other

    2.6         2.6     0.2 %   300.0         300.0     19.1 %

Total

  $ 1,245.7   $ 190.2   $ 1,435.9     100.0 % $ 1,393.4   $ 178.3   $ 1,571.7     100.0 %

        Provider Arrangements.    Our network providers deliver health care services to members enrolled in our Medicare Advantage coordinated care plans and Medicaid plan to which we provide services through a network of contracted providers, including physicians, behavioral health providers and other clinical providers, hospitals, a variety of outpatient facilities and the full range of ancillary provider services. The major ancillary services and facilities include:

    ambulance services;

    medical equipment services;

    home health agencies;

    home infusion providers;

    mental health and substance abuse providers;

    rehabilitation facilities;

    skilled nursing facilities;

    optical services; and

    pharmacies.

        We use a wide range of systems and processes to organize and deliver needed health care services to our members. The key steps in this process are:

    the careful selection of primary care physicians to provide overall care management and care coordination of members;

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    development of a comprehensive panel of specialists usually selected by the primary care physicians;

    contracting for the balance of needed services based on the preference and experience of the local physicians; and

    arranging for the full range of medical management systems required to support the primary care and specialist physicians.

        We employ health evaluation and assessment tools, quality improvement, care management and credentialing programs to ensure that we meet target goals relating to the provision of quality patient care by our providers. The major medical management systems are:

    an inpatient hospitalist program at contracted hospitals;

    selected authorization of target services;

    referral management;

    case management;

    transition of care management;

    in-home interventions;

    focused chronic illness management;

    transplant coordinator services; and

    outpatient prescription drug management.

Investments

        Our investment policy is to attempt to balance our portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity adequate to meet payment obligations of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. These laws generally prescribe the nature, quality of and limitations on various types of investments that we may make. In addition, we establish our own internal policies, guidelines and constraints to provide additional granularity and conservatism to our investment process. Such guidelines are reviewed at least annually by our Chief Financial Officer and approved by the Investment Committee of the Board of Directors.

Reserves

        We establish, and carry as liabilities in our financial statements prepared in accordance with GAAP and statutory accounting practices, actuarially determined reserves in accordance with applicable insurance regulations. For further discussion, see Critical Accounting Policies in our Management's Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this Annual Report on Form 10-K.

        We calculate reserves together with premiums to be received on outstanding policies and contracts and interest at assumed rates on these amounts, which we believe to be sufficient to satisfy policy and contract obligations.

        Medicare Advantage and Medicaid—For Medicare Advantage and Medicaid, claims reserves are estimated using standard actuarial development methodologies. Under such methods, we take into consideration the historical lag between incurred date of claim and payment date of claim, membership changes, expected medical cost trend, changes in pending claims, amount of claims receipts, claims seasonality, changes in average risk profile, changes in laws, rules, regulations (including CMS coverage guidelines, where applicable) and benefit plan changes.

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        Traditional (Discontinued Operations)—For accident and health insurance policies, we determine the reserves based on our best estimates of mortality and morbidity, persistency, expenses and investment income. GAAP reserves differ from statutory reserves due to the use of different assumptions regarding mortality and morbidity, interest rates and the introduction of lapse assumptions into the GAAP reserve calculation. Policy reserves for life insurance policies are determined using actuarial factors based on mortality tables and interest rates. Reserves for future policy benefits for accident and health insurance policies use prescribed morbidity tables based on our historical experience. Claims reserves for future payments not yet due on incurred claims, primarily relating to individual disability and long term care insurance and group long term disability insurance products use prescribed morbidity tables based on our historical experience, which is periodically reviewed and updated. Additionally, claim liabilities for Medicare supplement and other short tail accident and health insurance policies are estimated using standard actuarial development methodologies, as described above. We also maintain reserves for unearned premiums, for premium deposits, for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

    Reinsurance of Medicare Advantage

        We maintain excess of loss reinsurance on our Medicare Advantage products, which limits our per member risk. Our retention in 2015 is $300,000 of benefits and 10% in excess of the $300,000, except for one company, Select Care of Texas, for which our retention in 2014 is $350,000 of benefits and 10% in excess of the $350,000.

    Reinsurance of Medicaid

        We maintain stop-loss coverage provided to us by the New York State Stop-Loss Reinsurance Program which limits our loss on aggregate hospital inpatient claims received over a member's enrollment year. Our retention is $100,000 and 20% of the claim amounts in excess of the $100,000 up to $250,000. Above $250,000, 100% of expenses are covered by the reinsurance.

    Reinsurance of Traditional Insurance (Discontinued Operations)

        We have retained all new Medicare supplement business written after January 1, 2004. Under the existing coinsurance agreements for business written prior to 2004, which remain in effect for the life of each policy reinsured, we reinsure a portion of the premiums, claims and commissions on a pro rata basis and receive additional expense allowances for policy issue and administration and premium taxes. The amounts reinsured under these agreements range from 25% to 100%. Depending on how the older reinsured business lapses, the overall percentage of business we retain may increase. As of December 31, 2014, the percentage of Medicare supplement business in force retained by us was 79%.

        We retain 100% of the fixed benefit accident & sickness disability and hospital business issued in our Traditional Insurance segment. We reinsure our long-term care business on a 50% quota share basis, except for the acquired long-term care business in Constitution Life Insurance Company which is 100% retained. We have excess of loss reinsurance agreements to reduce our liability on individual risks for home health care policies to $125,000. For other long-term care policies issued, we have reinsurance agreements which cover 90% of the benefits on claims after two years and 100% of the benefits on claims after the third or fourth years depending upon the plan. We also have excess of loss reinsurance agreements with unaffiliated reinsurance companies on most of our major medical insurance policies to reduce the liability on individual risks to $325,000 per year.

        Effective April 1, 2009, we reinsured substantially all of the net in force life and annuity business with Commonwealth under a 100% coinsurance treaty. In 2010 the annuity portion of this reinsurance transaction was commuted with Commonwealth and reinsured with Athene. There were certain blocks

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of life business in force at April 1, 2009 that are subject to separate coinsurance arrangements with other companies ranging from 75% to 90% that were not included in the transaction with Commonwealth. We retain 100% of senior life insurance products issued after March 31, 2009.

Underwriting Procedures

        For our Medicare Advantage products, pursuant to applicable regulations, we are not permitted to underwrite new enrollees. However, premiums received for these members are risk adjusted based on CMS adjustment policies reflecting the health status for each member. For our Medicaid product, New York sets the premium rates that we are paid for our membership.

Regulation

    General

        Our insurance and HMO companies along with certain other subsidiaries are subject to the state and local laws, regulations and supervision of the jurisdictions in which they are domiciled and licensed, as well as to federal laws and supervision. Those laws and regulations provide safeguards for policyholders and members, and do not exist to protect the interest of shareholders. Government agencies that oversee insurance and health care products and services generally have broad authority to issue regulations to interpret and enforce laws and rules. Changes in applicable laws and regulations are continually being considered, and the interpretation, enforcement, and application of existing laws and rules also change periodically, which could make it increasingly difficult to control medical costs, among other things. Therefore, future regulatory revisions could materially affect our operations and financial results.

        We are subject to various governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. For example, state departments of insurance audit our health plans and insurance companies for financial and contractual compliance. State departments of health audit our health plans for compliance with health services. The Centers for Medicare & Medicaid Services, also known as CMS, the Office of the Inspector General of Health and Human Services, the Department of Justice, the Department of Labor, the Government Accountability Office, the foregoing state equivalent agencies, state attorneys general, state departments of insurance and departments of health and Congressional committees may also conduct audits and investigations of us. In addition, we are a public company and subject to the oversight and regulation of the Securities and Exchange Commission, New York Stock Exchange and other agencies.

    Medicare

        Medicare is a federal program that provides eligible persons age 65 and over and certain eligible persons with disabilities under age 65 with a variety of hospital, prescription drug, and medical insurance benefits. Medicare members have the option to enroll in a Medicare Advantage health plan. Under Medicare Advantage, insurance companies and managed care organizations contract with CMS to provide benefits at least equivalent to the traditional fee-for-service Medicare program in exchange for a fixed monthly payment per member that varies based on the county in which a member resides as well as a member's demographics and health status. Medicare supplemental insurance, sometimes called Medigap is jointly regulated by the federal government and by state Departments of Insurance. In all but a few states, there are standard Medicare supplement plans.

        The Medicare Part D drug benefit offers Medicare members the option to obtain covered outpatient prescription drug benefits either as a stand-alone plan or offered in conjunction with a Medicare Advantage health plan. Certain of our Medicare Advantage plans offer a Medicare Part D drug benefit.

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        The ACA made several changes to Medicare Advantage. Beginning in 2012, the Medicare Advantage "benchmark" rates began the transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county and 2017 will be the final transition year. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 63%, 35% and 1%, respectively, of our January 1, 2016 membership resides in counties where the Medicare Advantage benchmark rate will equal 95%, 115%, and 107.5%, respectively, of the calculated Medicare fee-for-service costs.

        Implementation of quality bonus for Star ratings—Beginning in 2012, Medicare Advantage plans with an overall "Star rating" of three or more stars (out of five) based on 2011 performance were eligible for a "quality bonus" in their basic premium rates. For 2015 and beyond, plans must achieve an overall star rating of at least 4 stars to receive the quality bonus. Plans receiving Star bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees, to comply with required minimum loss ratios, resulting in a competitive advantage for those plans rather than a direct financial impact. In addition, beginning in 2012, Medicare Advantage Star ratings affect the rebate percentage available for plans to provide additional member benefits (plans with quality ratings of 3.5 stars or above will have their rebate percentage increased from a base rate of 50% to 65% or 70%). In all cases, this rebate percentage is lower than the pre-ACA rebate percentage of 75%. Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. The Company earned a 4-Star rating for its flagship TexanPlus® plan in Houston/Beaumont and for its largest plans in New York and Maine, Today's Options PPO plan and Today's Options Network PFFS plan. Ratings were considered when preparing our bids to be submitted for 2016.

        Notwithstanding continued efforts to improve or maintain our Star ratings and other quality measures, there can be no assurances that we will be successful in doing so. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

        In addition, CMS has indicated that plans with a Star rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain Star ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS Star ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.

        Stipulated minimum MLRs—Beginning in 2014, the ACA stipulates a minimum medical loss ratio, or MLR, of 85% for Medicare Advantage plans. This MLR, which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have a material adverse effect on our operating margins, results of operations, and our statutory capital.

        Non-deductible health insurance industry fee ("ACA Fee")—Beginning in 2014, the new healthcare reform legislation imposed an annual aggregate health insurance industry fee of $8.0 billion, increasing to $11.3 billion in 2015 (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. In 2017, the

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ACA Fee has been suspended for one year. Our effective income tax rate increased in 2014, and will remain at a higher level in future years in which the ACA fee is assessed. Our share of the ACA Fee is based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated annually. The ACA Fee, first expensed and paid in 2014, adversely affects the profitability of our Medicare Advantage business and could have a material adverse effect on our results of operations. We paid a fee of $28.8 million in 2015 and $23.1 million in 2014, based on prior year net written premiums and estimate that the ACA Fee to be paid in 2016, based on 2015 net written premiums, will be approximately $25 million. Pursuant to GAAP, the liability for the ACA Fee will be estimated and recorded in full once the entity provides qualifying health insurance in the corresponding period with a corresponding deferred cost that is to be amortized to expense on a straight-line basis over the applicable calendar year. For statutory reporting purposes, the ACA Fee will be expensed on January 1 in the year of payment, rather than amortized to expense over the year. The ACA Fee is included in other operating costs; however, will be factored in when calculating the stipulated minimum MLR.

    Accountable Care Organizations

        The ACA established Medicare ACOs, as a tool to improve quality and lower costs through increased care coordination in the FFS program. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers and currently participate in twenty-one MSSP ACOs and one Next Generation ACO in the Houston market. ACOs are entities that contract with CMS to serve the FFS population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare FFS patients.

        Under the MSSP, CMS will not make any payments to ACOs for a measurement year until the second half of the following year, which will negatively impact our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACOs medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, the MSSP requires ACOs to meet thirty-three quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with our ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.

        On June 4, 2015, CMS released a final rule updating provisions related to the MSSP in the second contract period for years 2016-2019. This final rule made several changes, including allowing ACOs to participate in Track 1 for a second agreement period with the same sharing rate (up to 50%), establishing a new Track 3 with two-sided risk with additional flexibilities, providing new beneficiary-

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level claims data that will improve overall ACO information, and easing certain administrative requirements.

        In addition, CMS, the US Office of Inspector General, the Internal Revenue Service, the Federal Trade Commission, the US Department of Justice, and various states have adopted or are considering adopting new legislation, rules, regulations and guidance relating to formation and operation of ACOs. Such laws may, among other things, require ACOs to become subject to financial regulation such as maintaining deposits of assets with the states in which they operate, the filing of periodic reports with the insurance department and/or department of health, or holding certain licenses or certifications in the jurisdictions in which the ACOs operate. Failure to comply with legal or regulatory restrictions may result in CMS terminating an ACOs agreement with CMS and/or subjecting an ACO to loss of the right to engage in some or all business in a state, payment of fines or penalties, or may implicate federal and state fraud and abuse laws relating to anti-trust, physician fee-sharing arrangements, anti-kickback prohibitions or prohibited referrals, any of which may adversely affect our operations and/or profitability.

    Medicaid

        Medicaid is a joint federal and state program to provide medical assistance to low income persons and certain disabled persons. It is funded and regulated by both the state and federal governments, but it is primarily a state operated and state implemented program. The federal government guarantees matching funds for qualifying Medicaid expenditures, based on a designated assistance percentage.

        This annual assistance percentage, or FMAP, varies among states, with a floor of 50 percent. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration for its Medicaid programs, subject to federal statutory and regulatory requirements. Some states administer managed care for their Medicaid program, others use fee-for-service and some maintain or have a combination of both. Common state-administered Medicaid programs are the Temporary Assistance for Needy Families program, or TANF, and a program for aged, blind or disabled, or ABD, Medicaid members. Numerous other programs exist and vary by state.

    Fraud and abuse laws

        Enforcement of health care fraud and abuse laws has become a top priority for the nation's law enforcement entities. The funding of these law enforcement efforts has increased dramatically in the past few years and is expected to continue. The focus of these efforts has been directed at participants in federal government health care programs such as Medicare and Medicaid.

    Privacy laws

        The use and disclosure of personal health information, personally identifiable information, and/or individually identifiable data by our business is regulated at federal and state levels. These laws and rules are subject to administrative interpretation. Various state laws address the use and maintenance of such data. Many state laws are derived from the privacy provisions in the Federal Gramm-Leach-Bliley Act, the Genetic Information Nondiscrimination Act, known as GINA, the Health Information Technology for Economic and Clinical Health Act of 2009, known as HITECH, and the Health Insurance Portability and Accountability Act of 1996, known as HIPAA.

        Among other things, HIPAA mandates the following:

    guaranteed availability and renewability of health insurance for specified employees and individuals;

    limits on termination options and on the use of preexisting condition exclusions;

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    prohibitions against discriminating on the basis of health status; and

    requirements which make it easier to continue coverage in cases where an employee is terminated or changes employers.

        HIPAA also calls for the adoption of standards for the exchange of electronic health information and privacy requirements that govern the handling, use and disclosure of protected customer health information. Compliance with HIPAA and other privacy laws is far-reaching and complex and proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor and adjust our business practices to comply with these laws are ongoing. In 2013, the United States Department of Health and Human Services issued the omnibus final rule on HIPAA privacy, security, breach notification requirements and enforcement requirements under the HITECH Act, and a final regulation for required changes to the HIPAA Privacy Rule for the Genetic Information Nondiscrimination Act, or GINA. Our failure to comply with the omnibus final rule or the failure of our business associates to comply with HIPAA, the HITECH ACT, GINA, or other privacy regulations could cause us to incur civil or criminal penalties, including significant damage to our reputation.

    USA PATRIOT Act

        A portion of the USA PATRIOT Act applying to insurance companies became effective in mid-2004. Insurance companies are required to impose processes and procedures to thoroughly verify their agents, applicants, insureds, claimants and premium payers in an effort to prevent money laundering. Our family of companies has implemented measures to comply with the Office of Federal Asset Control requirements, whereby the names of customers and potential customers must be reviewed against a listing of known terrorists and money launderers. The identification verification requirement of the USA PATRIOT Act became final in 2005. Beginning in 2006, insurance companies were required to verify the identity of their applicants, insureds, and beneficiaries.

    Consumer Protection Laws

        We may participate in direct-to-consumer activities and are subject to emerging regulations applicable to on-line communications and other general consumer protection laws and regulations.

    State and local regulation

        Each of our insurance company and HMO subsidiaries is also subject to the regulations of and supervision by the insurance department and/ or departments of health of each of the jurisdictions in which they are admitted and authorized to transact business. These regulations cover, among other things:

    the declaration and payment of dividends by our insurance company and HMO subsidiaries;

    the setting of rates to be charged for some types of insurance;

    the granting and revocation of licenses to transact business;

    the licensing of agents;

    the regulation and monitoring of market conduct and claims practices;

    the approval of policy forms;

    the establishment of reserve requirements;

    investment restrictions;

    the regulation of maximum allowable commission rates;

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    the mandating of some insurance benefits;

    minimum capital and surplus levels; and

    the form and accounting practices used to prepare statutory financial statements.

        A failure to comply with legal or regulatory restrictions may subject the insurance company subsidiary or HMO subsidiary to a loss of a right to engage in some or all business in a state or states or an obligation to pay fines, penalties, or make restitution, which may adversely affect our profitability.

        American Progressive Life & Health Insurance Company of New York is a New York domiciled insurance company. The Pyramid Life Insurance Company is a Kansas domiciled insurance company. Constitution Life Insurance Company is a Texas domiciled insurance company. In 2015, we merged the American Pioneer Life Insurance Company and Marquette National Life Insurance Company into Constitution Life Insurance Company. SelectCare of Texas, Inc. is licensed as an HMO in Texas, SelectCare Health Plans, Inc. is licensed as an HMO in Texas, Today's Options of New York, Inc. is licensed as a Prepaid Health Services Plan in New York and Today's Options of Texas, Inc. is licensed as a HMO in Texas. Collectively, our insurance subsidiaries and HMOs are licensed to sell health insurance, HMO products, life insurance and annuities in all 50 states and the District of Columbia.

        For our Traditional business, most jurisdictions mandate minimum benefit standards and loss ratios for accident and health insurance policies. We are generally required to maintain, with respect to our individual long-term care policies, minimum anticipated loss ratios over the entire period of coverage. With respect to our Medicare supplement policies, we are generally required to attain and maintain an actual loss ratio, after three years, of not less than 65 percent (75% for groups) of earned premium. We provide to the insurance departments of all states in which we conduct business annual calculations that demonstrate compliance with required loss ratio standards for Medicare supplement insurance. We prepare these calculations utilizing appropriate statutory assumptions. In the event we fail to maintain minimum mandated loss ratios, our insurance company subsidiaries could be required to provide retrospective premium refunds or prospective premium rate reductions. In addition, we actively review the loss ratio experience of our products and request approval for rate increases from the respective insurance departments when we determine they are needed. We cannot guarantee that we will receive the rate increases we request.

        Every insurance company and HMO that is a member of an "insurance holding company system" generally is required to register with the insurance regulatory authority in its domicile state and file periodic reports concerning its relationships with its insurance holding company and with its affiliates. Material transactions between registered insurance companies or HMOs and members of the holding company system are required to be "fair and reasonable" and in some cases are subject to administrative approval. The books, accounts and records of each party are required to be maintained so as to clearly and accurately disclose the precise nature and details of any intercompany transactions.

        Each of our insurance company and HMO subsidiaries is required to file detailed reports with the insurance department of each jurisdiction in which it is licensed to conduct business and its books and records are subject to examination by each licensing insurance department. In accordance with the insurance codes of their domiciliary states and the rules and practices of the NAIC, our insurance company and HMO subsidiaries are examined periodically by examiners of each company's domiciliary state with elective participation by representatives of the other states in which they are licensed to do business.

        Many states require deposits of assets by insurance companies and HMOs for the protection either of policyholders in those states or for all policyholders. These deposited assets remain part of the total assets of the company. For companies included in continuing operations as of December 31, 2015 and 2014, we had securities with market values totaling $12.1 million and $12.5 million, respectively, on deposit with various state treasurers or custodians. For companies included in discontinued operations

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as of December 31, 2015 and 2014, we had securities with market values totaling $20.2 million and $24.1 million, respectively, on deposit with various state treasurers or custodians. These deposits must consist of securities that comply with the standards established by the particular state.

        Certain of our subsidiaries are licensed in various states as a third party administrator, utilization review agent, or other similar entities. Those subsidiaries provide administrative and management services to our insurance and HMO companies. Those entities operate in states that regulate intercompany agreement, including the amounts that can be charged between affiliates for services, fiduciary bond amounts, utilization review processes, and claims payment processes.

    Dividend Restrictions

        Many of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to other affiliated entities including our parent company, Universal American Corp., and require minimum levels of equity as well as limit investments to approved securities. The amount of dividends that may be paid by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity's level of statutory income and statutory capital and surplus.

        Although minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements vary significantly from state to state. As of December 31, 2015, our state regulated retained subsidiaries had aggregate statutory capital and surplus of approximately $201.4 million. Based on current estimates, we expect the aggregate amount of dividends that may be paid by our retained insurance subsidiary and HMOs to our parent company in 2016 without prior approval by state regulatory authorities is approximately $10 million.

    Risk-Based Capital and Minimum Capital Requirements

        Risk-based capital requirements promulgated in each state take into account asset risks, interest rate risks, mortality and morbidity risks and other relevant risks with respect to the insurer's business and specify varying degrees of regulatory action to occur to the extent that an insurer does not meet the specified risk-based capital thresholds, with increasing degrees of regulatory scrutiny or intervention provided for companies in categories of lesser risk-based capital compliance. As of December 31, 2015, all of our U.S. insurance company subsidiaries and managed care affiliates maintained ratios of total adjusted capital to risk-based capital in excess of the authorized control level. Total Care is required to maintain statutory net worth equal to or in excess of a contingent reserve requirement equal to 7.25% of premium. At December 31, 2015 Total Care's net worth was in excess of the contingent reserve requirement. However, should our insurance company subsidiaries' and managed care affiliates' risk-based capital positions decline in the future, their ability to pay dividends, the need for capital contributions or the degree of regulatory supervision or control to which they are subjected might be affected.

    Guaranty Association Assessments

        Solvency or guaranty laws of most jurisdictions in which our insurance company subsidiaries do business may require them to pay assessments to fund policyholder losses or liabilities of unaffiliated insurance companies that become insolvent. These assessments may be deferred or forgiven under most solvency or guaranty laws if they would threaten an insurer's financial strength and, in most instances, may be offset against future premium taxes. Our insurance company subsidiaries provide for known and expected insolvency assessments based on information provided by the National Organization of Life & Health Guaranty Associations. Our insurance company subsidiaries have not incurred any significant costs of this nature. The likelihood and amount of any future assessments is unknown and is beyond our control.

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Outsourcing Arrangements

        We outsource certain processing and administration functions to third parties, subject to outsourcing agreements. The outsourced functions may include membership administration, call center operations, business process outsourcing, revenue management, marketing and pharmacy benefit management. In the future, it is possible that we may outsource additional functions or bring in-house one or more of these functions. A summary of our more significant arrangements is presented below.

    Business Process Outsourcing

        In 2010 we entered into a master services agreement with iGate, now known as Capgemini covering the services iGate provides to us. These services include policy administration, underwriting, claims processing and other related processes primarily related to our Traditional lines of business. In addition, we continue to use iGate as a business outsource vendor to provide a range of business process services, including, data entry, member application intake and processing, data validation, mailroom imaging and scanning, paper-based and electronic claims adjudication and processing, and overflow labor support services for our Medicare Advantage operations. In addition, iGate also provides certain information technology support and programming. In the future, we may outsource additional services and business processes.

    Membership Administration

        We outsource the administrative information technology platform necessary to support our Medicare Advantage businesses to The Trizetto Group. We have entered into an annual support and license agreement, a master hosting services agreement and a consulting services agreement with Trizetto. These agreements collectively support the basic infrastructure surrounding the membership information for our Medicare Advantage business.

    Pharmacy Benefit Management

        We have entered into a multi-year pharmacy benefits management agreement with CVS Caremark which provides a range of pharmacy benefit management to our Medicare Advantage plans. Our Medicaid plan uses Express Scripts for pharmacy benefit management.

Employees

        As of March 8, 2016, we employed 961 employees, none of whom is represented by a labor union in such employment. We consider our relations with our employees to be good.

Additional Information

        We were incorporated under the laws of the State of Delaware on December 22, 2011. Our common stock is listed on the NYSE under the ticker symbol "UAM." Our corporate headquarters are located at 44 South Broadway, White Plains, New York 10601 and our telephone number is (914) 934-5200.

