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WELLCARE HEALTH PLANS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Online, Inc.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 6 - Selected Financial Data
and our consolidated financial statements and related notes appearing elsewhere
in this 2012 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 1 -
Business and Part I, Item 1A - Risk Factors, as well as Forward-Looking
Statements discussed earlier in this 2012 Form 10-K.

OVERVIEW

Introduction


We are a leading provider of managed care services to government-sponsored
health care programs, focusing on Medicaid and Medicare. Headquartered in Tampa,
Florida, we offer a variety of health plans for families, children, and the
aged, blind and disabled, as well as prescription drug plans. As of December 31,
2012, we served approximately 2.7 million members nationwide. We believe that
our broad range of experience and exclusive government focus allows us to
effectively serve our members, partner with our providers and government
clients, and efficiently manage our ongoing operations.

Summary of Consolidated Financial Results

Summarized below are the key highlights for the year ended December 31, 2012. For additional information, see the remaining sections of this item, which discuss both consolidated and segment results in more detail.

• Membership increased 4%, reflecting growth in our Medicaid segment,

       particularly in Kentucky, which commenced in November 2011 and had a
       subsequent open enrollment in November 2012, and in Florida, as well as
       growth in our Medicare MA membership due to service area expansion.



•      Premiums increased 21%, mainly reflecting the membership growth in our

Medicaid and Medicare Advantage ("MA") markets, as well as rate increases

       in certain of our Medicaid markets.


• Net Income decreased 30%, primarily due to a decrease in our Medicaid

segment results, and higher selling, general and administrative expense

("SG&A") expense - mainly due to our spending on quality and growth

initiatives; partially offset by improved results in our MA and PDP

segments. 2011 results also benefited from a pre-tax gain of $10.8 million

on the repurchase of subordinated notes. The decrease in Medicaid segment

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results was due mainly to a lower amount of net favorable development of

prior period medical benefits payable in 2012 than occurred in 2011, and a

relatively higher MBR in the Kentucky Medicaid program due to transition

of members into managed care.

Key Developments and Accomplishments

Our strategic priorities for 2012 included improving health care quality and access for our members, ensuring a competitive cost position and delivering prudent and profitable growth. See Part I, Item 1 - Business for a complete definition of our strategic priorities.

Presented below are key developments and accomplishments relating to progress on our strategic business priorities that occurred or impacted our financial condition and results of operations during 2012 and for 2013, prior to the filing of this 2012 Form 10-K.

• In January 2013, we entered into an agreement to acquire Aetna's Medicaid

business in Missouri, which as of December 2012, served more than 100,000

       MO HealthNet Medicaid program members in 54 counties across the state.



•      In January 2013, we acquired UnitedHealthcare Group Incorporated'sMedicaid business in South Carolina, which participates in South

Carolina's Healthy Connections Choices program across 39 of the state's 46

       counties.


• In December 2012, we acquired from Humana, Inc. certain assets of Arcadian

Health Plan, Inc.'s Desert Canyon Community Care ("Desert Canyon") MA
       plans. Approximately 4,000 Desert Canyon plan members in Mohave and
       Yavapai Counties became members of our Arizona MA health plan on
       January 1, 2013.




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• In November 2012, we acquired Easy Choice Health Plan, Inc. of California

("Easy Choice"). As of January 2013, Easy Choice served approximately

       52,000 MA plan members. Easy Choice increased its 2013 service area to 11
       California counties, including the San Diego area and five counties in
       northern California. Easy Choice began offering MA chronic condition
       special needs plans in five of the 11 counties in its service area in
       January 2013.



•      In October 2012, we added approximately 20,000 new Florida Healthy Kids
       members as a result of our expansion from serving 18 counties to 65 of
       Florida's 67 counties. We now offer Florida Healthy Kids services in more
       counties than any other participating plan.


• As of January 2013, we expanded our service area in the Florida Medicaid

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       program to include all 67 counties across Florida. We also received a
       premium rate increase of approximately 3.0% to 3.5% retroactive to
       September 1, 2012.



•      In October 2012, we were awarded a contract by the Commonwealth of

Kentucky to coordinate physical, behavioral and dental care for a total of

approximately 170,000 Medicaid eligible beneficiaries in Medicaid Managed

Care Region 3, which consists of 16 counties. We began serving Medicaid

beneficiaries in Region 3 effective January 1, 2013. As of January 1,

       2013, our membership for this region was estimated to be more than 20,000.



•      The Commonwealth of Kentucky recently completed its initiative to ensure

that the Medicaid managed care program is structured to deliver quality,

cost-effective care to members on a sustainable, long-term basis. As a

result, effective January 1, 2013, the Company received an approximate

7.0% premium rate increase for the Kentucky Medicaid program. The

Commonwealth also has accelerated to July 1, 2013, our 3.0% rate increase

previously scheduled for October 1, 2013. These rate increases apply to

all Medicaid geographic regions of the Commonwealth, other than Region 3.

• In October 2012, we were awarded a contract by the Hawaii Department of

Human Services to case manage, authorize and facilitate the delivery of

behavioral health services to Medicaid-eligible adults who have serious

mental illnesses, and who are participants in the state's QUEST Expanded

Access (QExA) health program on a statewide basis. We anticipate services

       beginning in March 2013.



•      We continue to expand the geographic footprint of our MA plans and offer

D-SNPs for those who are dually-eligible for Medicare and Medicaid in most

of the MA markets we serve. This expansion is consistent with our focus on

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the lower-income demographic of the market and our ability over time to

serve both the Medicaid- and Medicare-related coverage of these members.

MA membership as of January 1, 2013 was approximately 250,000, an increase

       from 213,000 as of December 31, 2012. For the 2013 plan year, we now offer
       plans in a total of 204 counties.


• In October 2012, our MA plans in Florida, Hawaii, Illinois, Connecticut

and Ohio each achieved a three Star summary rating while our MA plans in

Georgia, Louisiana, Missouri, New York, Texas and New Jersey each received

a 2.5 Star summary rating. We are focused on improving quality across all

of our lines of business. For example, as a result of our quality

improvement measures, we met the performance requirements of our contracts

under the New York Medicaid and FHP programs, which were subject to

termination if our quality scores did not improve, and we will continue to

       provide services to members of our New York health plans, and we now have
       quality health plan status.


• Our 2012 quality accomplishments include the new health plan accreditation

of our Hawaii plan. In January 2013, our Florida Medicaid and Medicare

health plans were awarded NCQA accreditation. We continue to target

accreditation for all of our health plans, and anticipate further progress

       in 2013.



•      With respect to our strategic priority of ensuring a competitive cost

structure, 2012 was a year of significant progress. Our administrative

       expense ratio decreased 120 basis points year-over-year to 9.4% in 2012
       compared to 10.6% in 2011.