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ITEM 1A—RISK FACTORS

        Investors in our securities should carefully consider the risks described below and other information included in this report. This report contains both historical and forward-looking statements. We are making the forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend the forward-looking statements in this report or made by us elsewhere to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with and relying upon these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events, trends and uncertainties. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect our business. In making these statements, except as required by applicable securities laws, we are not undertaking to address or update each factor in future filings or communications regarding our business or results. Our business is highly complicated, regulated and competitive with many different factors affecting results. If any of the following risks or uncertainties develops into actual events, this could significantly and adversely affect our business, prospects, financial condition and operating results. In that case, the trading price of our common stock could decline materially and investors in our securities could lose all or part of their investment.

The Affordable Care Act and subsequent rules promulgated by CMS could have a material adverse effect on our business and financial results.

        The ACA was signed into law in March 2010 and legislates broad-based changes to the U.S. health care system. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance, and gradual implementation, the final impact of the health reform legislation remains difficult to predict and quantify. In addition, we believe that any impact from the health reform legislation could potentially be mitigated by certain actions we may take in the future including modifying future Medicare Advantage bids to compensate for such changes. For example, the anticipation of additional revenues from Star bonuses or reduced CMS reimbursement rates are factored into the anticipated level of benefits included in our Medicare Advantage bids for the upcoming year. However, we will need to dedicate significant resources and expense to complying with these new rules and there is a possibility that this new legislation could have a material adverse effect on our business, financial position and results of operations.

        The provisions of these new laws include the following key points, which are discussed further below:

    reduced Medicare Advantage reimbursement rates, beginning in 2012;

    implementation of a quality bonus for Star Ratings beginning in 2012;

    accountable care organizations, beginning in 2012;

    limitation on the federal tax deductibility of compensation earned by individuals for certain types of companies, beginning in 2013;

    stipulated minimum medical loss ratios, beginning in 2014;

    non-deductible health insurance industry fee, beginning in 2014; and

    coding intensity adjustments, with mandatory minimums beginning in 2014.

        Reduced Medicare Advantage reimbursement rates—Beginning in 2012, the Medicare Advantage "benchmark" rates transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5%

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or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county and 2017 will be the final transition year. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 63%, 35% and 1%, respectively, of our January 1, 2016 membership resides in counties where the Medicare Advantage benchmark rate will equal 95%, 115%, and 107.5%, respectively, of the calculated Medicare fee-for-service costs. Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. On February 19, 2016, CMS issued its 2017 Advance Notice and Draft Call Letter (the "Advance Notice") detailing preliminary 2017 Medicare Advantage benchmark payment rates. As is customary, CMS has invited public comment on these preliminary rates before issuing its final rates for 2017 in April 2016. The Advance Notice proposes to provide a slight overall increase to Medicare rates for 2017, but also proposes other changes regarding new risk adjustment models and Stars calculations to take into account dual eligibles that could result in overall decreases to rates in certain markets which could negatively impact our business. At this time, CMS is not implementing any major proposed policy changes with respect to the exclusion of in-home health risk assessments for risk adjustment purposes. If implemented, such change would result in significant additional funding declines for the Company. We will continue to evaluate proposed changes detailed in the Advance Notice, some of which could adversely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future.

        To address these rate reductions, we may have to reduce benefits (to the extent permitted), increase member premiums, modify existing operations, reduce profit margins, or implement some combination of these actions. Such actions could have a material adverse effect on our business by:

    Limiting our ability to maintain our current membership levels;

    Making our products less competitive or attractive to prospective members;

    Causing us to exit many service areas;

    Causing us to increase member premiums, lower benefits or impose higher member contributions (e.g., copayments); and

    Require more intensive medical and operating cost management in order to respond to the lower reimbursements.

        Continued reductions of Medicare Advantage payment rates may result in Medicare Advantage being no longer economically viable for us in many markets. There can be no assurance that we will be able to execute successfully on these or other strategies to address changes in the Medicare Advantage program. There can be no assurance that we will be able to successfully address such rate freezes/reductions and failure to do so may result in a material adverse effect on our results of operations, financial position, and cash flows.

        Implementation of quality bonus for Star Ratings—Beginning in 2012, Medicare Advantage plans with an overall "Star rating" of three or more stars (out of five) based on 2011 performance are eligible for a "quality bonus" in their basic premium rates. Plans receiving Star bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees to the extent necessary to maintain compliance with minimum loss ratio requirements resulting in a competitive advantage for those plans rather than a direct financial impact. In addition, beginning in 2012, Medicare Advantage Star ratings affect the rebate percentage available for plans to provide additional member benefits (plans with quality ratings of 3.5 stars or above will have their rebate percentage increased from a base rate of 50% to 65% or 70%). In all cases, this rebate percentage is lower than the pre-ACA rebate percentage of 75%. Beginning in 2015, in order to qualify for bonus payments, plans must have a 4 STAR rating or higher. All our Medicare Advantage plans for 2016 are rated 4 Stars with the exception of our HMO plan in Dallas Texas, which is rated 3 Stars. Notwithstanding continued efforts to improve

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or maintain our Star ratings and other quality measures, there can be no assurances that we will be successful. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

        In addition, CMS has indicated that plans with a Star rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain Star ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS Star ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.

        Accountable Care Organizations—The ACA established Accountable Care Organizations, or ACOs, as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service program. CMS established the Shared Savings Program to facilitate coordination and cooperation among providers to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers and currently participate in twenty-one active ACOs previously approved to participate in the MSSP, and one Next Generation ACO in the Houston region. ACOs are entities that contract with CMS to serve the Medicare fee-for-service population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare fee-for-service patients.

        To date, we have invested significant capital into our ACO business and have not made money. We expect to continue to invest significant amounts into this business in 2016 and there can be no assurance that we will recoup any of these costs.

        Under the current operation of the MSSP, CMS has not made any payments to ACOs for a measurement year until the second half of the following year, which negatively impacts our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACO's medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, the MSSP requires ACOs to meet thirty-three quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with our ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment. We continue to evaluate our portfolio of ACOs based on a variety of factors, including the level of commitment by the physicians in the ACO and the likelihood of the ACO achieving shared savings. Based on this evaluation, we have reduced the number of our ACOs and may further reduce the number of our ACOs in the future.

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        On June 4, 2015, CMS released a final rule updating provisions related to the MSSP in the second contract period for years 2016-2019. This final rule made several changes, including allowing ACOs to participate in Track 1 for a second agreement period with the same sharing rate (up to 50%), establishing a new Track 3 with two-sided risk with additional flexibilities, providing new beneficiary-level claims data that will improve overall ACO information, and easing certain administrative requirements.

        For 2016, six of our ACOs have selected Track 2 which involves two-sided risk. This means that the ACO will be financially responsible to the extent that actual medical expenditures of the ACO beneficiaries are higher than the ACOs benchmark. While the six ACOs that we selected for Track 2 have achieved savings in the past, there can be no assurance that they will achieve savings in 2016 or thereafter, which could result in substantial financial losses.

        In addition, CMS, the US Office of Inspector General, the Internal Revenue Service, the Federal Trade Commission, the US Department of Justice, and various states have adopted or are considering adopting new legislation, rules, regulations and guidance relating to formation and operation of ACOs. Such laws may, among other things, require ACOs to become subject to financial regulation such as maintaining deposits of assets with the states in which they operate, the filing of periodic reports with the insurance department and/or department of health, or holding certain licenses or certifications in the jurisdictions in which the ACOs operate. Failure to comply with legal or regulatory restrictions may result in CMS terminating an ACOs agreement with CMS and/or subjecting an ACO to loss of the right to engage in some or all business in a state, payment of fines or penalties, or may implicate federal and state fraud and abuse laws relating to anti-trust, physician fee-sharing arrangements, anti-kickback prohibitions or prohibited referrals, any of which may adversely affect our operations and/or profitability.

        Stipulated Minimum MLRs—Beginning in 2014, the ACA stipulates a minimum MLR of 85% for Medicare Advantage plans. This MLR which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have a material adverse effect on our operating margins, results of operations, and our statutory capital.

        Non-deductible health insurance industry fee ("ACA Fee")—Beginning in 2014, the new healthcare reform legislation imposed an annual aggregate health insurance industry fee of $8.0 billion, increasing to $11.3 billion in 2015 (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. In 2017, the ACA fee has been suspended for one year. Our effective income tax rate increased in 2014 as a result of the ACA fee, and will remain at a higher level in future years in which the ACA fee is assessed. Our share of the ACA Fee is based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated annually. The ACA Fee, first expensed and paid in 2014, adversely affects the profitability of our Medicare Advantage business and could have a material adverse effect on our results of operations. We paid an ACA Fee of $28.8 million in 2015 and $23.1 million in 2014, based on prior year net written premiums and estimate that the ACA Fee to be paid in 2016, based on 2015 net written premiums, will be approximately $25 million. Pursuant to U.S. GAAP, the liability for the ACA Fee will be estimated and recorded in full once the entity provides qualifying health insurance in the corresponding period with a corresponding deferred cost that is to be amortized to expense on a straight-line basis over the applicable calendar year. For statutory reporting purposes, the ACA Fee will be expensed on January 1 in the year of payment, rather than amortized to expense over the year. The ACA Fee is included in other operating costs; however, will be factored in when calculating the stipulated minimum MLR. In addition, because the

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ACA fee is not deductible for federal income tax purposes and we are a smaller company relative to our peers with smaller revenues and with smaller profits, our effective tax rate is likely to be significantly higher than our peers.

        Coding intensity adjustments—Under the ACA, the coding intensity adjustment instituted in 2010 became permanent, resulting in mandated minimum reductions in risk scores of 4.91% in 2014 increasing each year to 5.91% in 2018. These coding adjustments may adversely affect the level of payments from CMS to our Medicare Advantage plans.

        Limitation on the federal tax deductibility of compensation earned by individuals—Beginning in 2013, with respect to services performed during 2010 and afterward, for health insurance companies, the federal tax deductibility of compensation is limited under Section 162(m)(6) of the Code to $500,000 per individual and does not contain an exception for "performance-based compensation." In September 2014, the Internal Revenue Service issued final regulations on this compensation deduction limitation which provided additional information regarding the definition of a health insurance issuer. Based on our analysis of the final regulations, we believe we are not subject to the limitation. As a result, during the fourth quarter of 2014, we recorded a tax benefit of $3.2 million related to prior years and $1.7 million related to the first nine months of 2014. Prior to receiving the final regulations, our application of this limitation had increased our effective tax rate by approximately 60 basis points for the year ended December 31, 2013 and 200 basis points for the year ended December 31, 2012. However, there is a risk that the Internal Revenue Service or other regulators may disagree with our interpretation, which could result in higher taxes.

We are subject to extensive government regulation; compliance with laws and regulations is complex and expensive, and any violation of the laws and regulations applicable to us could reduce our revenues and profitability and otherwise adversely affect our operating results and/or impact our ability to participate in Government programs such as Medicare, Medicaid and the MSSP.

        There is substantial federal and state governmental regulation of our business. Several laws and regulations adopted by the federal government, such as the ACA, the False Claims Act, the Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act of 1996, which we refer to as HIPAA, the Health Information Technology for Economic and Clinical Health Act (HITECH Act), the MMA, the USA PATRIOT Act, anti-kickback laws, MIPPA and "Do Not Call" regulations, and their state equivalents have created administrative and compliance requirements for us. The requirements of these laws and regulations are continually evolving, and the cost of compliance may have an adverse effect on our operations and profitability. The evolution of existing laws, rules, or regulations, their enforcement, or changes in their application or interpretation, as well as new laws and regulations could materially and adversely affect our operations, financial position, or results of operations and may expose us to increased liability. As laws and regulations evolve, the costs of compliance, which are already significant, will tend to increase. If we fail to comply with existing or future applicable laws and regulations we could suffer civil, criminal or administrative penalties, including termination of our contracts with CMS. Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain the regulatory approvals required to operate our business. In addition, we are subject to potential changes in the political environment that can affect public policy and can adversely affect the markets for our products.

        Laws and regulations governing Medicare, Medicaid and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the ACA, CMS, State regulatory agencies and other regulatory agencies have been exercising increased oversight and regulatory authority over our Medicare and other businesses. Compliance with such laws and

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regulations is subject to CMS audit, other governmental review and investigation, including SEC investigations, and significant and complex interpretation. CMS audits our Medicare Advantage plans with regularity to ensure we are in compliance with applicable laws, rules, regulations and CMS instructions. Our Medicare Advantage plans will likely be subject to an audit in 2016 and our Total Care Medicaid plan will be subject to audit in 2016. There can be no assurance that we will be found to be in compliance with all such laws, rules and regulations in connection with these audits, reviews and investigations, and at times we have been found to be out of compliance. Failure to be in compliance can subject us to significant regulatory action including significant fines, penalties, cancellation of contracts with governmental agencies or operating restrictions on our business, including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans, termination of our contracts with CMS, exclusion from Medicare and other state and federal healthcare programs and inability to expand into new markets or add new products within existing markets.

        Certain of our subsidiaries provide products and services to various government agencies. As a government contractor, we are subject to the terms of the contracts we have with those agencies and applicable laws governing government contracts. As such, we may be subject to False Claim Act litigation (also known as qui tam litigation) brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government. In 2014 and 2015, Innovative Resources Group, LLC ("IRG"), a subsidiary of APS Healthcare, resolved three False Claims Act matters relating to IRG's historical contracts in Missouri, Tennessee and Nevada. During 2015, we sold our APS Healthcare business. However, it is possible that we could be the subject of additional False Claims Act investigations and litigation in the future that could have a material adverse effect on our business and results of operations.

        Laws in each of the states in which we operate our health plans, insurance companies and other businesses also regulate our sales practices, operations, the scope of benefits, rate formulas, delivery systems, utilization review procedures, quality assurance, complaint systems, enrollment requirements, claim payments, marketing, and advertising. These state regulations generally require, among other things, prior approval or notice of new products, premium rates, benefit changes and specified material transactions, such as dividend payments, purchases or sales of assets, inter-company agreements, and the filing of various financial and operational reports.

        We are also subject to various governmental reviews, audits and investigations, including SEC investigations, to verify our compliance with our contracts and applicable laws and regulations. State departments of insurance routinely audit our health plans and insurance companies for financial and contractual compliance. State departments of health audit our health plans for compliance with health services. State attorneys general, the SEC, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, the Government Accountability Office, state departments of insurance and departments of health and Congressional committees may also conduct audits and investigations of us. We have historically incurred, and expect to continue to incur, significant costs to respond to governmental reviews, audits and investigations, and we expect these costs to increase over time as regulation increases and becomes more complex and as regulatory agencies and Congressional committees become more sophisticated and thorough.

        Any adverse review, audit or investigation, or changes in regulations resulting from the conclusion of reviews, audits or investigations, could result in:

    repayment of amounts we have been paid pursuant to our government contracts;

    imposition of civil or criminal penalties, fines or other sanctions on us;

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    loss of licensure or the right to participate in Medicare and other government-sponsored programs;

    suspension of marketing and enrollment privileges;

    damage to our reputation in various markets;

    legislative or regulatory changes that affect our business and operations;

    increased difficulty in marketing our products and services; and

    prohibiting the expansion to new markets or the addition of new products in existing markets.

        Any of these events could make it more difficult for us to sell our products and services, reduce our revenues and profitability and otherwise adversely affect our reputation and/or operating results. CMS from time to time releases proposed or amended rules, regulations, and guidance that, if adopted, would, among other things, place tighter restrictions on marketing processes relative to the Medicare Advantage program and Medicare prescription drug benefit program. Depending upon the final content of these regulations, if CMS proposes and adopts them, compliance with and enforcement of the regulations could have a material adverse effect on our results of operations.

        We are also subject to a federal law commonly referred to as the "Anti-Kickback Statute." The Anti-Kickback Statute prohibits the payment or receipt of any "Remuneration" that is intended to induce referrals or the purchasing, leasing or ordering of any item or service that may be reimbursed, in whole or in part, under a Federal Health Care Program, such as Medicare. It also prohibits the payment or receipt of any remuneration that is intended to induce the recommendation of the purchasing, leasing or ordering of any such item or service. Violations of such statute or other laws could result in substantial monetary penalties and could also include exclusion from the Medicare program.

        In addition, in connection with the establishment of the MSSP, the relevant federal agencies issued waivers of certain laws governing potential fraud and abuse involving federal health care program beneficiaries (e.g. the Stark Law, Civil Monetary Penalties Law, and the Anti-Kickback Statute). The objective of the federal waivers is to foster innovative financial arrangements that will assist an ACO in meeting the goals of the MSSP. As part of our ACO business, we intend to enter into arrangements with various third parties such as laboratory companies and other providers, that are intended to be covered by such waivers. However, if such arrangements are found not to be covered by such waivers, we may be subject to substantial penalties and/or fines and could be precluded from participating in government programs such as the MSSP.

If we fail to effectively design and price our products properly and competitively, if the premiums and fees we charge are insufficient to cover the cost of health care services delivered to our members, or if our estimates of benefit expenses are inadequate, our profitability may be materially adversely affected.

        We use a substantial portion of our revenues to pay the costs of health care services delivered to our members. These costs include claims payments, capitation payments to providers, and various other costs incurred to provide health insurance coverage to our members. These costs also include estimates of future payments to hospitals and others for medical care provided to our members. Our premiums for our Medicare Advantage business are fixed for one-year periods. Accordingly, costs we incur in excess of our benefit cost projections generally are not recovered in the contract year through higher premiums. We estimate the costs of our future benefit claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical inflation, historical developments, including claim inventory levels and claim receipt patterns, and other relevant factors. We continually review estimates of future payments relating to benefit claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves. However, these

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estimates involve extensive judgment, and have considerable inherent variability that is sensitive to payment patterns and medical cost trends. The profitability of our risk-based products depends in large part on our ability to predict, price for and effectively manage medical costs. Many factors may and often do cause actual health care costs to exceed what was estimated and used to set our premiums. In addition, we have and may continue to pursue additional opportunities in the Medicaid risk business, which presents additional challenges around pricing and underwriting. Failure to adequately price our products or estimate medical costs may result in a material adverse effect on our business, cash flows and results of operations.

        In addition, during 2015, we significantly grew our Medicare Advantage membership in our Northeast markets, increasing membership by approximately 35%. We incurred losses in 2015 in our Northeast Medicare Advantage markets as a result of higher than expected utilization and a lag in adequate premium for our new members. While we have taken steps to address these issues, there can be no assurance that we will be able to achieve profitably in these markets.

Reductions in funding for Medicare or Medicaid programs could materially reduce our ability to achieve profitability.

        We generate a significant majority of our total revenue from the operation of our Medicare Advantage plans, our MSSP ACOs and various Medicaid programs. As a result, our revenue and profitability are dependent, in part, on government funding levels for all of these various programs. The rates paid to Medicare Advantage health plans like ours are established by contract, although the rates differ depending on a combination of factors, such as upper payment limits established by CMS, a member's health profile and status, age, gender, county or region, benefit mix, member eligibility categories and the plan's risk scores. Future Medicare rate levels and overall funding for Medicare, may be affected by continuing government efforts to contain and/or reduce overall medical expenses, including the Advance Notice and Draft Call Letter described above, and other budgetary and fiscal constraints pursuant to the Budget Control Act of 2011 as a result of the failure of a bipartisan joint congressional committee to agree on certain spending cuts, known as "Sequestration". The government is continuously examining Medicare Advantage health plans like ours in comparison to Medicare fee-for-service payments, and this examination could result in a reduction in payments to Medicare Advantage health plans like ours. Changes in the Medicare program or funding may affect our ability to operate under the Medicare program or lead to reductions in the amount of reimbursement, eliminate coverage for some benefits or reduce the number of persons enrolled in or eligible for Medicare or increase member premium.

Failure to control and/or reduce our administrative operating costs could have a material adverse effect on our financial position, results of operations and cash flows.

        The level of our administrative operating costs significantly affects our profitability. During 2015, our administrative expense ratio in our Medicare Advantage business was 10.8%. Beginning in 2014, Medicare Advantage plans are required to meet an 85% medical loss ratio and we are subject to a non-deductible insurance industry fee that is approximately 1.6% of premium for 2015. Thus, in order to generate meaningful earnings, we will need to continue to reduce our administrative operating expenses from current levels. We are smaller than many of our competitors which makes it harder to reduce administrative operating expenses. Reducing administrative expenses has and may continue to require us to reduce our headcount, which can place significant strains on our operations. If we are unable to reduce our administrative operating expenses to better match our smaller size, or if we are unable to effectively manage operating our business with a reduced headcount, it could have a material adverse effect on our financial condition, results of operations and cash flows.

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A significant portion of our revenues are tied to our Medicare businesses and regulated by CMS and if our government contracts are not renewed or are terminated, our business would be substantially impaired.

        We earn a significant portion of our revenue from our Medicare Advantage businesses in which CMS is not only our largest customer but also our regulator. If we are unable to maintain a constructive relationship with CMS, our business could suffer materially. As a government contractor, we provide our Medicare Advantage benefits and other services through a limited number of contracts with federal government agencies. These contracts generally have terms of one to three years and are subject to non-renewal by the applicable agency. All of our government contracts are terminable for cause if we breach a material provision of the contract or violate relevant laws or regulations. In addition, a government agency may suspend our right to add new members if it finds deficiencies in our provider network or operations, as was the case for a significant portion of the 2011 selling season as a result of CMS sanctions. If we are unable to renew, or to successfully re-bid or compete for any of our government contracts, or if any of our contracts are terminated, our business could be substantially impaired. If any of those circumstances were to occur, we would likely pursue one or more alternatives, such as

    seeking to enter into contracts in other geographic markets;

    seeking to enter into contracts for other services in our existing markets; or

    seeking to acquire other businesses with existing government contracts;

        If we were unable to do so, we could be forced to cease conducting business. In this event, our revenues and profits would decrease materially.

Competition in the healthcare industry is intense, and if we do not design and price our products properly and competitively, our membership and profitability could decline.

        We operate in a highly competitive industry. Some of our competitors have more established businesses with larger market share, more established reputations and brands and greater financial resources than we have in some markets. In addition, other companies may enter our markets in the future. Medicare Advantage plans are generally bid upon or renewed annually. We compete for members on the basis of the following and other factors:

    price;

    the size, location, quality and depth of provider networks;

    benefits provided;

    quality and extent of services; and

    reputation.

        In addition to the challenge of controlling health care costs, we face intense competitive pressure to contain premium prices. Factors such as business consolidations, strategic alliances, legislative reforms and marketing practices create pressure to contain premium rate increases, despite being faced with increasing medical costs. Premium increases, introduction of new product designs, our relationship with our providers in various markets, and our possible exit from or entrance into markets, among other issues, could also affect our membership levels.

        We compete based on innovation and service, as well as on price and benefit offering. We may not be able to develop innovative products and services which are attractive to clients. Moreover, although we need to continue to expend significant resources to develop or acquire new products and services in the future, we may not be able to do so. We cannot be sure that we will continue to remain

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competitive, nor can we be sure that we will be able to market our products and services to clients successfully at current levels of profitability.

        Consolidation within the industries in which we operate, as well as the acquisition of our competitors by larger companies (e.g., Anthem's pending acquisition of Cigna and Aetna's pending acquisition of Humana), may lead to increased competition. Strategic combinations involving our competitors could have an adverse effect on our business or results of operations.

Our business strategy is evolving and may involve pursuing new lines of business or strategic transactions and investments, some of which may not be successful.

        The healthcare industry is undergoing significant change and our business strategy is continuing to evolve to meet these changes. In order to profitably grow our business, we may need to expand into new lines of business beyond our historical core of providing managed care and health insurance products, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or unrelated businesses. In addition, we may seek a variety of strategic transactions, including, without limitation, divestitures of existing businesses or assets, a merger or consolidation with a third party that results in a change in control, a sale or transfer of all or a significant portion of our assets or a purchase by a third party of our securities that may result in a minority or control investment by such third party.

        For example, over the past several years we partnered with groups of providers to form numerous ACOs under the MSSP and have invested significant capital into this business. While our ACO business continues to improve, it has lost money since inception. Going forward, we may pursue additional opportunities in the healthcare sector which may involve us providing capital and/or reinsurance to health plans. We may also pursue various strategic transactions with providers, IPAs and other provider groups, including acquisitions, joint ventures and other arrangements. Each of these opportunities may require the investment of significant capital and management attention. There can be no assurance that we will be successful with any of these potential new ventures and we could suffer significant losses as a result, which could have a material adverse effect on our business, financial condition and results of operations.

        We may finance future acquisitions, investments or opportunities through available cash, equity issuances or through the incurrence of additional indebtedness. Future acquisitions or investments, and the incurrence of additional indebtedness, could subject us to a number of risks, including, but not limited to:

    the assumption of contingent liabilities;

    potential losses from unanticipated litigation, undiscovered or undisclosed liabilities or unanticipated levels of claims, relating to either the pre- or post-acquisition periods;

    risks and uncertainties associated with transaction counterparties;

    the loss of key personnel and business relationships;

    difficulties associated with assimilating and integrating new personnel, assets, intellectual property and operations of an acquired company or business;

    the distraction of our management from existing programs and initiatives in pursuing such strategic transactions; and

    where indebtedness is incurred, general risks associated with higher leverage, including increased debt service obligations, reduced liquidity and reduced access to capital markets.

        In addition, any strategic transaction that we may pursue may not result in anticipated benefits to us and may result in unforeseen costs that, in each case, may adversely impact our financial condition and results of operations.

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Changes in governmental regulation or legislative reform could increase our costs of doing business and adversely affect our profitability.

        The federal government and the states in which we operate extensively regulate our various businesses. The laws and regulations governing our operations are generally intended to benefit and protect policyholders, health plan members and providers rather than shareholders. From time to time, Congress has considered various forms of "Patients' Bill of Rights" legislation, which, if adopted, could alter the treatment of coverage decisions under applicable federal employee benefits laws. There have also been legislative attempts at the state level to limit the preemptive effect of federal employee benefits laws on state laws. If adopted, these types of limitations could increase our liability exposure and could permit greater state regulation of our operations. The government agencies administering these laws and regulations have broad latitude to enforce them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with our policyholders, members, providers and the public. Healthcare laws and regulations are subject to frequent change and differing interpretations.

        In addition, changes in the political climate or in existing laws or regulations, or their interpretations, or the enactment of new laws or the issuance of new regulations could adversely affect our business by, among other things:

    imposing additional license, registration, or capital reserve requirements;

    increasing our administrative and other costs;

    forcing us to undergo a corporate restructuring;

    increasing mandated benefits without corresponding premium increases;

    limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries;

    adversely affecting our ability to operate under the Medicare program and to continue to serve our members and attract new members;

    changing the manners or the basis upon which CMS reinsures us or pays premium to us, or upon which our members pay premiums;

    forcing us to alter or restructure our relationships with providers and agents;

    restricting our ability to market our products;

    increasing governmental regulation or provision of healthcare services;

    requiring that health plan members have greater access to non-formulary drugs;

    expanding the ability of health plan members to sue their plans;

    requiring us to implement additional or different programs and systems; and

    prohibiting us from participating in existing or future programs and systems.

        While it is not possible to predict when and whether fundamental policy changes would occur, policy changes on the local, state and federal level could fundamentally change the dynamics of our industry, such as policy changes mandating a much larger role of the government in the health care arena. In addition, the results of the 2016 Presidential election could have a material adverse effect on our business. Changes in public policy could materially affect our profitability, our ability to retain or grow business, or our financial condition. State and federal governmental authorities are continually considering changes to laws and regulations applicable to us which could result in new regulations that increase the cost of our operations or otherwise have a material adverse effect on our business and results of operations.

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        Compliance with and enforcement of the existing and any proposed regulations could have a material adverse effect on our results of operations.

If we fail to properly maintain the integrity of our data and information systems and we sustain a cyber-attack or other data security or privacy breach, we could incur significant regulatory fines or penalties, significant damage to our reputation and our business and results of operations could be materially adversely affected.

        Cybersecurity attacks and data security breaches have become increasingly common, particularly in the healthcare industry. While we take precautions to prevent such attacks, there can be no assurance that we will not be subject to an attack or breach in the future. Our business depends significantly on efficient, effective and secure information systems and the integrity and timeliness of the data we use to run our business. We have various information systems that support our operating segments. The information gathered and processed by our management information systems assists us in, among other things, marketing and sales tracking, underwriting, billing, claims processing, medical management, medical care cost and utilization trending, financial and management accounting, reporting, planning and analysis and e-commerce. These systems also support on-line customer service functions, provider and member administrative functions and support tracking and extensive analyses of medical expenses and outcome data.

        Cybersecurity attacks can arise in a variety of manners, including from third parties who may attempt to fraudulently induce employees, vendors, providers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our members or beneficiaries. In addition, while we maintain certain standards for vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach as a result of their failure to perform in accordance with contractual arrangements.

        Our information systems and applications require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences. If the information we rely upon to run our businesses were to be found to be inaccurate or unreliable, if we fail to properly maintain our information systems and data integrity, or if we fail to successfully update or expand processing capability or develop new capabilities to meet our business needs in a timely manner, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, lose our ability to produce timely and accurate reports, have regulatory or other legal problems, have increases in operating and administrative expenses, lose existing customers, have difficulty in attracting new customers or in implementing our business strategies, sustain losses due to fraud or suffer other adverse consequences.

        To the extent we fail to maintain effective information systems, we may need to contract for these services with third-party management companies, which may be on less favorable terms to us and significantly disrupt our operations and information flow. In addition, we have outsourced the operation of certain of our data centers to independent third parties and may from time to time obtain and/or outsource additional services or facilities from or to other independent third parties. Dependence on third parties for these services and facilities may make our operations vulnerable to their failure to perform as agreed. In addition, we could be subject to hackers or other forms of cyber-security attacks that bypass our information technology security systems. If a hacker or cyber-security attack were to be successful, we could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data, operational or business delays resulting from the disruption of our systems, negative publicity resulting in reputational damage with our members, agents, providers, regulators and other stakeholders and significant fines, penalties and other costs.

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        Furthermore, our business requires the secure transmission of confidential information over public networks. Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss. Our security measures may be inadequate to prevent security breaches and our business operations and profitability would be adversely affected by cancellation of contracts, loss of members and potential criminal and civil sanctions if they are not prevented.

        There can be no assurance that our process of improving existing systems, developing new systems to support our expanding operations, integrating new systems, protecting our proprietary information, and improving service levels will not be delayed or that additional systems issues will not arise in the future. Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, results of operations and cash flows.

CMS's risk adjustment payment system, including the results of any RADV audits and budget neutrality factors, make our revenue and profitability difficult to predict and could result in material retroactive adjustments to our results of operations.

        All of the Medicare Advantage programs we offer are subject to Congressional appropriation. As a result, our profitability is dependent, in large part, on continued funding for government healthcare programs at or above current levels. The reimbursement rates paid to health plans like ours by the federal government are established by contract, although the rates differ depending on a combination of factors such as a member's health status, age, gender, county or region, benefit mix, member eligibility categories, and the plans' risk scores.

        CMS has implemented a risk adjustment model that apportions premiums paid to Medicare Advantage plans according to health severity. The risk adjustment model pays more for enrollees with predictably higher costs. Under this model, rates paid to Medicare Advantage plans are based on actuarially determined bids, which include a process whereby our prospective payments are based on a comparison of our beneficiaries' risk scores, derived from medical diagnoses, to those enrolled in the government's original Medicare program.

        Under the risk adjustment methodology, all Medicare Advantage plans must capture, collect and submit the necessary diagnosis code information from inpatient and ambulatory treatment settings to CMS within prescribed deadlines. The CMS risk adjustment model uses this diagnosis data to calculate the risk adjusted premium payment to Medicare Advantage plans. We generally rely on providers to code their claim submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment model. We also rely on providers to appropriately document all medical data, including the diagnosis data submitted with claims. As a result of this process, it is difficult to predict with certainty our future revenue or profitability. CMS may also change the manner in which it calculates risk adjusted premium payments in ways that are adverse to us. For example, in the past, CMS proposed excluding for risk adjustment purposes the diagnosis codes obtained from in-home health risk assessments unless such codes are subsequently validated by a clinical encounter with a qualified provider. Over the past several years, we have utilized in-home health risk assessments for our Medicare Advantage members. Accordingly, if implemented, this change could have a material adverse effect on our payments from CMS and our results of operations. In addition, our own risk scores for any period may result in favorable or unfavorable adjustments to the payments we receive from CMS and our Medicare premium revenue. Because diagnosis coding is a manual process, there is the potential for human error in the recording of codes and there can be no assurance that physicians, hospitals, and other health care providers are submitting accurate codes to us or that they will be successful in improving the accuracy of recording diagnosis code information and therefore our risk scores. In addition, CMS continues to evaluate the overall risk adjustment methodology that is used to pay Medicare Advantage plans. Any major changes to this methodology could have a material adverse effect on our profitability.

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        Beginning in 2008, CMS announced its intention to engage in a pilot program to more extensively audit a select group of Medicare Advantage plans in the area of hierarchical condition category, or HCC, coding for the determination of risk score revenue. These audits were labeled "Risk Adjustment Data Validation" audits, or RADV. RADV audits review medical record documentation in an attempt to validate provider coding practices and the presence of risk adjustment conditions which influence the calculation of premium payments to Medicare Advantage plans. On February 24, 2012, CMS released a final RADV audit and payment adjustment methodology which clarified many of the uncertainties arising from prior proposals. Under the final rule, CMS has indicated that it will now reduce the extrapolated contract level error rate found during the audits based on the error rate found in the Government's 'benchmark' audit data for Medicare fee-for-service population CMS has begun to conduct RADV audits of select Medicare Advantage plans and our PPO plan offered by American Progressive Life & Health Insurance Company of New York is currently being audited based on 2012 revenue using 2011 dates of service. As of December 31, 2012, this PPO plan had approximately 12,000 members. CMS may discover coding errors during this or other RADV audits, which could require us to make significant payments to CMS or require significant payment adjustments, which could have a material adverse effect on our results of operations, financial position and cash flows. On December 22, 2015, CMS issued a proposed statement of work related to a material expansion of RADV audits, with the ultimate goal of subjecting all Medicare Advantage contracts to either a comprehensive or a targeted RADV audit for each contract year.

        Coincident with phase-in of the risk-adjustment methodology, CMS also adjusted payments to Medicare Advantage plans by a "budget neutrality" factor. CMS implemented the budget neutrality factor to prevent overall health plan payments from being reduced during the transition to the risk-adjustment payment model. CMS first developed the payment adjustments for budget neutrality in 2002 and began to use them with the 2003 payments. CMS began phasing out the budget neutrality adjustment in 2007 and fully eliminated it in 2011. The risk adjustment methodology and phase-out of the budget neutrality factor will reduce our plans' premiums unless our risk scores increase. We do not know if our risk scores will increase in the future or, if they do, that the increases will be large enough to offset the elimination of this adjustment. As a result of the CMS payment methodology described previously, the amount and timing of our CMS monthly premium payments per member may change materially, either favorably or unfavorably. In addition, the possibility exists that CMS may reduce revenues in the future for plans whose risk scores have increased significantly greater than the general Medicare average increase in risk scores. If our risk scores increase significantly greater than the general Medicare average increase, and CMS introduces this approach, it could adversely affect our results of operations. In addition, CMS continues to evaluate the overall risk adjustment methodology that is used to pay Medicare Advantage plans. Any changes to this methodology could have a material adverse effect on our profitability.

        In February 2016, CMS finalized rules regarding "overpayments" to Medicare Advantage plans which may arise under a variety of circumstances, including risk adjustment. The failure to report and return overpayments may result in significant potential liabilities under the False Claims Act and the imposition of other administrative penalties by CMS, which could adversely effect our results of operations, financial position, or cash flows. The precise interpretation, impact, and scope of the final rules regarding overpayments are not clear and are subject to pending litigation.

Our results of operations will be adversely affected if our insurance premium rates are not adequate.

        Our results of operations depend on our ability to charge and collect premiums sufficient to cover our health care costs, expenses of distribution and operations and provide a reasonable margin. Although we attempt to base the premiums we charge on our estimate of future health care costs, we may not be able to control the premiums we charge as a result of competition, government regulations

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and other factors. Our results of operations could be adversely affected if we are unable to set premium rates at appropriate levels or adjust premium rates in the event our health care costs increase.

        We set the premium rates on our insurance policies based on facts and circumstances known at the time we issue the policies and on assumptions about numerous variables, such as:

    the actuarial probability of a policyholder incurring a claim;

    the severity and duration of the claim;

    the mortality rate of our policyholder base;

    the persistency or renewal rate of our policies in force;

    our commission and policy administration expenses; and

    the interest rate earned on our investment of premiums.

        In setting premium rates, we consider historical claims information, industry statistics and other factors. We cannot be assured that the data and assumptions used at the time of establishing premium rates will prove to be correct and that premiums will be sufficient to cover benefits and expenses plus a reasonable margin.

        For certain of our Traditional products, we can periodically file for rate increases, if our actual claims experience proves to be less favorable than we assumed. If we are unable to raise our premium rates, our net income may decrease. We generally cannot raise our premiums in any state unless we first obtain the approval of the insurance regulator in that state. We have not been able to obtain approvals for rate increases at the levels we have requested on our closed-block of long term care business, which has contributed to our incurring losses on this block. We review the adequacy of our accident and health premium rates regularly and file rate increases on our products when we believe permitted premium rates are too low. When determining whether to approve or disapprove our rate increase filings, the various state insurance departments take into consideration:

    our actual claims experience compared to expected claims experience;

    the block's credibility;

    policy persistency, which means the percentage of policies that are in-force at specified intervals from the issue date compared to the total amount originally issued;

    investment income; and

    medical cost inflation.

        If the regulators do not believe these factors warrant a rate increase, it is possible that we will not be able to obtain approval for premium rate increases from currently pending requests or requests filed in the future. If we are unable to raise our premium rates because we fail to obtain approval for rate increases in one or more states, our net income may decrease. If we are successful in obtaining regulatory approval to raise premium rates, the increased premium rates may cause existing policyholders to let their policies lapse. This would reduce our premium income in future periods. For example, we have not been successful in obtaining rate increases for certain portions of our long-term care block of business and there can be no assurance that our expected future premiums will be adequate to cover the future claims expense of this block of business.

The bidding process for our Medicare Advantage plans may adversely affect our profitability.

        Payments for Medicare Advantage health plans are based on a bidding process that may decrease the amount of premiums paid to us or cause us to increase the benefits we offer to our members. We are required to submit Medicare Advantage bids annually, approximately six months in advance of the

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corresponding benefit year. We attempt to use the best available member eligibility, claims and risk score data at the time of developing the bids. Furthermore, we make actuarial assumptions about the utilization of benefits in our plans and the impact of government regulations. However, these assumptions are subject to significant judgment and we cannot be assured that the data and assumptions used at the time of bid development will prove to be correct and that premiums will be sufficient to cover member benefits plus a reasonable margin. For example, our 2015 bid for our Northeast markets did not appropriately consider the unexpected 35% growth in membership that we experienced during 2015 which resulted in us incurring losses in these markets.

        Furthermore, our premiums from CMS relating to any prescription drug benefit are subject to risk corridor payments from or to CMS. Variances from our annual bids to actual prescription drug costs that exceed certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received. The estimate of the risk corridor payment requires us to consider factors that may not be certain, including differences in interpretation of data as compared with CMS.

        If our bid assumptions are too low and member claims are higher than anticipated, we could be required to expend significant unanticipated amounts and incur losses which could have a material adverse effect on our business, profitability and results of operations.

Because our Medicare Advantage premiums, which generate most of our Medicare Advantage revenues, are fixed by contract, we are unable to increase our Medicare Advantage premiums during the contract term if our corresponding medical benefits expense exceeds our estimates which can adversely affect our results of operations.

        Most of our Medicare Advantage revenues are generated by premiums consisting of fixed monthly payments per member. We use a significant portion of our revenues to pay the costs of health care services delivered to our members. The principal costs consist of claims payments, capitation payments and other costs incurred to provide health insurance coverage to our members. Generally, premiums in the health care business are fixed on an annual basis by contract, and we are obligated during the contract period to provide or arrange for the provision of healthcare services as established by the federal government.

        We are unable to increase the premiums we receive under these contracts during the then-current term. If our medical expenses exceed our estimates, we generally cannot recover costs we incur in excess of our medical cost projections in the contract year through higher premiums. As a result, our profitability depends, to a significant degree, on our ability to adequately predict and effectively manage our medical expenses related to the provision of healthcare services. Accordingly, the failure to adequately predict and control medical expenses and to make reasonable estimates and maintain adequate accruals for incurred but not reported claims, known as IBNR, may have a material adverse effect on our financial condition, results of operations, or cash flows. If our estimates of reserves are inaccurate, our ability to take timely corrective actions or to otherwise establish appropriate premium pricing could be adversely affected. Failure to adequately price our products or to estimate sufficient medical claim reserves may result in a material adverse effect on our financial position, results of operations and cash flows. In addition, to the extent that CMS or Congress takes action to reduce the levels of payments to Medicare Advantage providers, our revenues would be adversely affected.

        We estimate the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, cost trends, product mix, seasonality, medical inflation, historical developments, such as claim inventory levels and claim receipt patterns, and other relevant factors. We continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves.

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However, historically, our medical expenses as a percentage of premium revenue have fluctuated. The principal factors that may cause medical expenses to exceed our estimates are:

    increased utilization of medical facilities and services;

    increased utilization of prescription drugs (e.g., new treatments or specialty pharmacy drugs such as those associated with treatments for Hepatitis C);

    increased cost of services;

    our membership mix;

    variances in actual versus estimated levels of cost associated with new products, benefits or lines of business;

    product changes or benefit level changes;

    periodic renegotiation of hospital, physician and other provider contracts, or the consolidation of these entities;

    membership in markets lacking adequate provider networks;

    changes in the demographics of our members and medical trends affecting them;

    termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements or loss of membership;

    the occurrence of acts of terrorism, public health epidemics or other wide spread health emergencies such as higher incidence of the flu, severe weather events or other catastrophes;

    the introduction of new or costly treatments, specialty pharmacy drugs (such as drugs to treat Hepatitis C) and technologies;

    medical cost inflation or changes in the economy;

    government mandated benefits or other regulatory changes;

    contractual disputes with hospitals, physicians and other providers; and

    other unforeseen occurrences.

Because of the relatively high average age of the Medicare population, medical expenses for our Medicare Advantage plans may be particularly difficult to control. We may not be able to continue to manage these expenses effectively in the future. If our medical expenses increase, our profits could be reduced or we may not remain profitable.

We hold reserves for expected claims, which are estimated, and these estimates involve an extensive degree of judgment. If actual claims exceed reserve estimates, our results could be materially adversely affected.

        Our benefits incurred expense reflects estimates of IBNR. We, together with our internal and external consulting actuaries, estimate our claim liabilities using actuarial methods based on historical data adjusted for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors. Actual conditions, however, could differ from those assumed in the estimation process, and those differences could be material. Due to the uncertainties associated with the factors used in these assumptions, the actual amount of benefit expense that we incur may be materially more or less than the amount of IBNR originally estimated, and materially different amounts could be reported in our financial statements for a particular period under different conditions or using different assumptions. We make adjustments, if necessary, to benefits incurred expense when the criteria used to determine IBNR change and when we ultimately determine actual claim costs. If our estimates of IBNR are inadequate in the future, our reported results of operations will be adversely

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affected. Further, our inability to estimate IBNR accurately may also affect our ability to take timely corrective actions or otherwise establish appropriate premium pricing, further exacerbating the extent of any adverse effect on our results.

        In addition, we may experience higher than expected loss ratios if health care costs exceed our estimates. We seek to take appropriate actions in an effort to reverse any upward trend in our loss ratios; however, we can make no assurances that these actions will be sufficient. We also cannot give assurance that our loss ratios will not continue to increase beyond what we currently anticipate, and any increases could materially adversely affect our results of operations.

Compliance with the terms and conditions of our Corporate Integrity Agreement requires significant resources and, if we fail to comply, we could be subject to penalties or excluded from participation in government healthcare programs, which could have a material adverse effect on our financial condition and results of operations.

        In September 2011, in connection with the settlement of a False Claims Act action involving the sales and marketing practices of our Wisconsin HMO Plans, we entered into a five-year Corporate Integrity Agreement with the Office of Inspector General of the United States Department of Health and Human Services ("HHS-OIG"). The Corporate Integrity Agreement provides that we will, among other things, maintain a compliance program, including a corporate compliance officer, compliance officers and compliance committees, a code of conduct, comprehensive compliance policies, training and monitoring, a compliance hotline, an open door policy and a disciplinary process for compliance violations. The Corporate Integrity Agreement also requires us to engage independent third parties to review compliance with our obligations under the Corporate Integrity Agreement and submit various reports to HHS-OIG. Failure to comply with the obligations under our Corporate Integrity Agreement could have material consequences for us including monetary penalties, exclusion from participation in federal healthcare programs and/or subject to prosecution, which could have a material adverse effect on our financial condition and results of operations.

We are required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.

        Regulations under HIPAA require us to comply with standards regarding the exchange of health information within our company and with third parties, such as healthcare providers, business associates and our members. The HITECH Act broadened the scope of the privacy and security regulations of HIPAA and mandates individual notification in the event of certain breaches of individually identifiable health information and provides enhanced penalties for HIPAA violations. These regulations impose standards for common healthcare transactions, such as:

    claims information, plan eligibility, and payment information;

    unique identifiers for providers and employers;

    security;

    privacy; and

    enforcement.

        HIPAA also provides that to the extent that state laws impose stricter privacy standards than HIPAA privacy regulations, HIPAA does not preempt the state standards and laws.

        Given the complexity of the HIPAA regulations, the possibility that the regulations may change, and the fact that the regulations are subject to changing and potentially conflicting interpretation, our ability to maintain compliance with the HIPAA requirements is uncertain and the costs of compliance

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are significant. Furthermore, a state's ability to promulgate stricter laws, and uncertainty regarding many aspects of state requirements, make compliance more difficult. To the extent that we submit electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA, payments to us may be delayed or denied. Additionally, the costs of complying with any changes to the HIPAA regulations may have a negative impact on our operations. We could be subject to criminal penalties and civil sanctions for failing to comply with the HIPAA health information provisions, which could result in the incurrence of significant monetary penalties. In addition, our failure to comply with state health information laws that may be more restrictive than the regulations issued under HIPAA could result in additional penalties.

        Compliance with HIPAA and other privacy regulations requires significant systems enhancements, training and administrative effort. HIPAA could also expose us to additional liability for violations by our business associates. A business associate is a person or entity, other than a member of our work force, who on behalf of us performs or assists in the performance of a function or activity involving the use or disclosure of individually identifiable health information, or provides legal, accounting, consulting, data aggregation, management, administrative, accreditation or financial services. Because we are ultimately responsible for many of the acts of our business associates, any failure of such third parties to comply with HIPAA or other privacy regulations could cause us to incur civil or criminal penalties, including significant damage to our reputation.

        In 2013, the United States Department of Health and Human Services issued the omnibus final rule on HIPAA privacy, security, breach notification requirements and enforcement requirements under the HITECH Act, and a final regulation for required changes to the HIPAA Privacy Rule for the Genetic Information Nondiscrimination Act, or GINA. Our failure to comply with the omnibus final rule or the failure of our business associates to comply with HIPAA, the HITECH ACT, GINA, or other privacy regulations could cause us to incur civil or criminal penalties, including significant damage to our reputation.

Legal and regulatory investigations and actions are increasingly common in the insurance and managed care business and may result in financial losses and harm our reputation.

        We face a significant risk of class action lawsuits and other litigation and regulatory investigations and actions in the ordinary course of operating our businesses. Due to the nature of our businesses, we are subject to a variety of legal and regulatory actions relating to our business operations, such as the design, management and offering of products and services. The following are examples of the types of potential litigation and regulatory investigations we face:

    claims under the False Claims Act or State whistleblower statutes;

    investigations by the SEC;

    claims by government agencies, including CMS and state agencies with authority over that state's Medicaid program, relating to compliance with laws and regulations;

    claims relating to sales or underwriting practices;

    claims relating to the methodologies for calculating premiums;

    claims relating to the denial or delay of health care benefit payments;

    claims relating to claims payments and procedures;

    additional premium charges for premiums paid on a periodic basis;

    claims relating to the denial, delay or rescission of insurance coverage;

    challenges to the use of software products used in running our business;

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    claims relating to provider marketing;

    anti-kickback claims;

    medical malpractice or negligence actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers' alleged malpractice or negligence;

    medical malpractice or negligence actions related to the operation of our care management programs;

    claims relating to product design;

    allegations of anti-competitive and unfair business activities;

    provider disputes involving our right to properly withhold amounts relating to sequestration and other compensation-related matters, including termination of provider contracts;

    allegations of discrimination;

    claims related to the failure to disclose business practices;

    allegations of breaches of duties to members or customers;

    allegations of infringement of intellectual property rights of third parties;

    claims relating to inadequate or incorrect disclosure or accounting in our public filings;

    allegations of agent misconduct;

    claims related to deceptive trade practices;

    claims related to the quality of our networks (e.g., credentialing) or the quality of medical services rendered by our providers (e.g., vicarious liability for medical services); and

    claims relating to customer audits and contract performance (including our contracts with CMS for our Medicare Advantage and ACO companies).

        As a provider of health insurance, we are subject to the False Claims Act, which provides, in part, that the federal government may bring a lawsuit against any person or entity who it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. Violations of the False Claims Act are punishable by treble damages and penalties of up to a specified dollar amount per false claim. In addition, a special provision under the False Claims Act allows a private person (for example, a "whistleblower" such as a disgruntled employee, competitor or member) to bring an action under the False Claims Act on behalf of the government alleging that an entity has defrauded the federal government and permits the private person to share in any settlement of, or judgment entered in, the lawsuit.

        Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, and punitive and treble damages, which may remain unknown for substantial periods of time. We are also subject to various regulatory inquiries, such as information requests, formal and informal inquiries, subpoenas and books and record examinations, from state and federal regulators and other authorities, including the Securities and Exchange Commission. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

        We cannot predict the outcome of actions we face with certainty, and we have incurred and are incurring expenses in the defense of our past and current matters. We also may be subject to additional litigation in the future. Litigation could materially adversely affect our business or results of operations because of the costs of defending these cases, the costs of settlement or judgments against us, or the

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changes in our operations that could result from litigation. The defense of any these actions may be time-consuming and costly, and may distract our management's attention. In addition, we could suffer significant harm to our reputation, which could have an adverse effect on our business, financial condition and results of operations. As a result, we may incur significant expenses and may be unable to effectively operate our business.

        Potential liabilities may not be covered by insurance or indemnity, insurers or indemnifying parties may dispute coverage or may be unable to meet their obligations or the amount of our insurance or indemnification coverage may be inadequate. In some cases, treble damages may be sought. In addition, some types of damages, such as punitive damages or damage for willful acts, may not be covered by insurance. The cost of business insurance coverage has increased, and may in the future increase, significantly. Insurance coverage for all or some forms of liability may become unavailable or prohibitively expensive in the future. We cannot assure you that we will be able to obtain insurance coverage in the future, or that insurance will continue to be available on a cost-effective basis, if at all.

        The health care industry continues to receive significant negative publicity regarding the public's perception of it. This publicity and public perception have been accompanied by increased litigation, in some cases resulting in large jury awards, legislative activity, regulation, and governmental review of industry practices.

        These factors, as well as any negative publicity about us in particular, could adversely affect our ability to market our products or services and to attract and retain members, may adversely affect our relationship with providers, may require us to change our products or services, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines. Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows.

Our business may be materially adversely impacted by CMS's adoption of the new coding set for diagnoses.

        ICD-9, the system of assigning codes to diagnoses and procedures associated with hospital utilization in the United States was scheduled to be replaced by ICD-10 code sets on October 1, 2014. However, on April 1, 2014, ICD-10 implementation was delayed until October 1, 2015. Implementing the new coding set was complex and required significant resources, in terms of both time and expense. If we did not adequately implement the new coding set, or if our network providers do not adequately transition to the new ICD-10 coding set, we could be investigated or otherwise audited for non-compliance with ICD-10 related regulations, we could lose significant revenue under the risk adjustment payment model, and/or our business and results of operations may be materially adversely affected.

We rely on the accuracy of information provided by CMS regarding the eligibility of an individual to participate in our Medicare Advantage plans, the list of Medicare fee-for-service beneficiaries assigned to our ACOs, and any inaccuracies in those lists could cause CMS to recoup premium payments from us with respect to members who turn out not to be ours, or could cause us to pay benefits in respect of members who turn out not to be ours, which could reduce our revenue and profitability, or result in us expending resources in attempting to manage the care of such individuals.

        Premium payments that we receive from CMS are based upon eligibility lists produced by federal and local governments. From time to time, CMS requires us to reimburse it for premiums that we received from CMS based on eligibility and dual-eligibility lists that CMS later discovers contained individuals who were not in fact residing in our service areas or eligible for any government-sponsored program or were eligible for a different premium category or a different program. We may have already provided services to these individuals and reimbursement of amounts paid on behalf of services provided to them may be unrecoverable. In addition to recoupment of premiums previously paid, we

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also face the risk that CMS could fail to pay us for members for whom we are entitled to payment. Our profitability would be reduced as a result of this failure to receive payment from CMS if we had made related payments to providers and were unable to recoup these payments from them.

        Further, our ACOs receive periodic lists of beneficiaries that are assigned to the ACOs. These lists are based on claims experience for certain primary care services. Since CMS adjusts the lists of assigned beneficiaries from time to time, we may expend significant resources on individuals who are not in fact ultimately assigned to our ACOs. This may have a material adverse effect on our ACO business. Further, CMS provides our ACOs with certain historic and current data based on paid claims which is used for a variety of purposes, including, but not limited to, (a) used by CMS to (i) establish the benchmark for an ACO; (ii) calculate beneficiary assignment; and (iii) calculate shared savings; and (b) used by our ACOs to (i) track and trend current medical costs of assigned beneficiaries; (ii) project cost savings, if any, relative to the benchmark established by CMS; and (iii) stratify assigned beneficiaries to identify those with chronic conditions who may benefit from care coordination activities. The failure of CMS to provide timely or accurate data or errors in our processing and evaluation of such data could have a material adverse effect on our ACO business.

If we are unable to develop and maintain satisfactory relationships with the providers of care to our members and ACO beneficiaries, our profitability could be adversely affected and we may be precluded from operating in some markets.

        We contract with physicians, hospitals and other providers to deliver health care to our members. Our Medicare Advantage products, ACOs and our Total Care Medicaid plan encourage or require our customers to use these contracted providers. In some circumstances, these providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner. Our operations and profitability are significantly dependent upon our ability to not only enter into appropriate cost-effective contracts with hospitals, physicians and other healthcare providers that have convenient locations for our members in our geographic markets, but to maintain good working relationships with such providers. In addition, as the healthcare system rapidly moves to a value-based payment system, the success of each of our Medicare, ACO and Medicaid businesses is and will continue to be highly dependent on achieving high quality scores. This requires significant collaboration with providers to improve customer experience and close gaps in care. If we cannot maintain satisfactory relationships with providers to positively impact quality, our ability to achieve profitability may be negatively impacted.

        More specifically, the success of our ACO business is highly dependent on building and maintaining strong relationships with our ACO providers, and if the providers in our ACOs become dissatisfied with our performance or disengaged, it could have a material adverse effect on the results of our ACO business.

        In addition, given the rapidly changing environment for healthcare providers, many providers are considering joining larger health systems, including hospitals, which could negatively impact our business. In the long term, our ability to contract successfully with a sufficiently large number of providers in a particular geographic market will affect the relative attractiveness of our managed care products in that market. Any difficulty in contracting with providers in a market could preclude us from renewing or from entering our Medicare contracts in that market. We will be required to establish acceptable provider networks prior to entering new markets or continuing to provide services in existing markets. CMS has indicated that it intends to audit Medicare Advantage plans with respect to network adequacy. There can be no assurance that CMS will not identify areas where we fail to meet applicable network adequacy requirements.

        We may be unable to maintain our relationships with our network providers or enter into agreements with providers in new markets on a timely basis or under favorable terms. In any particular

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market, providers could refuse to contract with us, demand to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable products for members, disruption of benefits to our members, or difficulty meeting regulatory or accreditation requirements. In some markets, some providers, particularly hospitals, physician specialty groups, physician/hospital organizations or multi-specialty physician groups, may have significant market positions and negotiating power. In addition, physicians, hospitals, independent practice associations and other groups of providers may compete directly with us. Such competition may impact our relationships with those or other providers, adversely affect our products, benefits, or pricing of such products, and may require us to incur additional costs to change our operations, and our results of operations, financial position and cash flows could be adversely affected.

        In some situations, we have contracts with individual or groups of primary care physicians for a fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members. This type of contract is referred to as a "capitation" contract. The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us. In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members. The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers to demand payment from us even though we have made our regular fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers. In addition, there continues to be significant competition in our markets to employ, contract with or acquire physicians and physician practices which could make it difficult for us to maintain our current relationships. Any of these events could have an adverse effect on the provision of services to our members and our operations, resulting in loss of membership or higher healthcare costs or other adverse effects.

A reduction in the number of members in our Medicare Advantage or Medicaid plans could adversely affect our results of operations.

        Over the past several years, we have reduced our Medicare Advantage footprint to focus on markets where we believe we can positively impact the cost and quality of healthcare. These service area reductions have caused our aggregate membership numbers to fall. In the future, we may choose to exit additional markets and may suffer additional membership losses. In addition, during 2015, our membership in our Total Care Medicaid plan decreased. If we are unable to maintain and grow our membership levels, our business could deteriorate which could have a material adverse effect on our results of operations. A reduction in our membership could also make it more difficult to maintain or lower our administrative expense ratio to appropriate levels. The principal factors that could contribute to the loss of membership are:

    regulatory changes, such as the 45 Day Call Letter issued in February 2016 by CMS and the final rule to be issued in April 2016, which may adversely alter the benchmark reimbursement rates we receive from CMS and cause us to exit certain service areas;

    competition in premium or plan benefits from other health care benefit companies;

    competition from physicians or other provider groups who may elect to form their own health plans;

    poor Star Ratings relative to our competitors;

    inability to develop and maintain satisfactory relationships with the providers of care to our members;

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    increases in our premiums or changes in our benefits provided;

    our exit from a market or the termination of a health plan;

    negative publicity and news coverage relating to our company or the managed health care industry generally;

    insufficient distribution channels in a particular area;

    general economic conditions that induce beneficiaries to cancel their coverage; and

    catastrophic events, such as epidemics, pandemics, natural disasters, acts of terrorism, man-made catastrophes and other unforeseen occurrences.

Our Medicare Advantage and Medicaid membership remains concentrated in certain geographic areas, which exposes us to unfavorable changes in local competition, reimbursement rates, provider pricing power, benefit costs, and other economic conditions.

        Our Medicare Advantage membership is significantly concentrated in Texas and New York and our Medicaid membership is exclusively in New York. This significant concentration subjects us to greater risk to the extent that adverse conditions develop in one of these areas. Adverse changes in health care or other benefit costs or reimbursement rates payable to providers or increased competition in those geographic areas where we have concentrated membership could result in a disproportionate impact to us as compared to our competitors and material adverse impact on our operating results. Our membership has been and may continue to be affected by adverse and/or uncertain general economic conditions, such as the broad impact of the decline in oil prices which has and may continue to affect the Houston market. As a result, we may not be able to achieve, maintain, or grow profits and our revenue and operating results may be materially and adversely affected.

Our business and its growth are subject to risks related to difficulties in the financial markets and general economic conditions.

        The financial markets around the world have experienced significant disruption, including, among other things, volatility in security prices, diminished liquidity and credit availability, rating downgrades and declining or indeterminate valuations of many investments and declines in real estate values. While currently these conditions have not impaired our ability to access credit markets and finance our operations, largely because our financing has generally come from internal cash generation, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies or that any deterioration in markets or confidence will not impair our ability to access credit markets and finance our operations.

        These economic developments affect businesses such as ours in a number of ways, many of which we cannot predict. Among the potential effects could be further write-downs in the value of investments we hold and an inability to access credit markets should we require external financing. In addition, it is possible that economic conditions, and resulting budgetary concerns, could prompt the federal, state and local governments to make changes in the Medicare or Medicaid programs, which could adversely affect our results of operations. We are unable to predict the likely duration and severity of the current disruptions in financial markets and adverse economic conditions, or the effects these disruptions and conditions could have on us.

We may suffer losses due to fraudulent activity, which could adversely affect our financial condition and results of operation.

        Traditional Medicare, Medicare Advantage and Medicaid plans have been subject to fraudulent activity perpetrated by actual and purported beneficiaries and providers, as well as others. In 2009, we

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incurred significant losses as a result of a fraudulent scheme or a group of similar fraudulent schemes. While we have undertaken efforts to prevent these schemes, there can be no assurance that we will not again become the target of fraud, or that we will detect fraud prior to incurring losses. The need to expend effort and construct infrastructure to combat fraud requires significant expenditures. These expenditures, and losses arising from any fraud that we suffer, could have a material adverse effect on our financial condition and results of operations.

The occurrence of natural or man-made disasters could adversely affect our financial condition and results of operation.

        We are exposed to various risks arising out of natural disasters, such as:

    earthquakes;

    hurricanes;

    floods, tornadoes;

    pandemic health events such as avian influenza; and

    man-made disasters, such as acts of terrorism, political instability and military actions.

        For example, a natural or man-made disaster could lead to unexpected changes in persistency rates as policyholders and members who are affected by the disaster may be unable to meet their contractual obligations, such as payment of premiums on our insurance policies. The continued threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in business and increased claims from those areas. Disasters also could disrupt communications and financial services and other aspects of public and private infrastructure, which could disrupt our normal business operations.

        A natural or man-made disaster also could disrupt the operations of our counterparties or result in increased prices for the products and services they provide to us. In addition, a disaster could adversely affect the value of the assets in our investment portfolio if it affects companies' ability to pay principal or interest on their securities.

If we are unsuccessful in our acquisitions or dispositions it may have an adverse effect on our business, growth plans, financial condition and results of operations.

        The rapid changes and complexity of our operations has placed, and will continue to place, significant demands on our management, operations systems, accounting systems, internal control systems and financial resources. As part of our strategy, we have pursued, and may continue to pursue, growth through acquisitions, joint ventures and similar strategic partnerships. Our acquisition of APS Healthcare in 2012 was not successful. From time to time, we may also seek to dispose of assets or businesses that no longer meet our strategic objectives or for other reasons. For example, we sold our APS businesses in 2015 and have entered into a definitive agreement to sell our Traditional Insurance business (See Note 21—Discontinued Operations in the notes to consolidated financial statements for additional information regarding this transaction) and may also seek to sell other businesses or the entire Company in the future. Generally, as part of these sale transactions, the seller is required to indemnify the buyer for certain matters per the contractual terms of the sale agreements. As a result, in the future, we may be required to indemnify the buyers under these sale transactions which could require significant payments by us.

        We anticipate that joint ventures with health care providers will be critical to our growth strategies. Joint ventures have certain risks that are different from acquisitions, including, but not limited to, the

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selection of appropriate partners, challenges with respect to governance of the joint venture, pursuit of growth opportunities acceptable to all the parties, maintaining a positive relationship with our joint venture partner(s), and disruption that may occur should the joint venture terminate for any reason.

        These transactions involve numerous risks, some of which we have experienced in the past, such as:

    difficulties in the integration of operations, technologies, products, systems and personnel of the acquired company;

    diversion of financial and management resources from existing operations;

    potential losses from unanticipated litigation, undiscovered or undisclosed liabilities or unanticipated levels of claims relating to either the pre- or post-acquisition periods;

    inability to generate sufficient revenue to offset acquisition costs;

    loss of key customer accounts;

    loss of key provider contracts or renegotiation of existing contracts on less favorable terms; and

    other systems and operational integration risks.

        In addition, we generally are required to obtain regulatory approval from one or more governmental agencies when making acquisitions, dispositions or other strategic transactions, which may require a public hearing, regardless of whether we already operate a plan in the state in which the business to be acquired is located. We may be unable to comply with these regulatory requirements for an acquisition, disposition or other strategic transaction in a timely manner, or at all. Even if we identify suitable acquisition targets, we may be unable to complete acquisitions or obtain the necessary financing for acquisitions on terms favorable to us, or at all.

        To the extent we complete a strategic transaction; we may be unable to realize the anticipated benefits from it because of operational factors or difficulties in integrating the following or other aspects of acquisitions with our existing businesses:

    additional employees who are not familiar with our operations;

    new provider networks, which may operate on terms different from our existing networks;

    additional members, who may decide to transfer to other healthcare providers or health plans;

    disparate information technology, claims processing and record keeping systems; and

    accounting policies, some of which require a high degree of judgment or complex estimation processes, such as estimates of reserves, IBNR claims, valuation and accounting for goodwill and intangible assets, stock-based compensation and income tax matters.

        For all of the above reasons, we may not be able to implement our acquisition strategy successfully, which could materially adversely affect our growth plans and our business, financial condition and results of operations.

        Furthermore, in the event of an acquisition or investment, you should be aware that we may issue stock that would dilute stock ownership, incur debt that would restrict our cash flow, assume liabilities, incur large and immediate write-offs, incur unanticipated costs, divert management's attention from our existing business, experience risks associated with entering markets in which we have no or limited prior experience, or lose key employees from the acquired entities or our historical business.

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Our reliance upon third party administrators and other outsourcing arrangements may disrupt or adversely affect our operations.

        We depend, and may in the future increase our dependence, on independent third parties for significant portions of our operations, including pharmacy benefit administration, data center operations, data network, claims processing, enrollment, premium billing, call centers, voice communication services, data processing and payment and other systems-related support, among others. This dependence makes our operations vulnerable to the third parties' failure to perform adequately under the contract, due to internal or external factors. In the future, this dependence may increase as we may outsource additional areas of our business operations to additional vendors. There can be no assurance that any conversion or transition of business process functions from the Company to a vendor or between vendors will be seamless and, oftentimes, these projects result in significant operational challenges that cause financial difficulties. In addition, if our relationships with our outsourcing partners are significantly disrupted or terminated for any reason or if the financial terms of such outsourcing partners changes materially, we may not be able to find an alternative partner in a timely manner or on acceptable financial terms. As a result, we may not be able to meet the demands of our customers and, in turn, our business, cash flows, financial condition and results of operations may be harmed.

        We have outsourced portions of our administrative functions, including, without limitation, the operation of several of our data centers, call centers and claims processing to independent third parties and may from time to time obtain additional services or facilities from other independent third parties. Dependence on third parties for these services and facilities may make our operations vulnerable to their failure to perform as agreed. Incorrect information from these entities could generate inaccurate or incomplete membership and payment reports concerning our Medicare eligibility and enrollment, and claims information used by CMS to determine plan benefit subsidies and risk corridor payments. This could cause us to incur additional expense to utilize additional resources to validate, reconcile and correct the information. We have not been able to independently test and verify some of these third party systems and data. There can be no assurance that future third party data will not disrupt or adversely affect our plans' relationships with our members or our results of operations. A change in service providers, or a move of services from internal operations to a third party, or a move of services from a third party to internal operations, could result in significant operational challenges, a decline in service quality and effectiveness, increased cost or less favorable contract terms, which could adversely affect our operating results. Some of our outsourced services are being performed offshore. CMS requires attestations from plans that utilize the services of offshore vendors as to the vendors' ability to perform delegated functions. Prevailing economic conditions and other circumstances could prevent our offshore vendors' ability to adequately perform as agreed, which would impair our ability to provide the requisite attestations to CMS and could have a material adverse effect on our results of operations and financial condition.

Our business may suffer if we are not able to hire and retain sufficient qualified personnel or if we lose our key personnel.

        Our future success depends partly on the continued contribution of our senior management and other key employees. While we currently have employment agreements with certain key executives, these do not guarantee that the services of these executives will continue to be available to us. The loss of the services of any of our senior management, or other key employees could harm our business. In addition, recruiting and retaining the personnel we require to effectively compete in our markets may be difficult. If we fail to hire and retain qualified employees, we may not be able to maintain and expand our business.

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We may be responsible for the actions of our third party agents, and restrictions on our ability to market would adversely affect our revenue.

        In regulatory proceedings and reviews and other litigation, regulators and our members sometimes claim that agents failed to comply with applicable laws, regulations and rules, or acted improperly in other ways, and that we are responsible for the alleged failure. We could be liable for contractual and extra-contractual damages on these claims and other penalties, such as a suspension from marketing and enrolling new members. We cannot assure you that any future claim will not result in material liability in the future. Federal and state regulators increasingly scrutinize the marketing practices of insurers, such as Medicare Advantage plans and their marketing agents, and there is no guarantee that regulators will not continue to scrutinize the practices of our Medicare Advantage plans and our marketing agents, and that such practices will not expose us to liability.

        We rely on our marketing and sales efforts for a significant portion of our premium revenue. The federal government and state governments in the states in which we currently operate permit marketing but impose strict requirements and limitations as to the types of marketing activities that we may conduct. If our marketing efforts were to be prohibited or curtailed, our ability to increase or sustain membership would be significantly harmed, which would adversely affect our revenue and results of operations.

We may not be able to compete successfully in our Medicare Advantage business if we cannot recruit and retain insurance agents, which could materially adversely affect our business and ability to compete.

        We distribute our Medicare Advantage products principally through career agents and independent agents who we recruit and train to market and sell our products. We also engage managing general agents from time to time to recruit agents and develop networks of agents in various states. Strong competition exists for sales agents. We compete with other insurance companies for productive agents, primarily on the basis of our financial position, support services, compensation and product features. It can be difficult to successfully compete for productive agents with larger insurance companies that have higher financial strength ratings than we do. Our business and ability to compete will suffer if we are unable to recruit and retain insurance agents or if we lose the services provided by our managing general agents.

A significant portion of our assets are invested in fixed income securities and other securities that are subject to market fluctuations, which have recently been intensified by general economic conditions.

        A significant portion of our investment portfolio consists of fixed income securities and other investment securities. Our portfolio can be viewed on our web site, www.universalamerican.com, in the "Investors" section. Our reference to the web site in this report is not intended to, and does not, incorporate the information contained in the web site into this report.

        The fair value of these assets and the investment income from these assets generally fluctuate depending on general economic and market conditions and these variations have been exacerbated recently. The fair value of our investments in fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease in a direct relationship with fluctuations in interest rates; in addition, these values and prospective income have been adversely affected by general economic conditions. Moreover, actual net investment income or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment or at various financial statement dates as a result of interest rate fluctuations, general economic conditions and other factors.

        Because our investment securities are classified as available for sale, we reflect changes in the fair value of these securities in our consolidated balance sheets. Therefore, interest rate fluctuations and

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changes in the values of securities we hold could adversely affect our results of operations and financial condition.

We may not have adequate intellectual property rights in our brand names for our health plans, and we may be unable to adequately enforce these rights.

        Our success depends, in part, upon our ability to market our health plans under the brand names that we own or license. We may not have taken enforcement action to prevent infringement of our marks and may not have secured registrations of the other brand names that we use in our business. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property rights. Other businesses may have prior rights in our brand names or in similar names, which could cause market confusion or limit or prevent our ability to use these marks or prevent others from using similar marks. If we are unable to prevent others from using our brand names, or if others prohibit us from using them, our revenues could be adversely affected. Even if we are able to protect our intellectual property rights in our brands, we could incur significant costs in doing so.

Our results of operations and stockholders' equity could be materially adversely affected if we have an impairment of our intangible assets.

        Due to our past acquisitions, goodwill and other intangible assets represent a significant portion of our total assets. As of December 31, 2015, we had goodwill and other intangible assets of approximately $68 million, or approximately 4% of our total assets as of such date. During 2013, certain events occurred and circumstances changed ultimately resulting in a $189 million impairment of goodwill and other assets relating to APS Healthcare.

        In accordance with applicable accounting standards, we perform periodic assessments of our goodwill and other intangible assets to determine whether all or a portion of their carrying values may no longer be recoverable, in which case a charge to earnings may be necessary. This impairment testing requires us to make assumptions and judgments regarding the estimated fair value of our reporting units.

        We test goodwill for impairment annually, as of October 1 of the current year, or more frequently if circumstances suggest that impairment may exist. During each quarter, we perform a review of certain key components of our valuation of our reporting units, including the operating performance of the reporting units compared to plan (which is the primary basis for the prospective financial information included in our annual goodwill impairment test), our weighted average cost of capital and our stock price and market capitalization.

        We estimate the fair values of our reporting units using discounted cash flows, or other indicators of fair value, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of cash flow (including significant assumptions about operations and target capital requirements), long term growth rates for determining terminal value, and discount rates. Forecasts and long term growth rates used for our reporting units are consistent with, and use inputs from, our internal long term business plan and strategy. During our forecasting process, we assess revenue trends, medical cost trends, operating cost levels and target capital levels. Significant factors affecting these trends include changes in membership, premium yield, medical cost trends, contract renewal expectations and the impact and expectations of regulatory environments.

        Although we believe that the financial projections used are reasonable and appropriate at the time made, the use of different assumptions and estimates could materially impact the analysis and resulting conclusions. In addition, due to the long term nature of the forecasts there is significant uncertainty

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inherent in those projections. That uncertainty is increased by the impact of healthcare reforms as discussed in Item 1, "Business—Regulation."

        We use a range of discount rates that correspond to a market based weighted average cost of capital. Discount rates are determined for each reporting unit based on the implied risk inherent in their forecasts. This risk is evaluated using comparisons to market information such as peer company weighted average costs of capital and peer company stock prices in the form of revenue and earnings multiples. The most significant estimates in the discount rate determinations include the risk free rates and equity risk premium. Company specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.

        The passage of time and the availability of additional information regarding areas of uncertainty in regards to the reporting units' operations could cause these assumptions used in our analysis to change materially in the future. If our assumptions differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected.

        Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units include, but are not limited to:

    decreases in business growth;

    decreases in forecasted margins;

    the loss of significant contracts;

    decreases in earnings projections;

    increases in the weighted average cost of capital; and

    increases in the amount of required capital for a reporting unit.

Negative changes in one or more of these factors, among others, could result in additional impairment charges.

Our ability to obtain funds from our regulated subsidiaries is restricted and our cash flows and liquidity may be adversely affected which could restrict our ability to pursue new opportunities.