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Business and Financial Outlook

General Economic, Political Environment and Health Care Reform


A number of states are evaluating new strategies for their Medicaid programs.
Given ongoing fiscal challenges, economic conditions, and the success of
Medicaid managed care programs over the long run, states continue to recognize
the value of collaborating with managed care plans to deliver quality,
cost-effective health care solutions. Additionally, we believe that the 2010
Acts will bring about significant changes to the American health care system.
For further discussion of the current and political environment that is
affecting our business, including health care reform and its potential impact on
our business, see Part I, Item 1 - Business, General Economic and Political
Environment Impacting our Business. In addition, refer to the risks and
uncertainties related to health care reform as discussed in Part I, Item 1A -
Risk Factors - Future changes in health care law present challenges for our
business that could have a material adverse effect on our results of operations
and cash flows.

Medicaid

Our Florida Medicaid contracts expire in August 2015, however we currently
anticipate that these will be terminated early, possibly as early as the end of
2013. The Florida agency that operates the state's Medicaid program, AHCA,
recently began a competitive procurement process to award contracts for Medicaid
managed care across the state. The agency has not yet announced the
implementation schedule, but it expects to award contracts under the competitive
procurement in 2013. We currently intend to submit a proposal under this process
but we cannot assure you our proposal will be successful.

Additionally in Florida, AHCA plans to amend the DRG schedule that it uses to
set rates for certain providers whose contracts are tied to Medicaid effective
July 1, 2013, which may increase or decrease our payments to these providers.

In addition, our recent amendments to our Medicaid contracts with AHCA required
us to comply with federal law related to increased reimbursements to Medicaid
providers. We do not currently expect to increase the reimbursement amounts
until we receive an adjustment to the premium rates we receive, but if we are
required to do so in the future, our medical benefits expense and medical
benefits ratio would increase.
In 2012, the Georgia Department of Community Health (the "Georgia DCH")
announced further refinements to its Medicaid redesign initiatives. At this
time, the Georgia DCH will not conduct a re-procurement of the Georgia Families
program, which currently serves Temporary Assistance for Needy Families ("TANF")
and Children's Health Insurance Program ("CHIP") members, and will not begin to
include aged, blind and disabled ("ABD") beneficiaries as previously planned,
given what the Georgia DCH describes as increasing uncertainty at the federal
level. Our current Georgia Medicaid contract provides for an additional one-year
renewal option exercisable by the Georgia DCH. The Georgia DCH exercised its
option to extend the term of our Georgia Medicaid contract until June 30, 2013
and the remaining renewal option potentially extends the contract through June
30, 2014. The Georgia DCH has also indicated its intent to amend our GeorgiaMedicaid contract to include two additional one-year renewal options,
exercisable by the Georgia DCH, that could potentially extend the contract term
to June 30, 2016.

The Georgia DCH also plans to move forward with several changes to modernize the
Georgia Families program. These may include the promotion of a Primary Care
Medical Home initiative, a move to value-based purchasing, and the adoption of a
common preferred drug list. Additionally, the state is looking to simplify the
administrative process for providers by moving all three care management
organizations operating in the state to a common platform for functions such as
credentialing, and prior authorization management. We look forward to working
with the Georgia DCH to accomplish these initiatives.

Beginning with the fourth quarter 2012, the Commonwealth of Kentucky eliminated
its caps on the risk adjustment of premium rates for the Medicaid program. We
began serving Medicaid beneficiaries in Region 3 of the Commonwealth of Kentucky
on January 1, 2013. As of January 1, 2013, our membership for this region was
estimated to be more than 20,000. Region 3 members will have the opportunity to
change their health plan through the end of March. In addition, the members
assigned to us in January will be served under a 30 day transition of care
period.

As a result of our quality improvement measures, we met the performance
requirements of our contracts under the New York Medicaid and FHP programs,
which were subject to termination if our quality scores did not improve, and we
will continue to provide services to members of our New York health plans, and
we now have quality health plan status.


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With respect to Medicaid rates, we continue to expect the environment to be
challenging, given state and federal fiscal conditions. The ultimate premium
rate is based on program type, demographic mix and geographic location. We
estimate that our rates will decrease approximately 0.3% in Georgia retroactive
to July 1, 2012. In Florida, we estimate that our rates will increase
approximately 3.0 to 3.5%, retroactive to September 1, 2012. We estimate that
our rates will increase by approximately 7.0% in Kentucky retroactive to January
1, 2013. In addition, we expect the approximately 3.0% rate increase we were
scheduled to receive on October 1, 2013 will be accelerated to July 1, 2013.
These rate increases apply to all regions other than the newly launched Region
3.

Although premiums are generally contractually payable to us before or during the
month in which we are obligated to provide services to our members, we have
experienced delays in premium payments from certain states. Given the budget
shortfalls in many states with which we contract, additional payment delays may
occur in the future.

Provider reimbursement levels are subject to change by the states and the
Centers for Medicare and Medicaid Services ("CMS"). In addition, some hospital
contracts are directly tied to state Medicaid fee schedules, resulting in
reimbursement levels that may be adjusted up or down, generally on a prospective
basis, based on adjustments made by the state to the fee schedule. We have
experienced, and may continue to experience, such adjustments. Unless such
adjustments are mitigated by corresponding changes in premiums, our
profitability will be negatively impacted.

Medicare Advantage (MA)


As a result of the 2013 annual election period, we have expanded our MA service
area to a total of 204 counties. Upon the completion of the acquisitions of Easy
Choice and Desert Canyon, we expanded our MA services to California and Arizona
and grew our presence in Florida, Georgia, Illinois, New York, and Texas. We
also now offer our MA plans to some of the dually eligible members we currently
serve through the Kentucky Medicaid program.

Prescription Drug Plans (PDP)


Based on the outcome of our 2013 stand-alone prescription drug plan ("PDP")
bids, our plans are below the benchmarks in 14 of the 34 CMS regions and within
the de minimis range of the benchmark in five other CMS regions. Comparatively,
in 2012, our plans were below the benchmark in five regions and within the de
minimis range in 17 other regions. In 2013, we will be auto-assigned
newly-eligible members into our plans for the 14 regions that are below the
benchmark. We will retain our auto-assigned members in the five regions in which
we bid within the de minimis range, however, we will not be auto-assigned new
members in those regions during 2013. Members previously auto-assigned to our
PDP plans in regions for which our 2013 bids were not within the de minimus
range will be reassigned to other plans in 2013. Consequently, membership has
declined to approximately 750,000 as of January 2013, a decrease from 869,000 as
of December 31, 2012 due to the reassignment to other plans of members who were
previously auto-assigned to us, primarily in California, offset in part by
additional auto-assignments to us in other regions and an increase in the
members who actively chose our PDP plans. We expect membership for the remainder
of 2013 to be relatively stable. A decrease in premium rates will further affect
our PDP segment's results of operations in 2013.

Dual Eligibles


As of January 2013, three states have executed Memorandums of Agreement with CMS
to participate in the Duals Alignment Demonstration Program, a key step in
demonstration implementation, and eighteen States are still negotiating with CMS
on their demonstration parameters. CMS has issued guidance that no programs will
begin before April 1, 2013 and the target enrollment will be limited to 1 to 2
million beneficiaries. Exact implementation times vary by state. CMS has issued
guidance indicating that dual-eligible beneficiaries participating in the
states' Duals Alignment Demonstration Programs cannot be forced to remain in a
duals alignment plan and will be allowed to switch between plans on a monthly
basis. However, enrollment in a MA plan is limited to the federally designated
annual enrollment period or in the event of a special election period unless the
individual seeks to enroll in a plan that has obtained a score of 5 on
Medicare's quality performance system ("Star Ratings"). None of our health plans
have yet achieved 5 stars. For this reason, dual-eligible beneficiaries subject
to a Dual Alignment Demonstration Program will only be able to elect to remain
in or join a WellCare plan during the annual enrollment period or special
election periods.


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The guidance promulgated by CMS requires a cost savings to both Medicare and
Medicaid. To the extent that the assumed savings are deemed unrealistic, these
programs could limit the number of states in which we choose to provide
services. If the rates are deemed sufficient to support the provision of high
quality care, we may choose to bid for participation in these programs. In
addition, certain states' programs have not permitted us to participate, due to
our plan's program design. For those states that have a Duals-Eligible
Demonstration Program in which we do not participate, the membership in our MA
and PDP plans in those states would be reduced. Per CMS guidance, Part D auto
assignments to another PDP will be limited to January 1, 2014, and January 1,
2015, for 2013 and 2014 demonstration states, respectively.


RESULTS OF OPERATIONS

Consolidated Financial Results


The following table sets forth condensed data from our consolidated statements
of comprehensive income (loss), as well as other key data used in our results of
operations discussion for the year ended December 31, 2012, compared to the
years ended December 31, 2011 and 2010. The historical results are not
necessarily indicative of results to be expected for any future period.
                                                            For the Years Ended December 31,
                                                       2012                  2011              2010
Revenues:                                             (Dollars in millions, except per share data)
Premium                                         $       7,400.2        $     6,098.1       $   5,430.2
Investment and other income                                 8.8                  8.7              10.0
Total revenues                                          7,409.0              6,106.8           5,440.2
Expenses:
Medical benefits                                        6,303.9              4,948.0           4,594.5
Selling, general and administrative                       690.8                642.1             838.0
Medicaid premium taxes                                     82.2                 76.2              56.4
Depreciation and amortization                              31.6                 26.4              23.9
Interest                                                    4.1                  6.5               0.2
Total expenses                                          7,112.6              5,699.2           5,513.0
Income (loss) from operations                             296.4                407.6             (72.8 )
Gain on repurchase of subordinated notes                      -                 10.8                 -
Income (loss) before income taxes                         296.4                418.4             (72.8 )
Income tax (benefit) expense                              111.7                154.2             (19.4 )
Net income (loss)                               $         184.7        $       264.2       $     (53.4 )

Effective Tax Rate                                         37.7 %               36.9 %            26.7 %

Membership by Segment
Medicaid                                              1,587,000            1,451,000         1,340,000
MA                                                      213,000              135,000           116,000
PDP                                                     869,000              976,000           768,000
Total                                                 2,669,000            2,562,000         2,224,000




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Membership

2012 vs. 2011

As of December 31, 2012, we served approximately 2,669,000 members; an increase
of approximately 107,000 members from December 31, 2011. We experienced
membership growth in both our Medicaid and MA segments when compared to
December 31, 2011, which was offset by a decline in PDP membership. Medicaid
segment membership increased by 136,000 mainly from membership growth in
Florida, membership growth in our Kentucky Medicaid program following its launch
in the fourth quarter of 2011 and subsequent open enrollment in November 2012,
and membership growth in our Hawaii Medicaid program due to our participation in
Hawaii's QUEST program beginning in July 2012. Our Kentucky Medicaid membership
increased from 129,000 at December 31, 2011 to 207,000 at December 31, 2012.
Members participating in the Kentucky Medicaid program were able to switch plans
until January 31, 2012, and membership has also increased due to retroactive
member re-assignments. MA segment membership increased by 78,000 compared to
December 31, 2011, due to the Easy Choice acquisition, and as a result of the
annual election period during 2011, which resulted in an increase of
approximately 10,000 members effective January 1, 2012, as well as our continued
focus on dually-eligible beneficiaries and expansion into 19 new counties.
Excluding the Easy Choice plan, December membership was 174,000, up 29% from
December 2011. In our PDP segment, membership decreased by 107,000 compared to
December 31, 2011 as a result of our 2012 PDP bids, which resulted in the
reassignment to other plans, effective January 1, 2012, of members who were
auto-assigned to us in 2011 or prior years.

2011 vs. 2010


As of December 31, 2011, we served approximately 2,562,000 members; an increase
of 338,000 members from December 3, 2010. We experienced membership growth in
all of our segments. Our Medicaid segment grew with the launch of the KentuckyMedicaid program on November 1, 2011. As of December 31, 2011, we served 129,000
Medicaid members in Kentucky. For our MA segment, we focused on our membership
growth activities during the annual election period in the fourth quarter of
2010. Our products have benefit designs that are attractive to both current and
prospective members. We invested in strengthening our sales processes and
organization and ensuring an effective on-boarding experience for our new
members. We added approximately 19,000 MA members from December 31, 2010. In our
PDP segment, our plans were below the benchmark in 20 of the 34 CMS regions in
2011, an increase of one region from 2010. Additionally, we were within the de
minimis range in eight additional regions. As a result, we added approximately
208,000 PDP members compared to December 31, 2010.

Net income (loss)

2012 vs. 2011


For the year ended December 31, 2012, our net income was $184.7 million compared
to $264.2 million for the same period in 2011. Excluding the impact of
investigation-related settlements and litigation costs and the 2011 gain on
repurchase of subordinated notes, which amounted to a net expense of
$30.9 million and $27.2 million, net of tax, for the years ended December 31,
2012 and 2011, respectively, net income decreased by $75.8 million in 2012
compared to 2011. The decrease resulted mainly from a decrease in our Medicaid
segment results, higher SG&A expense, partially offset by improved results in
our MA and PDP segments. The decrease in our Medicaid segment results were due
to the impact of higher net favorable development of prior period medical
benefits payable experienced in 2011, the relatively higher MBR in the KentuckyMedicaid program, and a $21.4 million reduction to premium revenue recorded
during the third and fourth quarters of 2012 related to a reconciliation of
duplicate member records in Georgia dating back to the beginning of the program
in 2006. These decreases were partially offset by the impact of higher
membership and related premium revenues and the impact of rate increases in
certain markets. The improved result in our MA segment was due to increased
membership and related premium revenues, while the improvement in the PDP
segment resulted mainly from favorable claims experience. The increase in SG&A
was driven primarily by higher membership, but the rate of increase was lower
than the overall rate of increase in premium revenues.