        Because we operate as a holding company, we are dependent upon dividends and administrative expense reimbursements from our subsidiaries to fund our obligations, such as payment of principal and interest on our debt obligations. These subsidiaries generally are regulated by state departments of insurance. Our health plan and insurance company subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions they can pay us. These laws and regulations also limit the amount of management fees our subsidiaries may pay to our management subsidiaries and their other affiliates without prior notification to, or in some cases approval of, state regulators. If these regulators were to deny our subsidiaries' request to pay dividends to us, the funds available to us would be limited, which could harm our ability to implement our business strategy.

        We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries. The levels of capitalization required depend primarily upon the volume of premium generated. A significant increase in premium volume will require additional capitalization from our parent company. In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends that exceed specified amounts from these subsidiaries, or, in some states, any amount. The pre-approval and notice requirements vary from state to state, and the discretion of the state regulators, if any, in approving or disapproving a dividend is not always clearly defined. Subsidiaries that declare non-extraordinary dividends must usually provide notice to the regulators in advance of the intended distribution date. If the regulators were to deny or significantly restrict our subsidiaries' requests to pay dividends to us or to pay management and other

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fees to affiliates, the funds available to us would be limited, which could impair our ability to implement our business and growth strategy and satisfy our debt obligations, or we could be required to incur additional indebtedness to fund these strategies.

        In addition, one or more of these states could increase the minimum statutory capital level from time to time. States have also adopted risk-based capital requirements based on guidelines adopted by the National Association of Insurance Commissioners, which tend to be, although are not necessarily, higher than existing statutory capital requirements. Regardless of whether the states in which we operate maintain or adopt risk-based capital requirements, the state departments of insurance can require our subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state laws if they determine that maintaining additional statutory capital is in the best interests of our insureds. Any increases in these requirements could materially increase our reserve requirements. In addition, as we continue to expand our plan offerings in new states or pursue new business opportunities, such as our expansion of Medicare Advantage products and health plans in new markets, we may be required to maintain additional statutory capital reserves. In either case, our available funds could be materially reduced, which could harm our ability to implement our business strategy.

        In the event that we are unable to provide sufficient capital to fund our debt obligations, our operations or financial position may be adversely affected.

Our stock price may be volatile and could drop precipitously and unexpectedly.

        Our common stock is traded on the NYSE. The prices of publicly traded stocks often fluctuate. The price of our common stock may rise or fall dramatically without any change in our business performance. Specific issues and developments related to our company or those generally in the health care and insurance industries, the regulatory environment, the capital markets and the general economy may cause this volatility. The average trading volume of our common stock is approximately 207,000 shares and, given the price of our stock, it trades less than $2 million of value per day. As a result our common stock is thinly traded which exposes our stock price to potentially larger fluctuations than other companies and may make it more difficult to buy or sell our stock. The principal events and factors that may cause our stock price and trading volume to fluctuate include:

    changes in the laws and regulations affecting our business;

    the relatively small size of the public float of our common stock and the small volume of trading and the general liquidity in the market for our common stock;

    variations in our operating results;

    changes in the market's expectations about our future operating results;

    changes in financial estimates and recommendations by securities analysts concerning our company or the health care or insurance industries generally;

    operating and stock price performance of other companies that investors may deem comparable;

    news reports relating to trends in our markets;

    acquisitions and financings by us or others in our industry, including news reports or perceptions regarding mergers and acquisitions activity; and

    sales of our common stock by our directors and executive officers or principal shareholders, or the perception that these sales could occur.

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Future sales of our common stock may depress the market price of our common stock.

        Certain significant shareholders collectively own approximately 35% of our outstanding common stock, which are not subject to lock-ups. In addition, certain of these shareholders have held their shares for many years and may be required to sell or distribute their shares pursuant to their fund documents or may desire to sell or distribute their shares and realize a profit on their investment. We have filed a shelf registration statement on behalf of such significant shareholders and they may sell some or all of their shares in the near future. If any of these significant shareholders sells or distributes substantial amounts of our common stock, or if it is perceived that such sales or distributions could occur, the market price of our common stock could decline.

Your percentage ownership in our company may be diluted in the future.

        As with any publicly traded company, your percentage ownership in our company may be diluted in the future because of equity awards that we have granted and expect to grant to our directors, officers, employees and others. In addition, we may from time to time issue additional equity, including in connection with merger and acquisition transactions.

Downgrades in our insurance company financial strength ratings, should they occur, may adversely affect our business, financial condition and results of operations.

        Increased public and regulatory concerns regarding the financial stability of insurance companies and health plans have resulted in consumers placing greater emphasis upon financial strength ratings. Claims paying ability, financial strength, and debt ratings by recognized rating organizations are increasingly important factors in establishing the competitive position of insurance companies and health plans. Ratings information is broadly disseminated and generally used throughout the industry. Our ability to expand and to attract new business is affected by the financial strength ratings assigned to our subsidiaries by independent industry rating agencies, such as A.M. Best Company, Inc. Some distributors such as financial institutions, unions, associations and affinity groups may not sell our products to these groups unless the rating of our subsidiary writing the business improves to at least an "A–." The lack of higher A.M. Best ratings for our subsidiaries could adversely affect sales of our products.

        Our ratings affect both the cost and availability of future borrowings. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency's opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to policyholders and members, but are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such. There is no assurance that the rating agencies will maintain our current ratings in the future. Any future downgrade in our ratings may cause our policyholders and members to lapse, and may cause some of our agents to sell less of our products or to cease selling our products altogether. A downgrade in our ratings may also limit our access to capital markets, increase the cost of debt, impair our ability to refinance debt and limit our capacity to support growth at our insurance subsidiaries. Increased lapse rates would reduce our premium revenue and net income. Thus, downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations.

Some of our shareholders, directors and executive officers may have interests that conflict with, are different from, or in addition to, the interests of our shareholders generally.

        Some of our directors and executive officers have and may continue to have significant equity ownership in our company, employment, indemnification and severance benefit arrangements, potential rights to other benefits on a change in control and rights to ongoing indemnification and insurance that

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result in their having interests that may differ from the interests of our shareholders generally. The receipt of compensation or other benefits by our directors or executive officers in connection with any acquisition or disposition may make it more difficult to retain their services after the acquisition or disposition, or require the combined company to expend additional sums to continue to retain their services. In addition, we may enter into transactions, including the sale of stock or assets or similar transactions, with our shareholders, directors or executive officers that may raise a conflict of interest. Further, the current concentration of equity ownership may discourage acquisition transactions. In addition, some of our directors are affiliated with entities that own significant portions of our common stock. Such shareholders may have different investment time horizons than other shareholders and may otherwise have interests that are different than other shareholders.

If we are unable to maintain effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the price of our common stock.

        Because of our status as a public company, we are required to test our financial, internal, and management control systems to meet obligations imposed by the Sarbanes-Oxley Act of 2002. These control systems relate to our corporate governance, corporate control, internal audit, disclosure controls and procedures, and financial reporting and accounting systems. Our disclosure controls and procedures and our internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected. Among these inherent limitations are the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The individual acts of some persons or the collusion of two or more people can circumvent controls. The design of any system of controls is based in part on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

        If we conclude that we do not have effective internal controls over financial reporting or if our independent auditors are unable to conclude that our internal controls over financial reporting are effective, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our internal controls over financial reporting may also uncover material weaknesses, significant deficiencies or other issues with these controls that could also result in adverse investor reaction. These results may also subject us to adverse regulatory consequences.

Risk Factors relating to our Traditional Insurance Business:

The sale of our Traditional Insurance is subject to many conditions, including regulatory approvals, and if these conditions are not satisfied or waived, the transaction will not be completed.

        On October 8 2015, we entered into a definitive agreement to sell our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. The purchase price is approximately $43 million, subject to adjustments based on actual capital and surplus of Constitution Life Insurance Company and The Pyramid Life Insurance Company at closing, compared to the target statutory capital and surplus

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of $68.5 million. We will also be entitled to receive potential earn-out payments through June 30, 2018 that may result in additional payments of between $13 million and $24 million.

        Excluding the impact of the earn out, based on projected capital and surplus, we currently expect to receive approximately $15 million to $20 million of net cash proceeds at closing, which could change based on actual capital and surplus at closing. At December 31, 2015, we have recorded a $133.8 million adjustment, after tax, to write down the carrying value of this business to estimated fair value. See Note 21—Discontinued Operations in the notes to consolidated financial statements for additional information.

        The closing of the transaction is expected in the first half of 2016, subject to customary closing conditions, including regulatory approval from the Texas, Kansas and New York insurance departments and other third party reinsurer consents. If the sale of our Traditional Insurance business is not consummated, the price of our Common Stock may decline to the extent that the market price of our Common Stock reflects positive market assumptions that the transaction will be completed.

Our Traditional Insurance business is a closed block and the level of policy reserves, together with future premiums, may not be adequate to provide for future expected policy benefits and maintenance costs.

        Our Traditional Insurance segment reflects our closed block of insurance which includes Medicare supplement, other senior health insurance, specialty health insurance and life insurance, including a non-strategic closed block of approximately 11,500 long-term care insurance policies. Long-term care insurance policies are intended to protect the insured from the cost of long-term care services including those provided by nursing homes, assisted living facilities, and adult day care as well as home health care services. Our Traditional business is currently in run-off as we discontinued marketing and selling Traditional insurance products after June 1, 2012.

        Our block of long-term care business continues to generate losses. We stopped selling new long-term care business at the end of 2004. Claims under long-term care products tend to be higher in dollar amount, longer in duration and incurred later in the life of the policy than other Traditional products, making the product difficult to price appropriately. We estimate costs associated with long-duration insurance policies, such as long-term care policies sold to individuals, for which some of the premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These future policy benefit reserves are recognized on a net level premium method based on interest rates, mortality, morbidity, withdrawal and maintenance expense assumptions from published actuarial tables, as modified based upon actual experience. The assumptions used to determine the liability for future policy benefits are established and locked in at the time each contract is acquired and would only change if our expected future experience deteriorated to the point that the level of the liability, together with the present value of future gross premiums, are not adequate to provide for future expected policy benefits. Long-term care policies provide for long- duration coverage and, therefore, our actual claims experience will emerge many years after assumptions have been established. The risk of a deviation of the actual morbidity and mortality rates from those assumed in our reserves are particularly significant to our closed block of long-term care policies.

        We monitor the loss experience of these long-term care policies, and, when necessary, apply for premium rate increases through a regulatory filing and approval process in the jurisdictions in which such products were sold. However, it is possible that we will not be able to obtain approval for premium rate increases from currently pending requests or from future requests. A significant amount of our in-force long-term care premium is in two states, New York and Florida. Historically, Florida has not approved our requests for rate increases for our long-term care business that we believe are warranted based on the underlying experience of that business. Additionally, many states are now requiring us to offer policyholders alternatives in lieu of rate increases, including reduced coverage or fully paid up policies. If we are unable to raise our premium rates because we fail to obtain approval in

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one or more jurisdictions, our financial results will be adversely affected. These policies contain guaranteed renewal features that make exiting unprofitable blocks of business difficult. Due to this feature, we cannot exit such business without regulatory approval, and accordingly, we may be required to continue to service those policies at a loss for an extended period of time. To the extent actual premium rate increases or loss experience vary from our acquisition date assumptions, adjustments to increase reserves could be required. There can be no assurance that rate increases we may seek will be approved by the applicable state regulators or, if approved, will be adequate to fully mitigate adverse loss experience. As a result of the inadequacy of the rates approved by Florida, among others, in 2015 we were required to make a $15.5 million capital contribution to fund the statutory loss experience in our American Pioneer subsidiary, which was subsequently merged into our Constitution Life subsidiary.

        The actuarial assumptions used to estimate reserves for long-term care policies are inherently uncertain due to the potential changes in trends in mortality, morbidity, persistency (the percentage of policies remaining in-force) and interest rates. As a result, our long-term care reserves may be subject to material increases if these trends develop adversely to our expectations. We are evaluating strategic alternatives related to our Traditional insurance business, which includes our closed block of long-term care policies. Our long-term care business has and is expected to continue to generate losses, which has made disposing of this business challenging. While no decision has been made with respect to any course of action, if we were to divest this business, including a sale to an affiliate, it is likely that we would have to recognize a material loss on both a statutory and GAAP basis.

        We perform loss recognition tests for our Traditional business at least annually in the fourth quarter, and more frequently if adverse events or changes in circumstances indicate that the level of the liability, together with the present value of future gross premiums, may not be adequate to provide for future expected policy benefits and maintenance costs. Based on the results of our loss recognition test in 2015, we determined the GAAP benefit reserves, net of the DAC asset, along with the present value of future revenue, were not sufficient to provide for all future benefits and expenses. As a result, we wrote off $12.2 million of DAC. Further, in connection with the planned sale of the Traditional Insurance business to Nassau, we recorded a $133.8 million adjustment, after tax, to write down the carrying value of this business to estimated fair value in our consolidated GAAP financial statements. See Note 21—Discontinued Operations in the notes to consolidated financial statements for additional information. This adjustment included the write off of all remaining DAC and an increase in reserves. However, there can be no assurance they will continue to be sufficient in the future.

Our reserves for future insurance policy benefits and claims on our Traditional business may prove to be inadequate, requiring us to increase liabilities and resulting in reduced net income and stockholders' equity.

        We calculate and maintain reserves for the estimated future payment of claims to our insurance policyholders using the same actuarial assumptions that we use to set our premiums. For our traditional accident and health insurance business, we establish active life reserves for expected future policy benefits, plus a liability for due and unpaid claims, claims in the course of settlement, and incurred but not reported claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and medical costs, changes in mortality, changes in persistency, changes in utilization, changes in state regulations, our ability to obtain rate increases, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, we necessarily base our reserves and liabilities on extensive estimates, assumptions and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our net income depends significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in setting our reserves and pricing our policies. If our assumptions with respect to future

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claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities resulting in reduced net income, statutory surplus and stockholders' equity.

We may experience higher than expected lapsation in our Medicare supplement business, reducing the revenues and profits for this business faster than anticipated.

        We have in the past experienced higher than expected lapsation in our Medicare supplement business. We believe competitive pressure from other Medicare supplement companies and Medicare Advantage products, as well as the departure of some of our sales managers, and other factors, contributed to the level of lapsation. In addition, during 2012, we discontinued selling new Medicare supplement products. This excess lapsation results in a faster than anticipated decline in this block of business and required us to accelerate the amortization of the deferred acquisition cost and present value of future profits assets associated with the business that lapsed. Continued higher than expected lapsation of our Medicare supplement business would reduce the revenues and profits for this business faster than anticipated.

If our reinsurers fail to meet their financial obligations, it could require us to fund significant liabilities.

        Like many insurance companies, we transfer exposure to certain risks to others through reinsurance arrangements. Under these arrangements, the reinsurers assume a portion of the premium on the reinsured business and are responsible for a portion of the losses and expenses on that business. At December 31, 2015, we had $608 million recoverable from reinsurers, including $605 million related to our Traditional Insurance business. When we obtain reinsurance, we are still liable for those transferred risks if the reinsurer cannot meet its obligations. From time to time, we have disputes with our reinsurers concerning, among other things, our compliance with the relevant reinsurance treaty or our administration of the underlying block of business. If these disputes are resolved unfavorably to us, it could result in substantial damages against us or, in some instances, termination of the underlying reinsurance treaty, which could have a material adverse effect on our Traditional business and our consolidated results of operations. In addition, the inability or failure of our reinsurers to meet their financial obligations may require us to increase liabilities, thereby reducing our net income and overall profitability.

ITEM 1B—UNRESOLVED STAFF COMMENTS

        There are no unresolved comments from the Staff of the Securities and Exchange Commission regarding the registrant's periodic or current reports under the Act.

ITEM 2—PROPERTIES

        Our corporate headquarters are located in White Plains, New York. We also have offices in Lake Mary, Florida; Houston, Texas; and Syracuse, New York. In addition, we maintain other smaller offices to support our businesses. Management considers its office facilities suitable and adequate for the current level of operations. Additional information regarding our lease obligations is included in Note 22—Commitments and Contingencies in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

ITEM 3—LEGAL PROCEEDINGS

        In addition to the matters discussed below, we are also subject to a variety of legal proceedings, arbitrations, governmental investigations, including SEC investigations, audits, claims and litigation, including claims under the False Claims Act and claims for benefits under insurance policies and claims by members, providers, customers, employees, regulators and other third parties. In some cases,

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plaintiffs seek punitive damages. It is not possible to accurately predict the outcome or estimate the resulting penalty, fine or other remedy that may result from any current or future legal proceeding, investigation, audit, claim or litigation. Nevertheless, the range of outcomes and losses could be significant and could have a material adverse effect on our consolidated financial statements.

        On October 22, 2013, we filed a lawsuit in the United States District Court for the District of Delaware against funds affiliated with the private equity firm GTCR, known as GTCR, David Katz, a former managing director of GTCR, and former senior management of APS Healthcare (Gregory Scott, Jerome Vaccaro and John McDonough, all such defendants, collectively, the "Defendants"). The lawsuit, which alleges securities fraud, multiple material breaches of contract and common law fraud, seeks substantial damages, including punitive damages. The lawsuit arises out of our acquisition of APS Healthcare from GTCR in March 2012. The Defendants filed a motion to dismiss the complaint. In a decision issued on July 24, 2014, the court denied the motion with respect to the breach of contract claim. The court granted the motion with respect to the securities fraud claims and portions of the common law fraud claims on the ground that they did not provide enough detail about each Defendant's specific role in the alleged fraud. On September 22, 2014, the Company filed an Amended Complaint to provide additional details regarding each Defendant's role in the alleged fraud. We are awaiting a decision from the court on the Defendant's motion to dismiss.

    Governmental Regulation

        Laws and regulations governing Medicare, Medicaid and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the Affordable Care Act, known as ACA, CMS, State regulatory agencies and other regulatory agencies have been exercising increased oversight and regulatory authority over our Medicare and other businesses. Compliance with such laws and regulations is subject to CMS audit, other governmental review and investigation, including SEC investigations and significant and complex interpretation. CMS audits our Medicare Advantage plans with regularity to ensure we are in compliance with applicable laws, rules, regulations and CMS instructions. Our Medicare Advantage plans will likely be subject to an audit in 2016 and our Total Care Medicaid plan will be subject to audit in 2016. There can be no assurance that we will be found to be in compliance with all such laws, rules and regulations in connection with these audits, reviews and investigations, and at times we have been found to be out of compliance. Failure to be in compliance can subject us to significant regulatory action including significant fines, penalties, cancellation of contracts with governmental agencies or operating restrictions on our business, including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans, termination of our contracts with CMS, exclusion from Medicare and other state and federal healthcare programs and inability to expand into new markets or add new products within existing markets.

        Certain of our subsidiaries provide products and services to various government agencies. As a government contractor, we are subject to the terms of the contracts we have with those agencies and applicable laws governing government contracts. As such, we may be subject to False Claim Act litigation (also known as qui tam litigation) brought by individuals who seek to sue on behalf of the government, alleging that the government contractor submitted false claims to the government. In 2014 and 2015, Innovative Resources Group, LLC ("IRG"), a subsidiary of APS Healthcare, resolved three False Claims Act matters relating to IRG's historical contracts in Missouri, Tennessee and Nevada. During 2015, we sold our APS Healthcare business. However, it is possible that we could be the subject of additional False Claims Act investigations and litigation in the future that could have a material adverse effect on our business and results of operations.

        Over the period from around 2012 to March 2015, the Company's then Chief Financial Officer and the Ernst & Young ("EY") coordinating audit partner developed a close friendship that extended to various members of their families that went well beyond what could be considered customary as

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between auditor and client, and raised questions as to the appearance of independence of EY and the EY coordinating audit partner. Upon learning of the extent of this friendship, EY informed the Company and the Company's Audit Committee of its concern and replaced the EY coordinating audit partner. Under the supervision of a new EY coordinating audit partner, EY reviewed, reassessed and, where appropriate, re-performed its independence and audit procedures. After assessing all the relevant facts, EY, the Company, and the Company's Audit Committee concluded and continue to believe that these matters did not affect EY's objectivity, skepticism or impartiality as the Company's auditors. As a result, EY issued its 2014 audit report on March 30, 2015.

        For additional information relating to litigation affecting us, please see Note 22—Commitments and Contingencies in the Notes to Consolidated Financial Statements of this Annual Report, which is incorporated into this Part I—Item 3—Legal Proceedings by reference.

ITEM 4—MINE SAFETY DISCLOSURES

        N/A

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PART II

ITEM 5—MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        The following table sets forth the high and low closing sales prices for Universal American common stock on the NYSE National Market, as reported by the NYSE for the periods indicated. Prices have been adjusted to reflect the $0.75 dividend paid in October 2015.

 
  Common Stock    
 
 
  Cash
Dividends
Declared
 
 
  High   Low  

2015

                   

Fourth Quarter

  $ 7.65   $ 5.93   $ 0.75  

Third Quarter

  $ 9.38   $ 6.00   $  

Second Quarter

  $ 10.22   $ 8.42   $  

First Quarter

  $ 9.93   $ 8.03   $  

2014

                   

Fourth Quarter

  $ 8.63   $ 7.05   $  

Third Quarter

  $ 7.90   $ 7.17   $  

Second Quarter

  $ 7.63   $ 6.29   $  

First Quarter

  $ 6.78   $ 5.90   $  

        The closing sale price of our common stock on March 8, 2016, as reported by the NYSE, was $6.85 per share.

Shareholders

        As of the close of business on March 8, 2016, there were approximately 800 registered holders of record of our voting common stock and one holder of record for our nonvoting common stock.

Dividends

        On October 26, 2015, we paid a special cash dividend of $0.75 per share, to shareholders of record on October 19, 2015.

Issuer Purchases of Equity Securities

        None.

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Stock Performance Graph

        The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return of the NYSE Composite Index, and the Dow Jones US Select Health Care Providers Index, to represent our peer group. The graph assumes an investment of $100 in each of our common stock, the NYSE Composite group, and the peer group on May 2, 2011, the first day of trading for Universal American after the sale of our Medicare Part D business. The graph assumes that the value of the investment in our common stock and in the above referenced indices was $100 at May 2, 2011 and that all dividends were reinvested. The price of our common stock on May 2, 2011, on which the graph is based, was $9.33. The shareholder return shown on the following graph is not necessarily indicative of future performance.


Comparison of Cumulative Total Return Among
Universal American Corp. Common Stock,
New York Stock Exchange Composite Index, S&P 500 Index and
Peer Group
May 2, 2011 through December 31, 2015

GRAPHIC


Note: The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Recent Sales of Unregistered Securities

        None.