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2011 vs. 2010


For the year ended December 31, 2011, our net income was $264.2 million compared
to a net loss of $53.4 million for the same period in 2010. Excluding the impact
of investigation-related settlements, litigation costs and gain on repurchase of
subordinated notes, all of which amounted to a net expense of $27.2 million and
$167.6 million, net of tax, for the years ended December 31, 2011 and 2010,
respectively, net income increased by $177.2 million, or 155%, in 2011 compared
to 2010. The increase in 2011 resulted mainly from improved results in our
Medicaid segment, largely driven by increased premium revenue and the impact of
net favorable reserve development of prior period medical benefits payable, rate
increases in certain markets, and to a lesser extent, improved results in our
PDP segment, mainly driven by an increase in membership. Such increases were
partially offset by an increase in SG&A expense and interest incurred on debt.

Premium revenue

2012 vs. 2011

Premium revenue for the year ended December 31, 2012 increased by approximately
$1,302.1 million, or 21%, compared to the same period in the prior year. The
increase is primarily attributable to membership growth in our Medicaid and MA
segments and rate increases in certain of our Medicaid markets, offset by a
$21.4 million reduction to premium revenue related to a reconciliation of
duplicate member records in the Georgia Medicaid program dating back to the
beginning of the program in 2006. Premium revenue includes $82.2 million and
$76.2 million of Medicaid premium taxes for the years ended December 31, 2012
and 2011, respectively.

2011 vs. 2010

Premium revenue for the year ended December 31, 2011 increased by approximately
$667.9 million, or 12%, compared to the same period in the prior year primarily
due to membership growth during 2011 in our PDP and MA segments, rate increases
in certain of our Medicaid markets, the launch of our Kentucky Medicaid program
in November 2011 and additional premiums recognized in connection with
retrospective maternity claims in Georgia. Premium revenue includes $76.2
million and $56.4 million of Medicaid premium taxes for the years ended December
31, 2011 and 2010, respectively.

Investment and other income

2012 vs. 2011

Investment and other income amounted to $8.8 million in 2012, which was consistent with 2011 investment and other income of $8.7 million.

2011 vs. 2010


Investment and other income amounted to $8.7 million in 2011 compared to $10.0
million in 2010. The decrease was due to lower volumes of specialty prescription
drugs sold to non-members, partially offset by an increase in investment income
resulting from higher average investment balances.

Medical benefits expense

2012 vs. 2011


Total medical benefits expense for the year ended December 31, 2012 increased
$1,356.0 million, or 27%, compared to the same period in 2011. The increase is
due mainly to increased membership in the Medicaid and MA segments, higher
overall utilization in the Medicaid and MA segments in the first half of 2012
and the impact of higher net favorable development of prior period medical
benefits payable experienced in 2011 and the relatively higher MBR in the
Kentucky Medicaid program, partially offset by a decrease in the PDP segment.
For the year ended December 31, 2012, medical benefits expense was impacted by
approximately $76.7 million of net favorable development related to prior
periods compared to $191.2 million of such development recognized in 2011.


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2011 vs. 2010


Total medical benefits expense for the year ended December 31, 2011 increased
$353.5 million, or 8%, compared to the same period in 2010. The increase in
medical benefits expense is due mainly to the increase in PDP membership, the
increase in MBR in the PDP segment that was consistent with our bids, and
increased membership and higher MBR in the MA segment. The increases were
partially offset by lower expense in the Medicaid segment resulting principally
from the impact of net favorable prior period development in medical benefits
payable and our medical expense initiatives. For the year ended December 31,
2011, medical benefits expense was impacted by approximately $191.2 million of
net favorable development related to prior years. For the year ended December
31, 2010, medical benefits expense was impacted by approximately $56.2 million
of net favorable reserve development related to prior years. The increased net
favorable development of prior years' medical benefits payable experienced in
2011 compared to 2010 was primarily related to unusually low utilization in our
Medicaid segment in 2010 that became clearer over time as claim payments were
processed and more complete claims information was obtained.

Effective January 1, 2012, we reclassified to medical benefits expense certain
costs related to quality improvement activities that were formerly reported in
SG&A expense. The quality improvement costs that we reclassified are consistent
with the criteria specified and defined in guidance issued by the Department of
Health and Human Services ("HHS") for costs that qualify to be reported as
medical benefits under the minimum medical loss ratio provision of the 2010 Acts
and include:

• Preventive health and wellness and care management;

• Case and disease management;

• Health plan accreditation costs;

• Provider education and incentives for closing care gaps;

• Health risk assessments and member outreach; and

• Information technology costs related to the above activities.




The reclassification of these quality improvement costs impacted our medical
benefits expense and MBR by reportable segment for the years ended December 31,
2011 and 2010 is as follows:
                                              For the Year Ended December 31, 2011
                                          Previously            Amounts            As
                                           Reported          Reclassified       Adjusted
                                                      (Dollars in millions)

Medicaid medical benefits expense $ 2,837.6$ 52.5

   $ 2,890.1
Medicaid MBR %                                80.9 %               1.5 %           82.4 %
MA medical benefits expense                1,180.5                18.3      

1,198.8

MA MBR %                                      79.8 %               1.2 %           81.0 %
PDP medical benefits expense                 853.9                 5.2      

859.1

PDP MBR%                                      82.4 %               0.5 %           82.9 %
Consolidated medical benefits expense $    4,872.0          $     76.0        $ 4,948.0




                                              For the Year Ended December 31, 2010
                                          Previously            Amounts            As
                                           Reported          Reclassified       Adjusted
                                                      (Dollars in millions)

Medicaid medical benefits expense $ 2,847.3$ 41.2

   $ 2,888.5
Medicaid MBR %                                87.5 %               1.3 %           88.8 %
MA medical benefits expense                1,054.1                13.1      

1,067.2

MA MBR %                                      78.9 %               1.0 %           79.9 %
PDP medical benefits expense                 635.2                 3.6      

638.8

PDP MBR%                                      80.9 %               0.5 %           81.4 %
Consolidated medical benefits expense $    4,536.6          $     57.9        $ 4,594.5




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Selling, general and administrative expense


SG&A expense includes aggregate costs related to the resolution of the
previously disclosed governmental and Company investigations and litigation,
such as settlement accruals and related fair value accretion, legal fees and
other similar costs; net of $25.8 million of directors and officers liability
insurance recoveries during December 31, 2010 related to the putative class
action complaints. Please refer to Note 12-Commitments and Contingencies within
the Consolidated Financial Statements for additional discussion of
investigation-related litigation and other resolution costs. We believe it is
appropriate to evaluate SG&A expense exclusive of these investigation-related
litigation and other resolution costs because we do not consider them to be
indicative of long-term business operations. Additionally, as discussed above,
we reclassified costs related to quality improvement activities that were
formerly reported in SG&A expenses to medical benefits expense effective
January 1, 2012. For the years ended December 31, 2011 and 2010, SG&A expense
decreased by $76.0 million and $57.9 million, respectively, due to the
reclassification.

A reconciliation of SG&A expense, which reflects the SG&A reclassification previously discussed, is presented below.