Securities Authorized for Issuance under Equity Compensation Plans

        The information regarding securities authorized for issuance under our equity compensation plans is disclosed in Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

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ITEM 6—SELECTED FINANCIAL DATA

        The table below provides selected financial data and other operating information as of and for the five years ended December 31, 2015. We derived the selected financial data presented below from our audited financial statements. Note that our Traditional Insurance business is currently held for sale and as of December 31, 2015 is being reported as discontinued operations. In addition, our APS Healthcare businesses were sold in 2015 and our Medicare Part D business was sold in 2011 and both are reported as discontinued operations. Our Consolidated Financial Statements and the selected financial data presented below have been restated for all periods to reflect these businesses as discontinued operations. See Note 21—Discontinued Operations for additional information on the 2015 transactions. We have prepared the following data, other than statutory data, in conformity with U.S. generally accepted accounting principles, known as GAAP. You should read this selected financial data together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements as well as the discussion under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  For the Year Ended December 31,  
 
  2015   2014   2013   2012   2011  
 
  (in thousands, except per share data)
 

Income Statement Data:

                               

Net premiums

  $ 1,436,165   $ 1,573,024   $ 1,629,947   $ 1,619,336   $ 1,960,494  

Net investment income

    12,098     19,761     18,997     23,453     26,395  

Fee and other income

    4,524     3,434     512     3,948     13,902  

Net realized gains (losses)

    38,954     (649 )   13,806     14,315     880  

Total revenues

    1,491,741     1,595,570     1,663,262     1,661,052     2,001,671  

Total benefits, claims and expenses

    1,481,921     1,607,857     1,646,335     1,594,261     2,007,452  

Income (loss) from continuing operations before equity in losses of unconsolidated subsidiaries

    9,820     (12,287 )   16,927     66,791     (5,781 )

Equity in losses of unconsolidated subsidiaries

    (9,626 )   (17,793 )   (33,602 )   (10,222 )    

Income (loss) from continuing operations before taxes

    194     (30,080 )   (16,675 )   56,569     (5,781 )

Provision for (benefit from) income taxes

    4,995     (5,116 )   (4,781 )   17,214     1,689  

(Loss) income from continuing operations

    (4,801 )   (24,964 )   (11,894 )   39,355     (7,470 )

Discontinued operations:

                               

(Loss) income from discontinued operations before income taxes

    (188,476 )   (3,845 )   (186,561 )   21,065     (63,589 )

(Benefit from) provision for income taxes

    (29,308 )   658     (6,129 )   7,387     (22,858 )

(Loss) income from discontinued operations

    (159,168 )   (4,503 )   (180,432 )   13,678     (40,731 )

Net (loss) income

  $ (163,969 ) $ (29,467 ) $ (192,326 ) $ 53,033   $ (48,201 )

(Loss) income per common share:

                               

Basic:

                               

Continuing operations

  $ (0.06 ) $ (0.30 ) $ (0.14 ) $ 0.46   $ (0.09 )

Discontinued operations

    (1.93 )   (0.05 )   (2.06 )   0.15     (0.52 )

Net (loss) income

  $ (1.99 ) $ (0.35 ) $ (2.20 ) $ 0.61   $ (0.61 )

Diluted:

                               

Continuing operations

  $ (0.06 ) $ (0.30 ) $ (0.14 ) $ 0.45   $ (0.09 )

Discontinued operations

    (1.93 )   (0.05 )   (2.06 )   0.16     (0.52 )

Net (loss) income

  $ (1.99 ) $ (0.35 ) $ (2.20 ) $ 0.61   $ (0.61 )

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  As of December 31,  
 
  2015   2014   2013   2012   2011  
 
  (in thousands, except per share data)
 

Balance Sheet Data:

                               

Total cash and investments

  $ 373,599   $ 447,823   $ 477,133   $ 564,076   $ 526,998  

Total assets

    1,737,059     2,100,954     2,155,858     2,565,369     2,357,816  

Policyholder related liabilities

    101,971     108,419     129,819     115,611     142,305  

Stockholders' equity

    382,395     614,465     664,899     1,012,497     940,363  

Book value per share:

                               

Basic

  $ 4.52   $ 7.34   $ 7.49   $ 11.47   $ 11.54  

Dividends per share

  $ 0.75   $   $ 1.60   $ 1.00   $  

Data Reported to Regulators(1):

                               

Statutory capital and surplus

  $ 282,469   $ 345,422   $ 369,850   $ 564,380   $ 607,972  

Asset valuation reserve

    3,597     4,510     3,911     2,967     1,384  

Adjusted capital and surplus

  $ 286,066   $ 349,932   $ 373,761   $ 567,347   $ 609,356  

(1)
2015 and prior periods include capital and surplus for Constitution Life Insurance Company (Constitution) and The Pyramid Life Insurance Company (Pyramid) which will be transferred to Nassau Reinsurance Group Holdings, L.P. ("Nassau") in connection with the Traditional Insurance sale. 2014 and prior also include capital and surplus of Marquette National Life Insurance Company (Marquette) and American Pioneer Life Insurance Company (Pioneer) which were merged into Constitution during 2015. 2012 and prior also include capital and surplus of Union Bankers Insurance Company, or Union Bankers, which was merged into Constitution during 2013. At December 31, 2015, Constitution and Pyramid had combined capital and surplus of $82.7 million and combined asset valuation reserve of $1.9 million.

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ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

        The following discussion and analysis presents a review of our financial condition as of December 31, 2015 and our results of operations for the years ended December 31, 2015, 2014 and 2013. As used in this report, except as otherwise indicated, references to the "Company," "Universal American," "we," "our," and "us" are to Universal American Corp., a Delaware corporation and its subsidiaries.

        You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the consolidated financial statements and related consolidated footnotes included in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under Part I, Item 1A—Risk Factors.

Overview

        Universal American, through our family of healthcare companies, provides health benefits to people covered by Medicare and Medicaid. Our core strength is our ability to partner with primary care physicians to improve health outcomes while reducing cost in the Medicare population. We currently are focused on three main businesses:

    Medicare Advantage:  We currently serve the growing Medicare population by providing Medicare Advantage products to approximately 114,000 members. Approximately 32% of the Medicare population in the United States is currently enrolled in Medicare Advantage plans; a type of Medicare health plan offered by private companies that contract with the federal government to provide enrollees with health insurance. Our current focus is to grow our Medicare Advantage business in Texas (especially Houston/Beaumont), upstate New York (especially the Syracuse area) and Maine, regions in which we have meaningful market positions.

    Medicare Accountable Care Organizations:  We believe there is a significant opportunity to address the high cost and lack of coordination of health care for the majority of the Medicare fee-for-service population and have joined with provider groups to operate Accountable Care Organizations, or ACOs, that participate in the Medicare Shared Saving Program, known as the MSSP. We currently operate twenty-one MSSP ACOs and one Next Generation ACO, including approximately 3,200 participating providers with approximately 236,000 assigned Medicare fee-for-service beneficiaries. In 2015, our Houston-based ACO was selected by CMS to participate in the Next Generation ACO model effective January 1, 2016.

    Medicaid:  We also own and operate the Total Care Medicaid health plan, currently serving approximately 39,000 members in upstate New York.

Healthy Collaboration® Strategy

        We have developed a successful primary care physician alignment strategy that we have branded as The Healthy Collaboration®. We work in collaboration with healthcare providers, especially primary care physicians, to help them assume and manage risk, in order to achieve measurably better quality and lower cost. Primary care is among the least expensive part of the overall care continuum. We

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believe that if given the right tools and incentives, primary care physicians can have significant leverage in improving the cost and quality of health care. Below are the key elements of the strategy:

    We align incentives through gain sharing arrangements so that providers are incented to assist members to achieve healthy outcomes;

    We provide actionable data and analytics to providers and employ enabling technology to ensure that the right care is delivered at the right time in the right setting; and

    We engage the people we serve to help them make informed choices about their healthcare.

Emerging Opportunities in Healthcare

    Senior Market Opportunity

        We believe that attractive growth opportunities exist in providing health insurance to the growing senior market. At present, approximately 57 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the Pew Research Center, more than 3.5 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65 and continue for nearly 20 years. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Medicare Advantage continues to grow its share of the overall Medicare market and we believe is likely to continue to gain positive acceptance with consumers.

        Over the past several years, we made a strategic decision to offer Medicare Advantage plans only in markets where we believe we can positively impact the cost and quality of healthcare through collaboration with providers. Accordingly, we now offer plans in only three states (Texas, New York and Maine). In the Houston/Beaumont region, we currently maintain the leading market position with strong brand awareness and committed and aligned physician groups with whom we share risk. In upstate New York, we are in the process of converting this historically fee-for-service market into a more value-based system by introducing pay for performance to the primary care physicians in the region.

        Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. The Company earned a 4-Star rating for its flagship TexanPlus® plan in Houston/Beaumont and for its largest plans in New York and Maine, Today's Options PPO plan and Today's Options Network PFFS plan. Plans that achieve a 4-Star rating or better are entitled to additional bonus payments and higher rebate percentages from CMS which enables the plans to enhance their product offering to members and prospective members through reduced premiums, reduced member cost sharing amounts, and/or additional benefits.

    Medicare Advantage

        Medicare Advantage—Texas:    Universal American's largest Medicare Advantage market is Texas, primarily the Houston/Beaumont region and North Texas. We market our products using the TexanPlus® brand. The products provided in our Texas markets include only HMO plans, although we introduced a special needs plan for dual eligibles (dSNP) in 2016 which currently has nominal membership. Enrollment in this market is generally supported by career agents.

    Our HMO plans are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. We built this coordinated care product around contracted networks of providers who, in cooperation with the health plan, coordinate an active care

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      management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.

    In connection with the HMOs, we operate separate Medicare Advantage Management Service Organizations that manage that business and affiliated Independent Physician Associations or IPAs through gain sharing arrangements. We participate in the net results derived from these affiliated IPAs.

        Medicare Advantage—Northeast:    Universal American's second largest market is upstate New York, primarily the ten counties that are considered part of the Syracuse market. Universal American markets its Medicare Advantage products using the Todays Options® brand. Enrollment in this market is generally supported by independent agents.

        The products provided in our Northeast market include PPO, Network PFFS, and our new HMO plan that was introduced in 2016. The HMO plan in upstate New York currently has nominal membership.

    Our HMO and PPO plans are provided under the brand Today's Options® HMO and Today's Options® PPO, respectively. They are offered under contracts with CMS and provide all basic Medicare covered benefits with reduced member cost-sharing as well as additional supplemental benefits, including a defined prescription drug benefit. This coordinated care product is built around contracted networks of providers who, in cooperation with the health plan, coordinate an active care management program. In addition to a monthly payment per member from CMS, the plan may collect a monthly premium from its members enrolled in specified products.

    Our Network PFFS plans, which are provided under the brand Today's Options® are offered under contracts with CMS and provide enhanced health care benefits compared to Medicare fee-for-service, subject to cost sharing and other limitations. Even though these plans allow the members more flexibility in the delivery of their health care services than other Medicare Advantage plans, we actively coordinate care for these members in a similar manner to our PPO and HMO plans. Some of these products include a defined prescription drug benefit. In addition to a fixed monthly payment per member from CMS, individuals in these plans may be required to pay a monthly premium in selected counties or for selected enhanced products.

    MSSP—Accountable Care Organizations

        The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the ACA established Medicare Shared Savings ACOs as a tool to improve quality and lower costs through increased care coordination in the Medicare fee-for-service, or FFS, program, which covers the majority of the Medicare-eligible population. The MSSP covers nearly eight million FFS beneficiaries comprising approximately 430 ACOs. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for FFS beneficiaries and reduce unnecessary costs. The MSSP is designed to improve beneficiary outcomes and increase value of care by:

    promoting accountability for the care of Medicare FFS beneficiaries;

    fostering better coordination of care for items and services provided under Medicare FFS; and

    encouraging investment in infrastructure and redesigned care processes.

The MSSP will reward ACOs that lower their health care costs while surpassing a minimum savings rate and meeting quality of care performance standards. Cost savings below the benchmark provided by CMS will be shared at least 50% with the ACOs. The minimum savings rate set by CMS varies depending on the number of beneficiaries assigned to the ACO, starting at 3.9% for ACOs with

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assigned beneficiaries totaling 5,000 and grading to 2.0% for ACOs with assigned beneficiaries totaling 60,000 or more.

        Universal American currently sponsors 21 MSSP ACOs in ten States and one Next Generation ACO operating in Houston, Texas, which include 3,200 participating providers and approximately 236,000 Medicare FFS beneficiaries covering more than $2.5 billion of medical spend. Certain of our ACOs overlap a portion of our Medicare Advantage footprint (Houston, Dallas and New York) and Medicaid footprint (Syracuse) which capitalizes on our existing relationship with providers. The other ACOs have no overlap with existing operations, offering an opportunity for expansion into other products and services. For example, in 2016, we launched a Medicare Advantage PPO plan in Westchester County, NY in collaboration with CareMount Medical, formerly known as Mt. Kisco Medical Group, one of our existing ACO partners. In addition, in 2016, we also launched a new Medicare Advantage HMO plan in the Syracuse NY area in collaboration with the largest primary care group in the region, one our ACO partners.

        In June 2015, the MSSP rules were revised in several important ways that we believe demonstrates an ongoing commitment by CMS to maintain participation in the MSSP. For example, Medicare ACOs now have more options under the MSSP, such as:

    MSSP Track 1:  One-sided risk (upside only); up to 50% shared savings; retrospective attribution

    MSSP Track 2:  Two-sided risk; up to 60% shared savings; retrospective attribution

    MSSP Track 3:  Two-sided risk; up to 75% shared savings; prospective attribution

        Additionally, the CMS Center for Medicare and Medicaid Innovation, or CMMI, launched the Next Generation ACO Model, a new value-based payment model that encourages providers to assume greater risk and reward in coordinating the healthcare of Medicare fee-for-service beneficiaries. The Next Generation ACO model provides ACOs with additional tools not found in the MSSP but used in the Medicare Advantage program to improve quality and lower cost, including preferred networks, negotiated discounts and beneficiary incentives. The Next Generation ACO model offers two risk arrangements with prospectively assigned beneficiaries under which a Next Generation ACO can share up to 80% or 100% of savings (losses) generated in each performance year depending on the financial arrangement selected by the ACO.

        In 2016, six of our MSSP ACOs elected Track 2 with the balance of MSSP ACOs remaining on Track 1. In addition, our Houston-based ACO was selected by CMS to participate in the Next Generation ACO model effective January 1, 2016.

        We provide our ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare FFS beneficiaries. We employ local market staff (operations and clinical) to drive physician and their staff engagement and care coordination improvements. Over the past few years, we have reduced the number of our active ACOs based on a variety of factors, including the level of engagement by the physicians in the ACO and the likelihood of the ACO achieving shared savings. We may make further reductions in the future.

        On July 30, 2015, CMS informed us that our 23 MSSP ACOs which were active in 2014, generated $80 million in gross savings for program year 2014. This compares to $66 million in gross savings for 2012/2013, the first program period of the MSSP, which comprised up to 21 months and which we reported in the third quarter of 2014. For these 23 ACOs, the program year 2014 results showed that:

    9 ACOs, serving more than 105,000 Medicare beneficiaries, including our flagship ACO in Houston, qualified for shared savings totaling $26.9 million. Our share of these payments, recorded in the second quarter of 2015, after payments to our physician partners of $6.0 million,

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      increased to $20.9 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during October 2015;

    8 additional ACOs achieved savings but did not exceed the Minimum Savings Rate, known as MSR. Of those eight, four missed the MSR by less than 1%; and

    Quality scores improved for all ACOs, which indicates improved healthcare management particularly for our chronically ill beneficiaries.

        During September 2014, we received notice that the ACOs generated $66 million in total program savings for CMS, as part of the MSSP for the first performance year of the MSSP (2012 and 2013). Of our 30 ACOs with start dates in 2012 and 2013, the results showed that:

    3 ACOs, serving more than 56,000 Medicare beneficiaries and including our largest ACO in Houston, generated savings in excess of their Minimum Savings Rate and therefore, qualified to share those savings with CMS;

    11 ACOs, serving more than 120,000 Medicare beneficiaries, generated savings but fell below their Minimum Savings Rate required to share savings with CMS;

    8 ACOs were within 2 percent of their benchmark;

    8 ACOs were 2 percent or more above their benchmark; and

    All ACOs met CMS's quality reporting standards.

        The three ACOs qualifying for savings received payments of $20.4 million, part to be shared between the physicians of those ACOs and us and part to be used by us to reimburse a portion of the costs that we had incurred. Our share of these savings, including expense recovery, amounted to $13.4 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments in October 2014. We did not recognize any shared savings revenue in 2013.

        The MSSP is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, during 2015 and 2014, we recognized our portion of ACO shared savings revenue when notified by CMS. Such notification lags the Program Year to which the revenue relates by six to nine months. Revenue from the initial 2012/2013 Program Year, which ended on December 31, 2013, was recorded in the quarter ended September 30, 2014 and revenue for the 2014 Program Year, which ended on December 31, 2014, was recorded in the quarter ended June 30, 2015. Similarly, we were not able to recognize revenue for the year ended December 31, 2015 in the 2015 financial statements. We expect that revenue, if any, for the program year ended December 31, 2015 will be reported in 2016 when the MSSP revenue is either known or estimable with reasonable certainty. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we share in up to 100% of the revenue to recover our costs incurred. Any remaining revenue is generally shared equally with our ACO provider partners.

    Medicaid Program

        Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level.

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Historically, children have represented the largest eligibility group. Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from approximately $544 billion in 2015 to approximately $890 billion by 2024.

        A portion of Medicaid members are dual eligibles, low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS, industry analyst and Kaiser Family Foundation data, we estimate there are approximately 10 million dual eligible enrollees with annual spending of approximately $400 billion. Only a small portion of the total spending on dual eligibles is administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues.

        Total Care NY Medicaid Plan—On December 1, 2013, we acquired the Total Care Medicaid health plan. Total Care provides Medicaid managed care services to approximately 39,000 members in three counties in upstate New York that overlap with our existing Medicare Advantage footprint. Roughly 80% of its members are located in Onondaga County. In addition to the Medicaid program, Total Care also participates in the Child Health Plus program for low-income, uninsured children.

    Healthcare Reform

        The ACA was signed into law in March 2010 and legislates broad-based changes to the U.S. health care system. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance, and gradual implementation, the impact of the health reform legislation remains difficult to predict and quantify. In addition, we believe that any impact from the health reform legislation could potentially be mitigated by certain actions we may take in the future including modifying future Medicare Advantage bids to compensate for such changes. For example, the anticipation of additional revenues from Star bonuses or reduced CMS reimbursement rates are factored into the anticipated level of benefits included in our Medicare Advantage bids for the upcoming year.

        The provisions of these new laws include the following key points, which are discussed further below:

    reduced Medicare Advantage reimbursement rates, beginning in 2012;

    implementation of a quality bonus for Star ratings, beginning in 2012;

    accountable care organizations, beginning in 2012;

    stipulated minimum medical loss ratios (MLR), beginning in 2014;

    non-deductible health insurance industry fee, beginning in 2014;

    coding intensity adjustments, with mandatory minimums, beginning in 2014; and

    limitation on the federal tax deductibility of compensation earned by individuals for certain types of companies, beginning in 2013.

        Reduced Medicare Advantage reimbursement rates—The ACA made several changes to Medicare Advantage. Beginning in 2012, the Medicare Advantage "benchmark" rates began the transition to target Medicare fee-for-service cost benchmarks of 95%, 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period is 2, 4 or 6 years depending upon the applicable county and 2017 will be the final transition year. The counties are divided into quartiles based on each county's fee-for-service Medicare costs. We estimate that approximately 63%, 35% and 1%, respectively, of our January 1, 2016 membership resides in counties where the Medicare Advantage benchmark rate will equal 95%, 115%, and 107.5%, respectively, of the calculated Medicare fee-for-service costs.

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        Medicare Advantage payment benchmarks have been cut over the last several years, with additional funding reductions to be phased in as noted above. On February 19, 2016, CMS issued its 2017 Advance Notice and Draft Call Letter (the "Advance Notice") detailing preliminary 2017 Medicare Advantage benchmark payment rates. As is customary, CMS has invited public comment on these preliminary rates before issuing its final rates for 2017 in April 2016. The Advance Notice proposes to provide a slight overall increase to Medicare rates for 2017, but also plans to make other changes that could negatively impact our business. At this time, CMS is not implementing any major proposed policy changes with respect to the exclusion of in-home health risk assessments for risk adjustment purposes. If implemented, such change would result in significant additional funding declines for the Company. We will continue to evaluate proposed changes detailed in the Advance Notice, some of which could adversely affect our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in the future.

        Implementation of quality bonus for Star ratings—Beginning in 2012, Medicare Advantage plans with an overall "Star rating" of three or more stars (out of five) based on 2011 performance were eligible for a "quality bonus" in their basic premium rates. For 2015 and beyond, plans must achieve an overall star rating of at least 4 stars to receive the quality bonus. Plans receiving Star bonus payments are required to use the additional dollars to provide "extra benefits" for the plans' enrollees, to comply with required MLR, resulting in a competitive advantage for those plans rather than a direct financial impact. In addition, beginning in 2012, Medicare Advantage Star ratings affect the rebate percentage available for plans to provide additional member benefits (plans with quality ratings of 3.5 stars or above will have their rebate percentage increased from a base rate of 50% to 65% or 70%). In all cases, this rebate percentage is lower than the pre-ACA rebate percentage of 75%. Approximately 97% of our 2016 membership is in plans that received a 4-Star Medicare quality rating. The Company earned a 4-Star rating for its flagship TexanPlus® plan in Houston/Beaumont and for its largest plans in New York and Maine, Today's Options PPO plan and Today's Options Network PFFS plan. A summary of these ratings is presented below:

Contract
  Plan Name   Location   Members
(000's)
  2016
Star
Rating
 

H4506

  Texan Plus HMO   Southeast Texas—Houston/Beaumont     65.7     4.0  

H2816

  Today's Options Network PFFS   Northeast—New York & Maine     32.4     4.0  

H2775

  Today's Options PPO   Northeast—New York & Maine     12.7     4.0  

H0174

  Texan Plus D-SNP   Southeast Texas     0.1     4.0  

H5656

  Texan Plus HMO   North Texas—Dallas     3.1     3.0  

            114.0        

        Notwithstanding continued efforts to improve or maintain our Star ratings and other quality measures, there can be no assurances that we will be successful. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

        In addition, CMS has indicated that plans with a Star rating of less than 3.0 for three consecutive years may be subject to termination. While we do not currently have any plans with a rating below 3.0, our inability to maintain Star ratings of 3.0 or better for a sustained period of time could ultimately result in plan termination by CMS which could have a material adverse impact on our business, cash flows and results of operations. Also, the CMS Star ratings/quality scores may be used by CMS to pay bonuses to Medicare Advantage plans that enable those plans to offer improved benefits and/or better pricing. Furthermore, lower quality scores compared to our competitors may result in us losing potential new business in new markets or dissuading potential members from choosing our plan in

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markets in which we compete. Lower quality scores compared to our competitors could have a material adverse effect on our rate of growth.

        Stipulated minimum MLRs—Beginning in 2014, the ACA stipulates a minimum MLR of 85% for Medicare Advantage plans. This MLR which is calculated at a plan level, takes into account benefit costs, quality initiative expenses, the ACA fee and taxes. Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the years ended December 31, 2015 and 2014 our Medicare Advantage plans exceeded the minimum MLR, as defined by CMS. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government could have a material adverse effect on our operating margins, results of operations, and our statutory capital.

        Non-deductible health insurance industry fee ("ACA Fee")—Beginning in 2014, the new healthcare reform legislation imposed an annual aggregate health insurance industry fee of $8.0 billion, increasing to $11.3 billion in 2015 (with increasing annual amounts thereafter) on health insurance premiums, including Medicare Advantage premiums, that is not deductible for income tax purposes. In 2017, the ACA Fee has been suspended for one year. Our effective income tax rate increased in 2014, and will remain at a higher level in future years in which the ACA fee is assessed. Our share of the ACA Fee is based on our pro rata percentage of premiums written during the preceding calendar year compared to the industry as a whole, calculated annually. The ACA Fee, first expensed and paid in 2014, adversely affects the profitability of our Medicare Advantage business and could have a material adverse effect on our results of operations. We paid a fee of $28.8 million in 2015 and $23.1 million in 2014, based on prior year net written premiums and estimate that the ACA Fee to be paid in 2016, based on 2015 net written premiums, will be approximately $25 million. Pursuant to GAAP, the liability for the ACA Fee will be estimated and recorded in full once the entity provides qualifying health insurance in the corresponding period with a corresponding deferred cost that is to be amortized to expense on a straight-line basis over the applicable calendar year. For statutory reporting purposes, the ACA Fee will be expensed on January 1 in the year of payment, rather than amortized to expense over the year. The ACA Fee is included in other operating costs; however, will be factored in when calculating the stipulated minimum MLR.

        Coding intensity adjustments—Under the ACA, the coding intensity adjustment instituted in 2010 became permanent, resulting in mandated minimum reductions in risk scores of 4.91% in 2014 increasing each year to 5.91% in 2018. These coding adjustments may adversely affect the level of payments from CMS to our Medicare Advantage plans.

        Limitation on the federal tax deductibility of compensation earned by individuals—Beginning in 2013, with respect to services performed during 2010 and afterward, for health insurance companies, the federal tax deductibility of compensation is limited under Section 162(m)(6) of the Code to $500,000 per individual and does not contain an exception for "performance-based compensation." In September 2014, the Internal Revenue Service issued final regulations on this compensation deduction limitation which provided additional information regarding the definition of a health insurance issuer. Based on our analysis of the final regulations, we believe we are not subject to the limitation. As a result, during the fourth quarter of 2014, we recorded a tax benefit of $3.2 million related to prior years and $1.7 million related to the first nine months of 2014. Prior to receiving the final regulations, our application of this limitation had increased our effective tax rate by approximately 60 basis points for the year ended December 31, 2013 and 200 basis points for the year ended December 31, 2012. However, there is a risk that the Internal Revenue Service or other regulators may disagree with our interpretation, which could result in higher taxes.

        Accountable Care Organizations—The ACA established Medicare ACOs, as a tool to improve quality and lower costs through increased care coordination in the FFS program. CMS established the MSSP to facilitate coordination and cooperation among providers to improve the quality of care for

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Medicare fee-for-service beneficiaries and reduce unnecessary costs. To date, we have partnered with numerous groups of healthcare providers and currently participate in twenty-one MSSP ACOs and one Next Generation ACO in the Houston market. ACOs are entities that contract with CMS to serve the FFS population with the goal of better care for individuals, improved health for populations and lower costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. We provide a variety of services to the ACOs, including care coordination, analytics and reporting, technology and other administrative services to enable these physicians and their associated healthcare providers to deliver better quality care, improved health and lower healthcare costs for their Medicare FFS patients.