                                                       For the Years Ended December 31,
                                                     2012              2011            2010
                                                                 (In millions)
SG&A expense                                    $     690.8       $     642.1      $    838.0
Adjustments:
Investigation-related litigation and other
resolution costs                                       (3.8 )            (7.7 )        (258.7 )
Investigation-related administrative costs, net
of D&O insurance policy recovery                      (47.7 )           (39.3 )          (7.2 )
Total investigation-related litigation and
other resolution costs                                (51.5 )           (47.0 )        (265.9 )
SG&A expense, excluding investigation-related
litigation and other resolution costs           $     639.3       $     

595.1 $ 572.1


SG&A ratio                                              9.4 %            10.6 %          15.6 %
SG&A ratio, excluding investigation-related
litigation and other resolution costs                   8.7 %             9.9 %          10.6 %



2012 vs. 2011

Excluding investigation-related litigation and other resolution costs, our SG&A
expense for the year ended December 31, 2012 increased approximately $44.2
million, or 7%, to $639.3 million. The increase was due to technology
investments, including those required by regulatory changes, as well as medical
cost initiatives, increased spending related to the launch of our KentuckyMedicaid program, and other growth initiatives. These increases were partially
offset by improvements in operating efficiency. Our SG&A expense as a percentage
of total revenue, excluding premium taxes ("SG&A ratio"), was 9.4% for the year
ended December 31, 2012 compared to 10.6% for the same period in 2011. After
excluding the investigation-related litigation and other resolution costs, our
SG&A ratio in 2012 was 8.7% compared to 9.9% for the same period in 2011. The
improvement in our SG&A ratio, excluding investigation-related litigation and
other resolution costs, is related to the growth in premium revenue and
improvement in our administrative cost structure driven by business
simplification projects, process management in our shared services functions,
and continued evaluation of our organizational design. The improvement was
partially offset by costs incurred from debt incurred in 2011 to settle
investigation-related litigation that was later redeemed in the fourth quarter
of 2011, and quality, regulatory and growth initiatives.

Looking ahead to 2013, our growth and other initiatives are driving a need for
certain investments. In particular, the integration of our recent acquisitions
into our infrastructure will result in incremental expenditures. In addition, we
will invest to improve the performance of these businesses and position them for
further growth. Finally, as we plan for 2014, we will be making investments to
meet the needs of our state and federal customers resulting from implementation
of the provisions of the 2010 Acts. As a result of these and other expenditures,
we anticipate that our adjusted administrative expense ratio, excluding
investigation-related litigation and other resolution costs for 2013 will be
consistent with 2012.


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2011 vs. 2010


Excluding investigation-related litigation and other resolution costs, our SG&A
expense increased approximately $23.0 million, or 4%, in 2011 compared to the
same period in 2010. Our SG&A ratio was 10.6% in the 2011 period compared to
15.6% for the same period in the prior year. After excluding the
investigation-related litigation and other resolution costs, our SG&A ratio for
2011 was 9.9% compared to 10.6% for the same period in 2010. The improvement in
our SG&A ratio, excluding investigation-related litigation and other resolution
costs, represents solid progress toward our long-term goal of ensuring our
competitive cost position, based on our current business and geographic mix.
Business simplification projects, process management in our shared services
functions, and continued evaluation of our organizational design continued to
drive improvement in our administrative cost structure, partially offset by
spending related to the launch of our Kentucky Medicaid program, increased costs
associated with our Medicare annual election period strong sales performance,
and costs incurred for other growth, regulatory and quality initiatives. An
additional factor impacting the comparability of the periods was the impact of
relatively low equity-based compensation expense resulting from a larger impact
from forfeiture activity in 2010 compared to 2011.

Medicaid premium taxes

2012 vs. 2011

Medicaid premium taxes incurred in the year ended December 31, 2012 were $82.2
million compared to $76.2 million, for the same period in 2011. The increase
corresponds to the increase in Medicaid premium revenues.

2011 vs. 2010

Medicaid premium taxes incurred in the years ended December 31, 2011 and 2010
amounted to $76.2 million and $56.4 million, respectively. The increase in
Medicaid premium taxes in 2011 was mainly due to the reinstatement of premium
taxes by Georgia in July 2010. In October 2009, Georgia stopped assessing taxes
on Medicaid premiums remitted to us, which resulted in an equal reduction to
premium revenues and Medicaid premium taxes. However, effective July 1, 2010,
Georgia began assessing premium taxes again on Medicaid premiums. Therefore,
during the first half of 2010, we were not assessed, nor did we remit, any taxes
on premiums in Georgia.

Interest expense

2012 vs. 2011

Interest expense for the year ended December 31, 2012 was $4.1 million compared
to $6.5 million for the same period in 2011. The decrease in interest expense
from 2011 is mainly from debt incurred in 2011 to settle investigation-related
litigation that was later redeemed in the fourth quarter of 2011, as discussed
below, partially offset by interest on the $150.0 million borrowed under a term
loan on August 1, 2011.

2011 vs. 2010

Interest expense for the year ended December 31, 2011 was $6.5 million compared
to $0.2 million for the same period in 2010. The increase in interest expense in
2011 is mainly driven by $6.1 million of interest related to the $112.5 million
subordinated notes issued in September 2011, and to a lesser extent, interest on
the $150.0 million term loan, which closed on August 1, 2011. We issued $112.5
million (aggregate par value) of tradable unsecured subordinated notes on
September 30, 2011 in connection with the stipulation and settlement agreement,
which was approved in May 2011 to resolve the putative class action complaints
previously filed against us in 2007. The subordinated notes had a fixed coupon
of 6% and interest was retroactive to May 2011.

Gain on repurchase of subordinated notes

2011 vs. 2010:


On December 15, 2011, we repurchased at 90% of face value all of the $112.5
million of subordinated notes issued in September 2011. The notes had an
original a maturity date of December 31, 2016. We recorded a gain on the
repurchase of subordinated notes in the amount of $10.8 million. For further
information regarding the subordinated notes, refer to Note 11 -Debt within the
Consolidated Financial Statements.


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Income tax expense (benefit)

2012 vs. 2011

Income tax expense for the year ended December 31, 2012 decreased by $42.5
million compared to the same period in 2011. Our effective income tax rate on
pre-tax income was 37.7% for the year ended December 31, 2012 compared to 36.9%
for the same period in 2011. The effective tax rate for the year ended December
31, 2012 increased compared to the same period in 2011 due to the settlement of
a state tax matter in 2012 which increased the effective rate, partially offset
by a decrease in the prevailing state income tax rate which lowered the
effective rate.

2011 vs. 2010


Income tax expense for the year ended December 31, 2011 was $154.2
million compared to an income tax benefit of $19.4 million for the same period
in 2010. Our effective income tax rate on pre-tax income was 36.9% for the
year ended December 31, 2011 compared to 26.7% on a pre-tax loss for the
same period in 2010. The comparability of the effective tax rates between 2011
and 2010 was impacted by changes related to estimated non-deductible amounts
associated with investigation resolution payments, the favorable resolution of
prior years' state tax matters in 2011 and the incurrence of a pre-tax loss in
2010. Additionally, the effective tax rate for the 2010 period was impacted by
limitations on the deductibility of certain administrative expenses associated
with the resolution of investigation-related matters.

Segment Reporting


Reportable operating segments are defined as components of an enterprise for
which discrete financial information is available and evaluated on a regular
basis by the Company's decision-makers to determine how resources should be
allocated to an individual segment and to assess performance of those segments.
Accordingly, we have three reportable segments: Medicaid, MA and PDP.

Segment Performance Measures


We use three measures to assess the performance of our reportable operating
segments: premium revenue, medical benefits ratio ("MBR") and gross margin. MBR
measures the ratio of medical benefits expense to premiums revenue excluding
Medicaid premium taxes. Gross margin is defined as our premium revenue less
medical benefits expense. For further information regarding premium revenues and
medical benefits expense, please refer below to "Premium Revenue Recognition and
Premiums Receivable", and "Medical Benefits Expense and Medical Benefits Payable
"under "Critical Accounting Estimates."

Our primary tools for measuring profitability are gross margin and MBR. Changes
in gross margin and MBR from period to period depend in large part on our
ability to, among other things, effectively price our medical and prescription
drug plans, manage medical costs and changes in estimates related to IBNR
claims, predict and effectively manage medical benefits expense relative to the
primarily fixed premiums we receive, negotiate competitive rates with our health
care providers, and attract and retain members. In addition, factors such as
changes in health care laws, regulations and practices, changes in Medicaid and
Medicare funding, changes in the mix of membership, escalating health care
costs, competition, levels of use of health care services, general economic
conditions, major epidemics, terrorism or bio-terrorism, new medical
technologies and other external factors affect our operations and may have a
material impact on our business, financial condition and results of operations.

We use gross margin and MBRs both to monitor our management of medical benefits
and medical benefits expense and to make various business decisions, including
which health care plans to offer, which geographic areas to enter or exit and
which health care providers to select. Although gross margin and MBRs play an
important role in our business strategy, we may be willing to enter new
geographical markets and/or enter into provider arrangements that might produce
a less favorable gross margin and MBR if those arrangements, such as capitation
or risk sharing, would likely lower our exposure to variability in medical costs
or for other reasons.



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Reconciling Segment Results

The following table reconciles our reportable segment results with our income (loss) before income taxes, as reported under GAAP.

                                   For the Years Ended December 31,
                                  2012             2011          2010
Gross Margin:                               (In millions)
Medicaid                      $    579.2       $    691.5      $ 420.3
MA                                 305.8            281.0        268.9
PDP                                211.3            177.7        146.5
Total gross margin               1,096.3          1,150.2        835.7
Investment and other income          8.8              8.7         10.0
Other expenses                    (808.7 )         (751.2 )     (918.5 )

Income (loss) from operations $ 296.4$ 407.6 $ (72.8 )

Medicaid


Our Medicaid segment includes plans for beneficiaries of Temporary Assistance
for Needy Families ("TANF"), Supplemental Security Income ("SSI"), Aged Blind
and Disabled ("ABD") and other state-based programs that are not part of the
Medicaid program, such CHIP, Family Health Plus ("FHP") and Managed Long-Term
Care ("MLTC") programs. As of December 31, 2012, we operated Medicaid health
plans in Florida, Georgia, Hawaii, Illinois, Kentucky, New York and Ohio.
                                            For the Years Ended December 31,
                                           2012            2011           2010
                                                     (In millions)
Premium revenue                       $   4,389.0      $  3,505.4     $  3,252.4
Medicaid premium taxes                       82.2            76.2           56.4
Total premiums                            4,471.2         3,581.6        3,308.8
Medical benefits expense                  3,892.0         2,890.1        2,888.5
Gross margin                          $     579.2      $    691.5     $    420.3

Medicaid Membership:
Georgia                                   570,000         562,000        566,000
Florida                                   454,000         404,000        415,000
Kentucky                                  207,000         129,000              -
Other states                              356,000         356,000        359,000
                                        1,587,000       1,451,000      1,340,000

Medicaid MBR, including premium taxes 87.0 % 80.7 % 87.3 % Medicaid MBR (1)

                             88.7 %          82.4 %         88.8 %




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

after excluding Medicaid premium taxes. Because Medicaid premium taxes are

included in the premium rates established in certain of our Medicaid

contracts and also recognized separately as a component of expense, we

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

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

GAAP reporting purposes, Medicaid premium taxes are included in premium

      revenue.




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2012 vs. 2011


Excluding Medicaid premium taxes, Medicaid premium revenue for the year ended
December 31, 2012 increased 25% when compared to the same period in 2011. The
increase was driven mainly by the Kentucky Medicaid program operating for a full
year in 2012, compared to two months in 2011, as well as membership growth in
that program, both the managed long-term care program and the carve-in of the
pharmacy benefit in our New York Medicaid program, membership growth in Florida,
and rate increases implemented in most markets in late 2011. The increase in
Kentucky Medicaid premiums also reflects the open enrollment in November 2012.
Partially offsetting these increases was a $21.4 million reduction of premium
revenue recorded during the third and fourth quarters of 2012 related to a
reconciliation of duplicate member records in Georgia dating back to the
beginning of the program in 2006.

Medicaid medical benefits expense for the year ended December 31, 2012 increased
35% when compared to the same period in 2011. The increase was due mainly to the
increase in membership and the relatively higher MBR in the Kentucky Medicaid
program and less net favorable development of prior year's medical benefits
payable in 2012 than we recognized in 2011, partially offset by the impact of
medical cost initiatives that we have implemented. Our Medicaid MBR for the year
ended December 31, 2012 increased by 630 basis points when compared to the same
period in 2011. The increase was mainly driven by the relatively higher MBR in
the Kentucky Medicaid program, the $21.4 million reduction of premium revenue
for duplicate member record reconciliation adjustments, and the impact of less
net favorable development of prior year's medical benefits payable in 2012 than
we recognized in 2011.

The Kentucky Medicaid program MBR for the year ended December 31, 2012 was
approximately 105.1% due to the relatively high transitional medical benefit
expenses for the program, including the impact of new members from the November
2012 open enrollment which have a higher MBR than previously existing members.
We continue to focus on our clinical management capabilities to appropriately
address the characteristics of the Kentucky members we serve. In particular, we
are executing on emergency room, inpatient, behavioral, and pharmacy cost
management activities, all of which are reducing medical costs. We believe the
actions we have taken, and are taking, to improve care coordination and manage
costs, combined with expected 2013 revenue enhancements and rate increases, will
make a meaningful contribution to our 2013 Medicaid gross margin and the
long-term stability and soundness of our Kentucky Medicaid program.

2011 vs. 2010


Excluding Medicaid premium taxes, Medicaid premium revenue for the year ended
December 31, 2011 increased 8% when compared to the same period in 2010. The
increase in premium revenue was mainly due to rate increases in certain markets,
the launch of the Kentucky Medicaid program on November 1, 2011 and additional
premiums related to certain retrospective maternity claims that were impacted by
a change that the Georgia DCH made to its methodology for determining and
accepting qualifying maternity claims.