        Under the MSSP, CMS will not make any payments to ACOs for a measurement year until the second half of the following year, which will negatively impact our cash flows. In order to receive revenues from CMS under the MSSP, the ACO must meet certain minimum savings rates (i.e. save the federal government money) and meet certain quality measures. More specifically, an ACOs medical expenses for its assigned beneficiaries during a relevant measurement year must be below the benchmark established by CMS for such ACO. On the quality side, the MSSP requires ACOs to meet thirty-three quality measures, which CMS may vary from time to time. Notwithstanding our efforts, our ACOs may be unable to meet the required savings rates or may not satisfy the quality measures, which may result in our receiving no revenues and losing our substantial investment. In addition, as the MSSP is a new program, it presents challenges and risks associated with the timeliness and accuracy of data and interpretation of complex rules, which may impact the timing and amount of revenue we can recognize and could have a material adverse effect on our ability to recoup any of our investment in this new business. Further, there can be no assurance that we will maintain positive relations with our ACO partners which may result in certain of the ACOs terminating our relationship, which will result in a potential loss of our investment.

        On June 4, 2015, CMS released a final rule updating provisions related to the MSSP in the second contract period for years 2016-2019. This final rule made several changes, including allowing ACOs to participate in Track 1 for a second agreement period with the same sharing rate (up to 50%), establishing a new Track 3 with two-sided risk with additional flexibilities, providing new beneficiary-level claims data that will improve overall ACO information, and easing certain administrative requirements.

        In addition, CMS, the US Office of Inspector General, the Internal Revenue Service, the Federal Trade Commission, the US Department of Justice, and various states have adopted or are considering adopting new legislation, rules, regulations and guidance relating to formation and operation of ACOs. Such laws may, among other things, require ACOs to become subject to financial regulation such as maintaining deposits of assets with the states in which they operate, the filing of periodic reports with the insurance department and/or department of health, or holding certain licenses or certifications in the jurisdictions in which the ACOs operate. Failure to comply with legal or regulatory restrictions may result in CMS terminating an ACOs agreement with CMS and/or subjecting an ACO to loss of the right to engage in some or all business in a state, payment of fines or penalties, or may implicate federal and state fraud and abuse laws relating to anti-trust, physician fee-sharing arrangements, anti-kickback prohibitions or prohibited referrals, any of which may adversely affect our operations and/or profitability.

Special Cash Dividend

        On October 26, 2015, we paid a special cash dividend of $0.75 per share, to shareholders of record on October 19, 2015. The total dividend was $63.0 million. This dividend is a liquidating dividend and was recorded as a reduction of additional paid in capital.

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Membership

        The following table presents our membership in Medicare Advantage products:

 
  January 31,
2016
  December 31,
2015
 
 
  (in thousands)
 

Houston/Beaumont

    65.7     63.0  

Dallas

    3.1     3.6  

SETX dSNP

    0.1      

Texas

    68.9     66.6  

Upstate New York/Maine

    45.1     40.5  

Medicare Advantage

    114.0     107.1  

Segment Overview

        Our business segments are based on product and consist of:

    Medicare Advantage;

    MSO; and

    Medicaid.

        Our remaining segment, Corporate & Other, reflects the activities of our holding company, our prior participation in the New York Health Benefits Exchange, known as the Exchange, and other ancillary operations. Effective January 1, 2015, we are no longer participating in the Exchange. See Note 23—Business Segment Information in the Notes to Consolidated Financial Statements for a description of our segments.

        We report intersegment revenues and expenses on a gross basis in each of the operating segments but eliminate them in the consolidated results. These intersegment revenues and expenses affect the amounts reported on the individual financial statement line items, but we eliminate them in consolidation and they do not change income before taxes. The most significant items eliminated relate to interest on intercompany loans which cross segments.

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Results of Operations—Consolidated Overview

        The following table reflects income (loss) from each of our segments and contains a reconciliation to reported net loss:

 
  For the year ended December 31,  
 
  2015   2014   2013  
 
  (in thousands)
 

Medicare Advantage(1)

  $ 21,480   $ 48,121   $ 54,027  

MSO(1)

    (20,058 )   (30,809 )   (41,588 )

Medicaid(1)

    105     2,635     (526 )

Corporate & Other(1)

    (40,287 )   (49,378 )   (42,394 )

Net realized gains (losses)(1)

    38,954     (649 )   13,806  

Income (loss) before income taxes(1)

    194     (30,080 )   (16,675 )

Provision for (benefit from) income taxes

    4,995     (5,116 )   (4,781 )

Loss from continuing operations

    (4,801 )   (24,964 )   (11,894 )

Loss from discontinued operations

    (159,168 )   (4,503 )   (180,432 )

Net loss

  $ (163,969 ) $ (29,467 ) $ (192,326 )

Loss per common share (diluted):

                   

Loss from continuing operations

  $ (0.06 ) $ (0.30 ) $ (0.14 )

Loss from discontinued operations

    (1.93 )   (0.05 )   (2.06 )

Net loss

  $ (1.99 ) $ (0.35 ) $ (2.20 )

(1)
We evaluate the results of operations of our segments based on income (loss) before realized gains and losses and income taxes. We believe that realized gains and losses are not indicative of overall operating trends. This differs from U.S. GAAP, which reflects the effect of realized gains and losses and income taxes in the determination of net income (loss). The schedule above reconciles our segment income (loss), to net (loss) income in accordance with U.S. GAAP.

    Years ended December 31, 2015 and 2014

        Loss from continuing operations for the year ended December 31, 2015 was $4.8 million, or $0.06 per diluted share, compared to a loss from continuing operations of $25.0 million, or $0.30 per diluted share, for the year ended December 31, 2014. These amounts include realized gains (losses), net of taxes, of $25.3 million, or $0.31 per diluted share, and $(1.8) million, or $(0.02) per diluted share in 2015 and 2014, respectively.

        Our Medicare Advantage segment generated income before income taxes of $21.5 million for the year ended December 31, 2015; a decrease of $26.6 million compared to the year ended December 31, 2014. The decrease in earnings was primarily driven by higher utilization in our Northeast markets, expected lower membership as we exited non-core markets, a decrease in favorable prior period items and lower net investment income, partially offset by a decrease in commissions and general expense levels driven by our cost reduction initiatives. Our administrative expense ratio improved to 10.8% for the year ended December 31, 2015 from 12.1% in 2014 due to the cost reduction initiatives. The year ended December 31, 2015, included $4.0 million of net favorable prior period items compared to $33.0 million of favorable items for the year ended December 31, 2014.

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        Our MSO segment generated a loss before income taxes of $20.1 million for the year ended December 31, 2015, compared to a loss of $30.8 million for the year ended December 31, 2014, an improvement of $10.8 million. This improvement was primarily driven by a $7.5 million increase in shared savings revenue, as nine of our ACOs qualified for shared savings in program year 2014, compared with three ACOs in program year 2012/2013. Operating expenses for the year ended December 31, 2015 were $40.9 million compared to $44.2 million for the year ended December 31, 2014, reflecting fewer active ACOs in 2015.

        Our Medicaid segment generated income before income taxes of $0.1 million for the year ended December 31, 2015 compared to income of $2.6 million for the year ended December 31, 2014. This decrease was as a result of higher medical benefits primarily related to increased inpatient utilization and unfavorable claims run-out from prior periods as well as an increase in operating expenses, partially offset by an increase in net premiums due to higher state capitation rates.

        Our Corporate & Other segment reported a loss of $40.3 million for the year ended December 31, 2015 compared to a loss of $49.4 million in 2014. This improvement was primarily due to corporate expense reduction initiatives, the discontinuation of our Exchange business and lower legal and debt service costs.

        Net realized gains for the year ended December 31, 2015 included gains of $29.6 million and $6.1 million on our cost-method minority investments in naviHealth and Data Driven Delivery Systems, Inc. (DDDS), respectively.

        Our effective tax rate from continuing operations was a provision in excess of 100% for 2015, compared with a benefit of 17% for 2014. The effective rate in 2015 and 2014 differs from the expected benefit of the 35% federal rate due to permanent items, primarily the ACA fee and preferred dividends, as well as state income taxes, net of non-recurring tax benefits. Non recurring tax benefits included in income taxes amounted to $6.4 million and $5.8 million for the years ended December 31, 2015 and 2014, respectively. The 2015 benefit primarily relates to $4.3 million in foreign tax credit carryforwards created in connection with the February 2015 sale of APS Puerto Rico, net of valuation allowance and a $2.4 million net capital loss created in connection with the Traditional Insurance fair value adjustment, net of valuation allowance. Utilization of these tax benefits will be as a result of sufficient taxable income, of the appropriate character, from continuing sources; therefore, they are included in continuing operations. The 2014 benefit primarily relates to the reversal of executive compensation previously considered non-deductible under Code section 162(m)(6) that resulted in the recording of a $3.2 million benefit for amounts considered non-deductible in our prior year tax return, recording of $1.3 million of foreign tax credits and a $0.7 million reserve release related to items on which the statute of limitations has expired.

        Our after-tax loss from discontinued operations was $159.2 million and $4.5 million for the years ended December 31, 2015 and 2014, respectively. 2015 included a pre-tax write down to fair value of $149.2 million, on our Traditional Insurance business, which is considered held for sale at December 31, 2015, a realized loss of $17.4 million, pre-tax, on the sale of APS Healthcare's domestic and foreign businesses and a restructure charge of $5.6 million related to the shutdown of facilities, run out of the retained managed behavioral health (MBH) business and severance. The 2015 loss also included operating results for Traditional Insurance for the year and APS Healthcare for the period prior to the sale and a return to provision adjustment related to the 2014 income tax return of the disposed businesses. 2014 income represents operating results of the disposed businesses. For further information on the Traditional Insurance transaction and the sale of APS Healthcare's businesses, see Note 21—Discontinued Operations and Note 18—Restructuring Charges in the Notes to Consolidated Financial Statements.

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    Years ended December 31, 2014 and 2013

        Loss from continuing operations for the year ended December 31, 2014 was $25.0 million, or $0.30 per diluted share, compared to a loss from continuing operations of $11.9 million, or $0.14 per diluted share, for the year ended December 31, 2013. These amounts include realized (losses) gains, net of taxes, of $(1.8) million, or $(0.02) per diluted share, and $9.0 million, or $0.10 per diluted share in 2014 and 2013, respectively.

        Our Medicare Advantage segment generated income before income taxes of $48.1 million for the year ended December 31, 2014; a decrease of $5.9 million compared to the year ended December 31, 2013. The decrease in earnings was primarily driven by the then new ACA fee of $22.9 million (effective in 2014), lower membership and lower net investment income; offset by an improved medical benefit ratio of 84.0% for the full year 2014 compared to 85.1% for 2013 and a decrease in our administrative expense ratio from 12.8% in 2013 to 12.1% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.

        Our MSO segment generated a loss before income taxes of $30.8 million for the year ended December 31, 2014; a decrease of $10.8 million compared to the year ended December 31, 2013. This improvement was primarily driven by the receipt of $13.4 million of revenue in 2014 related to the initial ACO program period ended December 31, 2013, partially offset by an increase in ACO operating expenses as we had four new ACOs start up on January 1, 2014.

        Our Medicaid segment generated income before income taxes of $2.6 million for the year ended December 31, 2014 compared to a loss of $0.5 million for the year ended December 31, 2013. This was due to 2013 consisting of only one month of activity that included approximately $0.6 million of acquisition related costs.

        Our Corporate & Other segment reported a loss of $49.4 million for the year ended December 31, 2014 compared to a loss of $42.4 million in 2013. This change was primarily related to higher legal costs, costs associated with our participation in the Exchange and higher interest expense, partially offset by savings from corporate expense reduction initiatives and increased distributions received from cost-method investments.

        Net realized gains of $13.8 million for the year ended December 31, 2013 included a $9.9 million realized gain on an interest rate swap with the balance primarily driven by sales of securities in our fixed maturity investment portfolio.

        Our effective tax rate from continuing operations was a benefit of 17% for 2014 compared with a benefit of 29% for 2013. The effective rate in 2014 differs from the expected benefit of the 35% federal rate due to permanent items, primarily the ACA fee (new in 2014) and preferred dividends, as well as state income taxes, net of non-recurring tax benefits of $5.8 million. The 2014 non-recurring tax benefit primarily relates to the reversal of executive compensation previously considered non-deductible under Code section 162(m)(6) that resulted in the recording of a $3.2 million benefit for amounts considered non-deductible in our prior year tax return, recording of $1.3 million of foreign tax credits and a $0.7 million reserve release related to items on which the statute of limitations has expired. The variance in the 2013 effective tax rate compared with the expected benefit of the 35% federal rate was driven by permanent items relating primarily to non-deductible goodwill impairment, the limitation on the deductibility of executive compensation for health insurers enacted in the ACA, interest on the mandatorily redeemable preferred stock, state income taxes and non-recurring tax expenses of $1.4 million. The 2013 non-recurring tax expense primarily relates to the establishment of a valuation allowance against deferred tax assets principally related to foreign tax credits.

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        Our after-tax loss from discontinued operations was $4.5 million and $180.4 million for the years ended December 31, 2014 and 2013, respectively. The decrease is primarily due to asset impairment charges taken in 2013 related to APS Healthcare of $189.4 million, pre-tax.

Segment Results—Medicare Advantage

        The following table presents the operating results of our Medicare Advantage segment:

 
  2015   2014   2013  
 
  (in thousands)
 

Net premiums

  $ 1,245,656   $ 1,393,444   $ 1,617,176  

Net investment and other income

    10,379     16,880     20,006  

Total revenue

    1,256,035     1,410,324     1,637,182  

Medical expenses

    1,074,658     1,171,002     1,376,960  

Amortization of intangible assets

    2,110     2,600     3,017  

ACA fee

    25,464     22,910      

Commissions and general expenses

    132,323     165,691     203,178  

Total benefits, claims and other deductions

    1,234,555     1,362,203     1,583,155  

Segment income before income taxes

  $ 21,480   $ 48,121   $ 54,027  

        Our Medicare Advantage segment includes the operations of our Medicare coordinated care HMO, PPO and Network PFFS Plans (collectively known as the Plans). Our HMOs offer coverage to Medicare members primarily in Southeastern Texas (primarily Houston/Beaumont), and the Dallas area. Our PPO and Network PFFS Plans offer coverage primarily in upstate New York and Maine.

Years ended December 31, 2015 and 2014

        Our Medicare Advantage segment generated income before income taxes of $21.5 million for the year ended December 31, 2015; a decrease of $26.6 million compared to the year ended December 31, 2014. The decrease in earnings was primarily driven by higher utilization in our Northeast markets, expected lower membership as we exited non-core markets, a decrease in favorable prior period items and lower net investment income, partially offset by a decrease in commissions and general expense levels driven by our cost reduction initiatives. Our administrative expense ratio improved to 10.8% for the year ended December 31, 2015 from 12.1% in 2014 due to the cost reduction initiatives. The year ended December 31, 2015, included $4.0 million of net favorable prior period items compared to $33.0 million of favorable items for the year ended December 31, 2014.

        In the Northeast markets, where we had a 35% increase in membership during 2015, and now have more than 45,000 members with a large concentration in upstate New York, we recorded an increased medical benefit ratio largely driven by higher utilization and a lag in adequate premium for new members.

        Net premiums.    Net premiums for the Medicare Advantage segment decreased by $147.8 million for the year ended December 31, 2015 compared to 2014, primarily as a result of exiting non-core markets. In the Northeast markets, where we had a 35% increase in membership during 2015, we had a lag in adequate premium for new members, as discussed above. Net premiums for the year ended December 31, 2015 included $15.7 million of favorable prior period items compared to $14.6 million of favorable prior period items for the year ended December 31, 2014.

        Net investment and other income.    Net investment and other income decreased by $5.6 million to $10.4 million for the year ended December 31, 2015 primarily due to lower invested asset levels resulting from the payment of dividends to the parent in 2015 and 2014.

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        Medical expenses.    Medical expenses decreased by $96.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily driven by our exit of non-core markets, offset by growth in our core markets, unfavorable prior period items and an increase in utilization in the Northeast markets, resulting in a Medicare Advantage medical benefit ratio of 86.3% for the year ended December 31, 2015 compared with 84.0% for the year ended December 31, 2014. Medical expenses for the year ended December 31, 2015 included $11.7 million of net unfavorable items related to prior periods, compared to $18.4 million of net favorable items related to prior periods for the year ended December 31, 2014.

        Quality improvement initiative costs of $25.3 million in the year ended December 31, 2015 and $28.4 million in the year ended December 31, 2014 are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. The following table provides a breakdown of medical expenses and the related medical benefit ratios:

 
  For the year ended December 31,  
 
  2015   2014  
 
  ($ in thousands)
 

Quality Initiatives

  $ 25,341     2.1 % $ 28,365     2.0 %

Medical Benefits

    1,049,317     84.2 %   1,142,637     82.0 %

Total Benefits

  $ 1,074,658     86.3 % $ 1,171,002     84.0 %

        Adjusting for the prior year items discussed above in premiums and medical expenses, for the year ended December 31, 2015, our medical benefit MBR, excluding quality initiative costs was 84.2%. Our medical benefit MBRs for the year ended December 31, 2015, as reported and revised to exclude prior year items, are summarized in the table below:

 
  Reported   Recast(1)  

Texas HMOs Medical Benefit Ratio

    81.8 %   82.0 %

Upstate New York/Maine Medical Benefit Ratio

    90.0 %   89.4 %

Total Medicare Advantage

    84.2 %   84.3 %

(1)
Recast excludes the impact of prior period items.

        ACA fee.    The ACA fee for the year ended December 31, 2015 amounted to $25.5 million, or 2.0% of 2015 net premiums compared to $22.9 million or 1.6% of net premiums for the year ended December 31, 2014. The ACA fee is included in the calculation of minimum medical loss ratios under the ACA. The increase in the ACA fee is due to the industry-wide total fee increasing from $8 billion in 2014 to $11.4 billion in 2015

        Commissions and general expenses.    Commissions and general expenses for the year ended December 31, 2015 decreased $33.4 million compared to the year ended December 31, 2014, primarily due to cost reduction initiatives and lower membership due to our exit of non-core markets. Our administrative expense ratio improved to 10.8% for the year ended December 31, 2015 from 12.1% in 2014 primarily as a result of our cost reduction efforts.

Years ended December 31, 2014 and 2013

        Our Medicare Advantage segment generated income before income taxes of $48.1 million for the year ended December 31, 2014; a decrease of $5.9 million compared to the year ended December 31, 2013. The decrease in earnings was primarily driven by the then new ACA fee of $22.9 million (effective in 2014), lower membership and lower net investment income; offset by an improved medical benefit ratio of 84.0% for the full year 2014 compared to 85.1% for 2013 and a decrease in our

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administrative expense ratio from 12.8% in 2013 to 12.1% in 2014. The year ended December 31, 2014, included $33.0 million of net favorable prior year items compared to $23.3 million for the year ended December 31, 2013.

        Net premiums.    Net premiums for the Medicare Advantage segment decreased by $223.7 million compared to the year ended December 31, 2013, primarily driven by lower membership in our non-core service areas as well as lower premium yield per member resulting from a change in membership mix. In 2014, net premiums included $14.6 million of favorable prior period items compared to $33.2 million of favorable prior period items in 2013.

        Net investment and other income.    Net investment and other income decreased $3.1 million primarily due to lower invested asset levels resulting from the payment of dividends to the parent in 2014 and 2013.

        Medical expenses.    Medical expenses decreased by $206.6 million compared to the year ended December 31, 2013. The decrease was driven by lower membership and lower claims cost per member (as a result of exiting non-core markets that incurred higher claims cost per member) as well as favorable prior period items, resulting in a medical benefit ratio of 84.0% in 2014 compared with 85.1% in 2013. During 2014, medical expenses included $18.4 million of net favorable items related to prior periods, compared to $9.9 million of net unfavorable items related to prior periods in 2013.

        Quality improvement initiative costs of $28.4 million in each of the years ended December 31, 2014 and 2013, respectively, are included in medical expenses in connection with the reporting of minimum medical loss ratios under the ACA. The following table provides a breakdown of medical expenses and the related medical benefit ratios:

 
  For the year ended December 31,  
 
  2014   2013  
 
  ($ in thousands)
 

Quality Initiatives

  $ 28,365     2.0 % $ 28,407     1.8 %

Medical Benefits

    1,142,637     82.0 %   1,348,553     83.3 %

Total Benefits

  $ 1,171,002     84.0 % $ 1,376,960     85.1 %

        ACA fee.    The ACA fee for the year ended December 31, 2014 amounted to $22.9 million, or 1.6% of 2014 net premiums. The ACA fee is included in the calculation of minimum medical loss ratios under the ACA.

        Commissions and general expenses.    Commissions and general expenses for the year ended December 31, 2014 decreased $37.5 million compared to the year ended December 31, 2013, primarily due to cost reduction initiatives and lower membership. Our administrative expense ratio improved to 12.1% for the year ended December 31, 2014 from 12.8% in 2013 primarily as a result of our cost reduction efforts.

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Segment Results—Management Services Organization

        The following table presents the operating results of our MSO segment, consolidating the ACOs in which we participate with the operations of our Collaborative Health Systems, LLC (CHS) subsidiary:

 
  For the year ended December 31,  
 
  2015   2014   2013  
 
  (in thousands)
 

Shared Savings Revenue(1):

                   

Gross Shared Savings

  $ 26,924   $ 20,357   $  

ACO Partner Share

    (6,040 )   (6,982 )    

Net Shared Savings Revenue

    20,884     13,375      

Operating expenses

    40,942     44,184     41,588  

Segment loss before income taxes

  $ (20,058 ) $ (30,809 ) $ (41,588 )

(1)
2015 revenue represents shared savings revenues received in 2015 related to program year 2014 and 2014 revenue represents shared savings revenues received in 2014 related to program year 2012/2013.

        Our MSO segment supports our physician partnerships in the development of value based healthcare models, such as ACOs, with a variety of capabilities and resources including technology, analytics, clinical care coordination, regulatory compliance and program administration. This segment includes our CHS subsidiary and affiliated ACOs. CHS works with physicians and other healthcare professionals to operate ACOs under the Medicare Shared Savings Program. CHS provides these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care and lower healthcare costs for their Medicare fee-for-service beneficiaries. The Company provides funding to CHS to support the operating activities of CHS and the ACOs.

        We have determined that we cannot consolidate the ACOs and therefore, include our share of their operating results in Equity in losses of unconsolidated subsidiaries on our Consolidated Statements of Operations. In the table above, we have presented our share of the results of the ACOs combined with the results of CHS to provide a better understanding of our MSO segment's results of operations.

        The MSSP is relatively new and therefore has limited historical experience. This impacts our ability to accurately accumulate and interpret the data available for calculating the ACOs' shared savings. Therefore, during 2015 and 2014, we recognized our portion of ACO shared savings revenue when notified by CMS. Such notification lags the Program Year to which the revenue relates by six to nine months. Revenue from the initial 2012/2013 Program Year, which ended on December 31, 2013, was recorded in the quarter ended September 30, 2014 and revenue for the 2014 Program Year, which ended on December 31, 2014, was recorded in the quarter ended June 30, 2015. Similarly, we were not able to recognize revenue for the year ended December 31, 2015 in the 2015 financial statements. We expect that revenue, if any, for the program year ended December 31, 2015 will be reported in the second quarter of 2016 when the MSSP revenue is either known or estimable with reasonable certainty. Based on the ACO operating agreements, we bear all costs of the ACO operations until revenue is recognized. At that point, we share in up to 100% of the revenue to recover our costs incurred. Any remaining revenue is generally shared equally with our ACO provider partners.

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    Years ended December 31, 2015 and 2014

        Our MSO segment generated a loss before income taxes of $20.1 million for the year ended December 31, 2015, compared to a loss of $30.8 million for the year ended December 31, 2014, an improvement of $10.8 million. This improvement was primarily driven by a $7.5 million increase in shared savings revenue, as nine of our ACOs qualified for shared savings in program year 2014, compared with three ACOs in program year 2012/2013. Operating expenses for the year ended December 31, 2015 were $40.9 million compared to $44.2 million for the year ended December 31, 2014, reflecting fewer active ACOs in 2015.

        On July 30, 2015, CMS informed us that our 23 Medicare Shared Savings Program, or MSSP, ACOs which were active in 2014, generated $80 million in gross savings for program year 2014. This compares to $66 million in gross savings for 2012/2013, the first program period of the MSSP, which comprised up to 21 months and which we reported in the third quarter of 2014. For these 23 ACOs, the results showed that:

    9 ACOs, serving more than 105,000 Medicare beneficiaries, including our flagship ACO in Houston, qualified for shared savings totaling $26.9 million. This compares to $20.4 million in shared savings paid to ACOs for the first program year 2012/2013, which was longer. Our share of these payments, recorded in the second quarter of 2015, after payments to our physician partners of $6.0 million, increased to $20.9 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments during October 2015;

    8 additional ACOs achieved savings but did not exceed the Minimum Savings Rate, known as MSR. Of those eight, four missed the MSR by less than 1%; and

    Quality scores improved for all ACOs, which indicates improved healthcare management particularly for our chronically ill beneficiaries.

    Years ended December 31, 2014 and 2013

        Our MSO segment generated a loss before income taxes of $30.8 million for the year ended December 31, 2014; a decrease of $10.8 million compared to the year ended December 31, 2013. This improvement was primarily driven by the receipt of $13.4 million of revenue in 2014 related to the initial ACO program period ended December 31, 2013, partially offset by an increase in ACO operating expenses as we had four new ACOs start up on January 1, 2014.