Medicaid medical benefits expense for the year ended December 31, 2011 decreased
slightly when compared to the same period in 2010 due mainly to the impact of
net favorable reserve development of prior period medical benefits payable and
the impact of medical cost initiatives that we have implemented, partially
offset by a change in member mix and the launch of the Kentucky Medicaid program
in November 2011. The net favorable reserve development resulted primarily from
unusually low utilization in 2010. Our Medicaid MBR improved by approximately
640 basis points in 2011 compared to 2010, and the decrease was also driven by
the net favorable reserve development of prior period medical benefits payable,
the impact of medical cost initiatives, rate increases in certain of our
Medicaid markets and additional premiums recognized in connection with
retrospective maternity claims in Georgia.

Outlook


We expect Medicaid segment premium revenue to increase in excess of 14% percent,
mainly as a result of the Kentucky program expansion and the South Carolina
acquisition. We currently anticipate our 2013 premium revenue from the KentuckyMedicaid program will be in excess of $1.0 billion. We currently anticipate that
our Medicaid segment MBR will be lower in 2013 as a result of improved
performance for the Kentucky program, offset in part by MBR increases in certain
other programs and the continuing shift in the mix of our Medicaid segment
programs toward higher MBR populations.


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Medicare


We contract with CMS under the Medicare program to provide a comprehensive array
of Part C and Part D benefits to Medicare eligible persons, provided through our
MA plans. Our MA plans are comprised of coordinated care plans ("CCPs"), which
are administered through HMOs and generally require members to seek health care
services and select a primary care physician from a network of health care
providers. In addition, we offer Medicare Part D coverage, which provides
prescription drug benefits, as a component of our MA plans. As of December 31,
2012, we operated our MA CCPs in California, Connecticut, Florida, Georgia,
Hawaii, Illinois, Louisiana, Missouri, New Jersey, New York, Ohio and Texas.

                              For the Years Ended December 31,
                              2012           2011          2010
                                       (In millions)
Premium revenue          $   1,936.4      $ 1,479.8     $ 1,336.1
Medical benefits expense     1,630.6        1,198.8       1,067.2
Gross margin             $     305.8      $   281.0     $   268.9

MA Membership                213,000        135,000       116,000

MA MBR                          84.2 %         81.0 %        79.9 %



2012 vs. 2011

MA premium revenue for the year ended December 31, 2012 increased 31% when
compared to the same period in 2011 and was mainly attributable to an increase
in membership, which increased by approximately 78,000 members between
December 31, 2012 and 2011 due to our product design, strengthening of our sales
processes and heightened focus on membership growth activities during the annual
election period in 2011 and the Easy Choice acquisition. MA segment MBR
increased by 320 basis points for the year ended December 31, 2012 compared to
the same period in 2011. The changes in the MBR were primarily due to increased
quality improvement costs and less net favorable development of prior year's
medical benefits payable in 2012 than we recognized in 2011.

2011 vs. 2010


MA premium revenue for the year ended December 31, 2011 increased 11% when
compared to the same period in 2010 mainly from an increase in membership.
Membership increased by approximately 19,000 members between December 31, 2010
and 2011. The increase in MA premium revenue and membership was attributable to
our product design, strengthening of our sales processes and heightened focus on
membership growth activities during the annual election periods in 2010 and
2011. MA medical expense increased by 12% in 2011, due to the increase in
membership, as well as an increase in the segment MBR. MA segment MBR increased
by approximately 110 basis points for the year ended December 31, 2011 compared
to the same period in 2010, primarily due to the favorable reserve development
we experienced in 2010 from the wind-down of our PFFS plans and increased
quality improvement costs. As a result, the segment gross margin increase in
2011 amounted to 4%.

Outlook

For the MA segment, membership as of January 1, 2013 was approximately 250,000,
an increase from 213,000 as of December 31, 2012 based on the outcome of the
recently completed open enrollment. Excluding Arizona and California, our
January 2013 enrollment was approximately 194,000, an increase of 11% from
174,000 as of December 2012. Currently, we expect MA segment membership to
continue to grow during the remaining months of 2013, as we leverage our success
in serving dually-eligible beneficiaries as well as the broader growth in the
Medicare population. Consequently, we expect MA premium revenue to increase by
approximately 50% in 2013. Our benefits and cost sharing terms for 2013 have
been designed to achieve what we believe is an appropriate financial rate of
return with plans that are attractive to both current and prospective members.
For the MA segment, we expect the MBR to increase in 2013, driven by the Easy
Choice acquisition as well as higher MBRs in many of our other states,
consistent with our expectations based on our 2013 bids.


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Prescription Drug Plans (PDP)

We have contracted with CMS to serve as a plan sponsor offering stand-alone Medicare Part D PDP plans to Medicare eligible beneficiaries segment through our PDP segment. As of December 31, we offered PDP plans in 49 states and the District of Columbia.


                               For the Years Ended December 31,
                             2012              2011           2010
                                        (In millions)

Premium revenue $ 992.6$ 1,036.8$ 785.3 Medical benefits expense 781.3

              859.1        638.9
Gross margin             $    211.3       $      177.7     $  146.4

PDP Membership              869,000            976,000      768,000

PDP MBR                        78.7 %             82.9 %       81.4 %



2012 vs. 2011

PDP premium revenue decreased 4% for the year ended December 31, 2012 when
compared to the same period in 2011, primarily due to the decline in membership.
Membership decreased by approximately 107,000 members from December 31, 2011 due
to the reassignment to other plans, effective January 1, 2012, of members who
were auto-assigned to us in 2011 or prior years. PDP MBR for the year ended
December 31, 2012 decreased 420 basis points over the same period in 2011 due to
the outcome of our 2012 bids and improvements in our pharmacy claims experience,
resulting from our focus on member utilization, cost sharing patterns and
generic medication utilization.

2011 vs. 2010


PDP premium revenue increased 32% for the year ended December 31, 2011 when
compared to the same period in 2010, resulting primarily from increased
membership, partially offset by the impact of lower pricing consistent with our
bid results. Membership increased by 27% in 2011, largely due to an increase in
auto-assigned members resulting from our 2011 bids and the addition of one CMS
region. The PDP MBR increased by 150 basis points in 2011 compared to 2010 due
to our bid results, member mix and higher utilization. The segment gross margin
increased by approximately 21%.

Outlook


PDP membership as of January 1, 2013 was approximately 750,000, a decrease of
approximately 14% from 869,000 as of December 31, 2012, based on the outcome of
our stand-alone 2013 PDP bids. We expect membership for the remainder of 2013 to
be relatively stable as we focus on marketing to those who actively choose our
product to offset normal attrition. For the PDP segment, we anticipate the MBR
to increase mainly due to the outcome of our 2013 bids and from the addition of
our new enhanced product. The decrease in membership and in premium rates is
expected to result in a minimum 20% reduction in our PDP segment's premium
revenue in 2013 when compared to 2012.