        During September 2014, we received notice that the ACOs we formed in partnership with primary care physicians and other healthcare professionals generated $66 million in total program savings for CMS, as part of the MSSP for the first performance year of the MSSP (2012 and 2013). Of our 30 ACOs with start dates in 2012 and 2013, the results showed that:

    3 ACOs, serving more than 56,000 Medicare beneficiaries and including our largest ACO in Houston, generated savings in excess of their Minimum Savings Rate and therefore, qualified to share those savings with CMS;

    11 ACOs, serving more than 120,000 Medicare beneficiaries, generated savings but fell below their Minimum Savings Rate required to share savings with CMS;

    8 ACOs were within 2 percent of their benchmark;

    8 ACOs were 2 percent or more above their benchmark; and

    All ACOs met CMS's quality reporting standards.

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        The three ACOs qualifying for savings received payments of $20.4 million, part to be shared between the physicians of those ACOs and us and part to be used by us to reimburse a portion of the costs that we had incurred. Our share of these savings, including expense recovery, amounted to $13.4 million, which is reflected in equity in losses of unconsolidated subsidiaries in our consolidated statements of operations. We received these payments in October 2014. We did not recognize any shared savings revenue in 2013.

Segment Results—Medicaid

        The following table presents the operating results of our Medicaid segment:

 
  For the year ended December 31,  
 
  2015   2014   2013  
 
  (in thousands)
 

Net premiums

  $ 190,194   $ 178,288   $ 12,771  

Net investment and other income

    141     173      

Total revenue

    190,335     178,461     12,771  

Medical expenses

    170,120     160,826     11,684  

Amortization of intangible assets

    805     806     66  

ACA fee

    3,332     183      

Commissions and general expenses

    15,973     14,011     1,547  

Total benefits, claims and other deductions

    190,230     175,826     13,297  

Segment (loss) income before income taxes

  $ 105   $ 2,635   $ (526 )

        Our Medicaid segment includes the operations of our Total Care Medicaid health plan, which we acquired on December 1, 2013. Total Care provides Medicaid managed care services to approximately 39,000 members in upstate New York. Total Care also participates in the Child Health Plus program for low-income, uninsured children.

    Years ended December 31, 2015 and 2014

        Our Medicaid segment generated income before income taxes of $0.1 million for the year ended December 31, 2015 compared to income of $2.6 million for the year ended December 31, 2014. This decrease was as a result of higher medical benefits primarily related to increased inpatient utilization and unfavorable claims run-out from prior periods as well as an increase in operating expenses, partially offset by an increase in net premiums due to higher state capitation rates.

        Net premiums.    Net premiums increased by $11.9 million, or 7%, compared to the year ended December 31, 2014 primarily as a result of an increase in state capitation rates, higher member months and a change in mix of business. Net premium includes state reimbursement for premium tax and the ACA fee. The state reimbursement for the ACA fee increased significantly in 2015, consistent with the increase in ACA fee expense discussed below.

        Medical expenses.    Medical expenses increased by $9.3 million, or 6% compared to the year ended December 31, 2014. The increase was driven by higher claims costs, caused primarily by higher membership as well as an increase in inpatient utilization, and unfavorable claims run-out from prior periods. The medical benefit ratio was 89.4% for the year ended December 31, 2015 compared with 90.2% for the year ended December 31, 2014.

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        ACA fee.    The ACA fee for the year ended December 31, 2015 increased by $3.1 million. The ACA fee is based on prior year premium. The 2014 ACA fee was based on Total Care's 2013 premium since December 1, 2013, the date of acquisition, while the 2015 ACA fee is based on Total Care's premium for the year ended December 31, 2014.

        Commissions and general expenses.    Commissions and general expenses increased $2.0 million compared to the year ended December 31, 2014, primarily due to increased compliance, personnel and technology costs. Our administrative expense ratio was 8.8% and 8.3% for the year ended December 31, 2015 and 2014, respectively.

    Years ended December 31, 2014 and 2013

        Our Medicaid segment generated income before income taxes of $2.6 million for the year ended December 31, 2014 compared to a loss of $0.5 million for the year ended December 31, 2013. This was due to 2013 consisting of only one month of activity that included approximately $0.6 million of acquisition related costs.

Segment Results—Corporate & Other

        The following table presents the primary components comprising the loss from the segment:

 
  For the year ended December 31,  
 
  2015   2014   2013  
 
  (in thousands)
 

Net premiums

  $ 316   $ 1,291   $  

Net investment income

    3,067     5,365     491  

Fee and other income

    3,809     1,837     5,923  

Total revenue

    7,192     8,493     6,414  

Claims and other benefits

    (184 )   1,560      

Interest expense

    5,289     6,999     6,562  

Commissions and general expenses

    42,374     49,312     42,246  

Total benefits, claims and other deductions

    47,479     57,871     48,808  

Segment loss before income taxes

  $ (40,287 ) $ (49,378 ) $ (42,394 )

        Corporate & Other reflects the activities of our holding company, our participation in the Exchange, and other ancillary operations. Effective January 1, 2015, we are no longer participating in the Exchange.

    Years ended December 31, 2015 and 2014

        Our Corporate & Other segment reported a loss of $40.3 million for the year ended December 31, 2015 compared to a loss of $49.4 million in 2014. This improvement was primarily due to corporate expense reduction initiatives, the discontinuation of our Exchange business and lower legal and debt service costs.

        Net premiums.    Net premiums decreased by $1.0 million for the year ended December 31, 2015 compared to 2014 as a result of the Company no longer participating in the Exchange. However, in 2015 we received a larger than anticipated risk score adjustment, net of risk corridor related to the Exchange business in 2014.

        Net investment income.    Net investment income decreased by $2.3 million for the year ended December 31, 2015 compared to 2014. In 2014, we received a distribution on a cost method minority

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investment of $2.7 million compared to $2.0 million in 2015. In addition, in 2014, the segment received investment income on a loan to our APS Healthcare subsidiary which is reported in discontinued operations.

        Fee and other income.    Fee and other income increased by $2.0 million for the year ended December 31, 2015 compared to 2014 primarily due to revenues from transition services agreements entered into in connection with the sale of our APS Healthcare businesses. These additional revenues are offset by expenses included in commissions and general expenses. All transition services were complete by December 31, 2015.

        Claims and other benefits.    Claims and other benefits decreased by $1.7 million for the year ended December 31, 2015 compared to 2014, due to the Company no longer participating in the Exchange. Additionally, in 2015, we received larger than anticipated recoveries from the Federal transitional reinsurance program related to the Exchange business in 2014.

        Interest expense.    Interest expense decreased by $1.7 million for the year ended December 31, 2015 compared to 2014 due to the term loan prepayments made on March 31, 2015 and October 14, 2015.

        Commissions and general expenses.    Commissions and general expenses decreased by $7.0 million for the year ended December 31, 2015 compared to 2014. This decrease was driven by reductions in general corporate expenses related to our expense reduction initiatives and lower legal costs which totaled $23.8 million. These reductions were partially offset by costs associated with the transition services agreements, accelerated vesting of stock compensation expense for terminated employees, lower recoveries of agents balances previously written off and accelerated amortization of debt issuance costs in connection with our loan repayments and amendment to our revolving credit facility totaling $16.8 million.

    Years ended December 31, 2014 and 2013

        Our Corporate & Other segment reported a loss of $49.4 million for the year ended December 31, 2014 compared to a loss of $42.4 million in 2013. This change was primarily related to higher legal costs, costs associated with our participation in the Exchange and higher interest expense, partially offset by savings from corporate expense reduction initiatives and increased distributions received from cost-method investments.

        Net premiums.    Net premiums increased by $1.3 million for the year ended December 31, 2014 compared to 2013 as a result of the Company's participation in the Exchange.

        Net investment income.    Net investment income increased by $4.9 million for the year ended December 31, 2014 compared to 2013. In 2014, we received a distribution on a cost-method minority investment of $2.7 million. In addition, in 2014, the segment received investment income on a loan to our APS Healthcare subsidiary which is reported in discontinued operations.

        Fee and other income.    Fee and other income decreased by $4.1 million for the year ended December 31, 2014 compared to 2013 primarily due to a decrease in revenue from our corporate agencies.

        Claims and other benefits.    Claims and other benefits increased by $1.6 million for the year ended December 31, 2014 compared to 2013 as a result of the Company's participation in the Exchange.

        Commissions and general expenses.    Commissions and general expenses increased by $7.1 million for the year ended December 31, 2014 compared to the same period in 2013. This increase was driven by higher legal costs. These increases were partially offset by decreases in related to our corporate agencies and expense reduction initiatives.

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Discontinued Operations

        The following table presents the primary components comprising the loss from discontinued operations:

 
  For the year ended December 31,  
 
  2015   2014   2013  
 
  (in thousands)
 

Traditional Insurance:

                   

Operating results

  $ (16,278 ) $ 2,507   $ 10,946  

Realized gains (losses)

    44     (733 )   56  

Fair value adjustment

    (149,153 )        

    (165,387 )   1,774     11,002  

APS Healthcare:

                   

Operating results

    (33 )   10,330     (4,082 )

Legal/settlement costs

        (15,949 )   (4,038 )

Restructure charge

    (5,638 )        

Loss on sale

    (17,418 )        

Asset impairmant charges

            (189,443 )

    (23,089 )   (5,619 )   (197,563 )

Loss before income taxes

  $ (188,476 ) $ (3,845 ) $ (186,561 )

        Discontinued Operations includes the results of our Traditional Insurance business and APS Healthcare.

        Traditional Insurance:    On October 8, 2015, we entered into a definitive agreement to sell our Traditional Insurance business to Nassau Reinsurance Group Holdings, L.P. ("Nassau"). Our Traditional Insurance business includes Medicare supplement, long-term care, disability, life, and other ancillary insurance products, all of which have been in run-off since 2012. As of December 31, 2015, we determined that this business should be classified as held for sale and reported in discontinued operations.

        APS Healthcare:    On February 4, 2015, we sold our APS Healthcare Puerto Rico subsidiaries to an affiliate of the Metro Pavia Health System. The purchase price at closing was $26.5 million, which was settled in cash. The transaction resulted in a pre-tax realized loss of approximately $0.4 million. On May 1, 2015, we sold our remaining APS Healthcare operating subsidiaries to KEPRO, Inc., a company that provides quality improvement and care management services to both government clients and the private sector. The purchase price was $5.0 million, which was settled in cash at closing, subject to a working capital true up, which was finalized during the quarter ended September 30, 2015. In addition, the transaction includes a potential earn-out of up to an additional $19.0 million based on certain contract renewals. Due to the variability in the length of time over which the contract renewals may occur and the difficulty of estimating the success of such renewals, we consider the potential earn-out to be a contingent gain which will be recorded only if and when we determine it to be realizable. The transaction resulted in a pre-tax realized loss of $17.0 million, including the working capital true up.

    Years ended December 31, 2015 and 2014

        Universal American reported a loss from discontinued operations of $188.5 million for the year ended December 31, 2015 compared with a loss of $3.8 million in 2014.

        Traditional Insurance—Operating Results:    Traditional Insurance had an operating loss of $16.3 million for the year ended December 31, 2015 compared with a gain of $2.5 million for the same

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period in 2014. The 2015 loss was primarily driven by an increase in claim reserves on our Disability Income line of business as a result of an updated claim termination study, as well as recording additional amortization of our deferred acquisition costs (DAC) asset as a result of loss recognition testing deficiencies.

        Traditional Insurance—Fair Value Adjustment:    As of December 31, 2015, we determined that this business should be classified as held for sale and reported in discontinued operations. Consequently, the related assets and liabilities at December 31, 2015 were adjusted to fair value, resulting in a pre-tax loss of $149.2 million, including the write off of $60.4 million in deferred acquisition costs and other intangible assets.

        APS Healthcare—Operating Results:    APS Healthcare had an operating loss of less than $0.1 million for the year ended December 31, 2015 compared with a profit of $10.3 million for the same period in 2014. 2015 results only included 1 month of operating results for Puerto Rico and four months of results for the domestic business, which were both sold in 2015, compared to a full year of operations in 2014.

        APS Healthcare—Legal/Settlement Costs:    APS Healthcare's 2014 results included litigation and settlement costs related to APS Healthcare matters.

        APS Healthcare—Restructure Charge:    During 2015, we recorded a restructure charge of $5.6 million related to the sale of our APS Healthcare domestic business. In connection with the sale, we retained certain office space which we have exited and certain MBH contracts which we have terminated and are operating at a loss as the business runs off. Our restructure charge for facilities represents the estimated costs to close the facilities, including lease buyout costs and rent costs, net of estimated sublease revenue, on non-cancellable leases prior to termination. The related leases run through 2021. The charge related to the MBH contracts represents the estimated operating losses on the terminated contracts through the end of the contractual period, March 31, 2016.

        APS Healthcare—Loss on Sale:    During 2015, we recorded losses on the sale of our APS Puerto Rico business of $0.4 million and on the sale of our APS domestic business of $17.0 million.

    Years ended December 31, 2014 and 2013

        Universal American reported a loss from discontinued operations of $3.8 million for the year ended December 31, 2014 compared with a loss of $186.6 million in 2014.

        Traditional Insurance—Operating Results:    Traditional Insurance generated income before taxes of $2.5 million for 2014, a decrease of $8.4 million compared to 2013. The decrease in earnings is primarily driven by the reduction of business in-force combined with higher benefits ratios on our Specialty health lines which resulted in lower underwriting income. Additionally, operating expenses included higher consulting costs related to the transition and outsourcing of certain functions.

        APS Healthcare—Operating Results:    APS Healthcare had an operating profit of $10.3 million for the year ended December 31, 2014 compared with a loss of $4.1 million for the same period in 2013. The improvement in 2014 is related primarily to a change in the terms of APS Healthcare's Puerto Rico contract to provide managed behavioral health services under the Mi Salud program effective July 1, 2014, the termination of unprofitable contacts and expense reduction initiatives.

        APS Healthcare—Legal/Settlement Costs:    APS Healthcare's 2014 and 2013 results included litigation and settlement costs related to APS Healthcare matters.

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        APS Healthcare—Asset Impairment Charge:    During calendar year 2013, we recorded asset impairment charges related to APS Healthcare of $189.4 million, which included impairments to goodwill of $164.8 million, amortizing intangibles of $16.1 million and tangible assets of $8.5 million.

Contractual Obligations and Commercial Commitments

        Our contractual obligations as of December 31, 2015, are shown below.

 
  Payments Due by Period  
Contractual Obligations
  Total   2016   2017 - 2018   2019 - 2020   Thereafter  
 
  (in thousands)
 

Continuing operations:

                               

Series A mandatorily redeemable preferred shares(1)

  $ 45,100   $ 3,400   $ 41,700   $   $  

Operating Lease Obligations

    14,105     5,692     6,525     1,403     485  

Purchase Obligations(2)

    21,742     4,145     8,590     9,007      

Policy and contract claims—health(3)

    102,340     91,970     10,370          

Total

  $ 183,287   $ 105,207   $ 67,185   $ 10,410   $ 485  

Discontinued operations:

                               

Policy Related Liabilities(3):

                               

Reserves and other policy liabilities—life          

  $ 42,872   $ 3,290   $ 4,151   $ 3,753   $ 31,678  

Reserve for future policy benefits—health                   

    501,094     25,502     48,456     45,247     381,889  

Policy and contract claims—health

    18,353     16,493     1,860          

Total

  $ 562,319   $ 45,285   $ 54,467   $ 49,000   $ 413,567  

(1)
These obligations include preferred dividends and the final payment of principal of $40 million in April 2017.

(2)
Reflects minimum obligations on our outsourcing contracts, See "Outsourcing Arrangements" in Part 1, Item 1 of this annual report on Form 10-K. The amount of service provided under the contracts and the levels of business processed affect our actual monthly payments. The above table includes only the minimum amounts required under the contracts. Based upon anticipated future service levels, we expect that our total actual payments for purchase obligations will exceed the amounts presented in the above schedule.

(3)
Our obligations for policy related liabilities represent those payments we expect to make on health insurance claims, net of amounts recovered from reinsurers. These projected values contain assumptions comparable with our historical experience. The distribution of payments for policy and contract claims reflects assumptions as to the timing of policyholders reporting claims for prior periods and the amounts of those claims. Actual amounts and timing policy and contract claims may differ significantly from the estimates above. We anticipate that our policy and contract claims, along with future net premiums, investment income and recoveries from our reinsurers will be sufficient to fund our policy related obligations. On our consolidated balance sheets in Part II, Item 8 of this annual report on Form 10-K, we report our policy related liabilities gross of amounts recoverable from reinsurers, which are reported as assets. We are obligated to pay claims in the event that a reinsurer fails to meet its obligations under the reinsurance agreements. We are not aware of any instances where any of our reinsurers have been unable to pay any policy claims on reinsured business. Therefore, we have presented our obligations in the table above net of amounts recoverable from reinsurers. Our obligations for policy related liabilities before amounts recovered from reinsurers amount to $102 million from continuing operations and $562 million from discontinued operations.

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    Liquidity and Capital Resources

        Sources and Uses of Liquidity to the Parent Company, Universal American Corp.    We require cash at our parent company to support the operations and growth of our HMO, insurance, MSO and other subsidiaries, fund new business opportunities through acquisitions or otherwise and pay the operating expenses necessary to function as a holding company, as applicable insurance department regulations require us to bear our own expenses.

        The parent company's ongoing sources and uses of liquidity are derived primarily from the following:

    dividends from and capital contributions to our Insurance and HMO subsidiaries—During 2015, our Insurance and HMO subsidiaries paid a total of approximately $101 million in dividends. Additionally, the parent company made capital contributions totaling approximately $29 million to various Insurance and HMO subsidiaries. See below for further discussion of 2015 activity.

    loans from and interest payments to our Insurance subsidiaries to support investments in our ACO business—During 2013, our Insurance subsidiaries loaned $22 million to our parent company. During 2015, the parent company paid interest totaling $0.5 million to our Insurance subsidiaries on such loans. The Company repaid $9 million of this loan in April 2015. The remaining $13 million loan payable is due June 30, 2016.

    the cash flows of our other subsidiaries, including our Medicare Advantage management service organization—Net cash flows available to our parent company amounted to approximately $23.9 million during the year ended December 31, 2015.

    the cash flows of our ACO business and other growth initiatives—For the year ended December 31, 2015, we funded expenses of approximately $40.9 million, pre-tax, related to our ACO business. In the second quarter of 2015, we accrued our share of program year 2014 shared saving revenues of $20.9 million, which was received in October 2015.

    payment of dividends to holders of our mandatorily redeemable preferred shares—Dividends paid to holders of our mandatorily redeemable preferred shares amount to $3.4 million during the year ended December 31, 2015. The $40 million face value of those shares cannot be redeemed prior to 2017, unless there is a change in control of the Company.

    payment of debt principal, interest and fees required under our 2012 Credit Facility—On October 14, 2015, we prepaid the balance of our term loan and terminated our 2012 Credit Facility—see below for discussion of 2015 activity.

    working capital loans to our Medicaid health plan—Periodically, our parent company lends cash to our Medicaid subsidiary, Today's Options of New York, Inc., known as TONY, to bridge the timing difference between claims payments and premium receipts from New York State Department of Health. These loans are immediately repaid upon receipt of premiums. As of December 31, 2015, TONY had no outstanding loan balance due to the parent company.

    payment of certain corporate overhead costs and public company expenses, net of revenues, which amounted to $15.3 million for the year ended December 31, 2015.

        In addition, the parent company from time-to-time engages in corporate finance activities that generate the following sources and uses of liquidity:

    payment of dividends to shareholders—We do not currently pay a regular dividend to our shareholders, however, on October 26, 2015, we paid a special cash dividend of $0.75 per share. Payment of any future dividends would be dependent upon an evaluation of excess capital, as discussed below.

    repurchase of our common stock under our stock repurchase plan—On May 13, 2014 we repurchased and retired six million shares of our common stock directly from funds associated with Capital Z Partners Management, LLC at a price of $6.03 per share for total consideration of $36.2 million. We used cash on hand to fund the repurchase of these shares.

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    proceeds from the sale of subsidiaries—During the first quarter of 2015, we completed the sale of our APS Healthcare Puerto Rico subsidiaries for $26.5 million in cash. During the second quarter of 2015, we completed the sale of our domestic APS subsidiaries for $5 million in cash. During the fourth quarter of 2015, we entered into a definitive agreement for the sale of our Traditional Insurance business to a third party. We expect this transaction to close in the first half of 2016. See Note 21—Discontinued Operations in the Notes to Consolidated Financial Statements.

    proceeds from the sale of and distributions received on investments—In August 2015, we sold our interest in our cost-basis investment in naviHealth for $35.6 million and received cash proceeds of $33.1 million, with the balance of $2.5 million held in escrow and booked a pre-tax realized gain of $29.6 million. In November 2015, we sold our interest in our cost-basis investment in DDDS for $6.6 million and received cash proceeds of $3.1 million, with the balance of $3.4 million representing the discounted fair value of a put option, exercisable in November 2018, and booked a pre-tax realized gain of $6.1 million. In addition, in 2015, we received a total of $2.0 million in cash distributions from DDDS.

    As of December 31, 2015, we had approximately $70 million of cash and investments in our parent company and unregulated subsidiaries.

        We continually evaluate the potential use of any excess capital, which may include the following:

    reinvestment in existing businesses;

    acquisitions, investments or other strategic transactions;

    return to shareholders through share repurchase, dividend or other means;

    paydown of debt (as applicable); or

    other appropriate uses.

        Any such use is dependent upon a variety of factors and there can be no assurance that any one or more of these uses will occur.

    Sources and Uses of Liquidity of Our Subsidiaries

        Insurance and HMO subsidiaries.    We require cash at our insurance and HMO subsidiaries to meet our policy-related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. The primary sources of liquidity are premiums received from CMS and policyholders and investment income generated by our invested assets.

        The National Association of Insurance Commissioners, known as the NAIC, imposes regulatory risk-based capital, known as RBC, requirements on insurance companies. The level of RBC is calculated and reported annually. A number of remedial actions could be enforced if a company's total adjusted capital is less than 200% of authorized control level RBC. However, we generally consider target surplus to be 350% of authorized control level RBC. At December 31, 2015, all of our insurance and HMO subsidiaries had total adjusted capital in excess of our target of 350% of authorized control level RBC except for SelectCare of Texas which has approximately 300%. Excess capital can be used by the insurance and HMO subsidiaries to make dividend payments to their respective holding companies, subject to certain restrictions, and from there to our parent company.

        At December 31, 2015, we held cash and invested assets of approximately $307 million at our insurance and HMO subsidiaries that could readily be converted to cash. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

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        During 2015, our Insurance subsidiaries, Pyramid, Constitution, and Marquette (which was merged into Constitution in May 2015) declared and paid dividends totaling approximately $92 million. These subsidiaries are being sold as part of the sale of our Traditional Insurance subsidiaries to Nassau (see Note 21—Discontinued Operations). In June 2015, our HMO subsidiary, SelectCare of Texas, declared a $9.0 million ordinary dividend, which was subsequently paid to the holding company in July 2015. No other dividends were declared or paid by our other Insurance and HMO subsidiaries in 2015. Based on current estimates, we expect the aggregate amount of dividends that may be paid to our parent company in 2016 without prior approval by state regulatory authorities to be approximately $10.0 million, which excludes dividends available from the Traditional Insurance subsidiaries.

        In the first quarter of 2015, we funded a total of $17.1 million in capital contributions to one of our Insurance subsidiaries, which was merged into Constitution, one of the entities included in the sale of our Traditional Insurance business. During 2015, we made a total of $8.3 million in capital contributions to our Medicaid health plan, Today's Options of New York, or Total Care; $3.2 million of which was done in the form of a surplus note, which bears interest at a rate of 5.0%. Interest and principal payments on the surplus note are subject to the approval of the plan's regulatory agency, the New York State Department of Health. Additionally, in the fourth quarter of 2015, we made a $3.5 million capital contribution to our Texas-based dSNP, Today's Options of Texas.

        Medicare Advantage Management Service Organizations.    The primary sources of liquidity for these subsidiaries are fees collected from affiliates for performing administrative, marketing and management services for our Medicare Advantage business. The primary uses of liquidity are the payments for salaries and expenses associated with providing these services. We believe the sources of cash for these subsidiaries will exceed scheduled uses of cash and result in amounts available to dividend to our parent company.

        Total Care.    We require cash at Total Care to pay claims and other benefits for our members, to pay operating expenses, to maintain adequate capital levels. The primary sources of liquidity are premiums received from the New York Department of Health. Total Care is required to maintain statutory net worth equal to or in excess of a contingent reserve requirement that is equal to 7.25% of premium. As discussed previously, during the year ended December 31, 2015, we made capital contributions totaling $8.3 million.

        Investments.    We invest primarily in fixed maturity securities of the U.S. Government and its agencies, U.S. state and local governments, mortgage