LIQUIDITY AND CAPITAL RESOURCES


Each of our existing and anticipated sources of cash is impacted by operational
and financial risks that influence the overall amount of cash generated and the
capital available to us. Additionally, we operate as a holding company in a
highly regulated industry. The parent and other non-regulated companies
("non-regulated subsidiaries") are dependent upon dividends and management fees
from our regulated subsidiaries, most of which are subject to regulatory
restrictions. For a further discussion of risks that can affect our liquidity,
see Part I - Item 1A - Risk Factors included in this 2012 Form 10-K.


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Liquidity

The Company maintains liquidity at two levels: the regulated subsidiary level and the non-regulated subsidiary level.

Regulated subsidiaries

Our regulated subsidiaries' primary liquidity requirements include:

• payment of medical claims and other health care services;


•      management fees paid to our non-regulated administrator subsidiary under
       intercompany services agreements and direct administrative costs, which

are not covered by the intercompany services agreement, such as selling

       expenses and legal costs; and


•      federal tax payments to the parent company under an intercompany tax
       sharing agreement.


Our regulated subsidiaries meet their liquidity needs by:

• maintaining appropriate levels of cash, cash equivalents and

short-term investments;

• generating cash flows from operating activities, mainly from premium revenue;


•      cash flows from investing activities, including investment income and
       sales of investments; and

• capital contributions received from our non-regulated subsidiaries.




We refer collectively to the cash, cash equivalents and investment balances
maintained by our regulated subsidiaries as "regulated cash and investments,"
respectively. Our regulated subsidiaries generally receive premiums in advance
of payments of claims for medical and other health care services; however,
regulated cash and cash equivalents can fluctuate significantly in a particular
period depending on the timing of receipts for premiums from our government
partners. Our unrestricted regulated cash and investments was $1,224.0 million
as of December 31, 2012, a decrease of $74.2 million from December 31, 2011.
Included in this change is $192.0 million in dividends and surplus capital paid
to, and $119.6 million of contributions received from our non-regulated
subsidiaries.

Our regulated subsidiaries are each subject to applicable state regulations that, among other things, require the maintenance of minimum levels of capital and surplus. We continue to maintain significant levels of aggregate excess statutory capital and surplus in our regulated subsidiaries. See further discussion under Regulatory Capital Requirements and Dividend Restrictions below.

Parent and non-regulated subsidiaries

Liquidity requirements at the non-regulated parent level generally consist of:

• payment of administrative costs not related to our regulated operations,

including, but limited to, business development, branding and certain

information technology services;

• capital contributions paid to our regulated subsidiaries;


• capital expenditures;


• debt service; and


• federal tax payments.


Our non-regulated subsidiaries normally meet their liquidity requirements by:

• management fees received from our non-regulated administrator subsidiary

under intercompany services agreements;

• dividends received from our regulated subsidiaries;

• collecting federal tax payments from the regulated subsidiaries;

• proceeds from issuance of debt and equity securities; and


•      cash flows from investing activities, including investment income and
       sales of investments.




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Our unregulated cash, cash equivalents and investments was $193.5 million as of
December 31, 2012, a decrease of $115.0 million from a balance of $308.5 million
as of December 31, 2011. The decrease is mainly attributable to $126.6 million
in net cash used in relation to our recent acquisitions, payment of certain
investigation-related litigation and other resolution costs in connection with
our settlement of the Civil Division of the U.S. Department of Justice (the
"Civil Division") and $119.6 million in capital contributions made to certain of
our regulated subsidiaries that were partially offset by $192.0 million in
dividends and surplus capital received from our regulated subsidiaries.

Auction Rate Securities


As of December 31, 2012, $32.0 million of our long-term investments were
comprised of municipal note securities with an auction reset feature ("auction
rate securities"), which are issued by various state and local municipal
entities for the purpose of financing student loans, public projects and other
activities and carry investment grade credit ratings. Liquidity for these
auction rate securities is typically provided by an auction process which allows
holders to sell their notes and resets the applicable interest rate at
pre-determined intervals, usually every seven or 35 days. As of the date of this
2012 Form 10-K, auctions have failed for our auction rate securities and there
is no assurance that auctions will succeed in the future. An auction failure
means that the parties wishing to sell their securities could not be matched
with an adequate volume of buyers. In the event that there is a failed auction
the indenture governing the security requires the issuer to pay interest at a
contractually defined rate that is generally above market rates for other types
of similar instruments. The securities for which auctions have failed will
continue to accrue interest at the contractual rate and be auctioned every seven
or 35 days until the auction succeeds, the issuer calls the securities, or they
mature. As a result, our ability to liquidate and fully recover the carrying
value of our remaining auction rate securities in the near term may be limited
or non-existent. In addition, while all of our auction rate securities currently
carry investment grade ratings, if the issuers are unable to successfully close
future auctions and their credit ratings deteriorate, we may in the future be
required to record an impairment charge on these investments.

Although auctions continue to fail, we believe we will be able to liquidate
these securities without significant loss. There are government guarantees or
municipal bond insurance in place and we have the ability and the present intent
to hold these securities until maturity or market stability is restored.
Accordingly, we do not believe our auction rate securities are impaired and as a
result, we have not recorded any impairment losses for our auction rate
securities. However, it could take until the final maturity of the underlying
securities to realize our investments' recorded value. The final maturity of the
underlying securities could be as long as 25 years. The weighted-average life of
the underlying securities for our auction rate securities portfolio is 20 years.

Cash flow activities

Our cash flows from operations are summarized as follows:

                                                       For the Years Ended December 31,
                                                     2012             2011            2010
                                                                (In millions)

Net cash (used in) provided by operations $ (30.7 ) $ 162.0$ 223.1 Net cash used in investing activities

                (222.8 )          (111.6 )        (60.5 )
Net cash provided by (used in) financing
activities                                             28.9             (84.9 )         38.9
Total net (decrease) increase in cash and cash
equivalents                                     $    (224.6 )     $     (34.5 )   $    201.5


Net cash (used in) provided by operations


For the year ended December 31, 2012, cash from operating activities was
negatively impacted by certain delayed Medicaid premiums, primarily associated
with our Georgia Medicaid supplemental payments for obstetric deliveries and
newborns, and the $39.8 million payment made to the Civil Division of the U.S.
Department of Justice ("Civil Division") on March 30, 2012.

Cash provided by operating activities, modified for the impact of the timing of
receipts from, and payments to, our government customers, increased in 2011 when
compared to 2010 due to improved results from operations, partially offset by
$87.5 million of investigation-related litigation and other resolution payments.


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Net cash used in investing activities


For the year ended December 31, 2012, cash used in investing activities,
excluding acquisitions, primarily reflects our investment in marketable
securities and restricted investments of approximately $502.3 million and
purchases of property and equipment of $61.3 million, partially offset by $467.3
million of proceeds from maturities of marketable securities and restricted
investments. Cash consideration paid for acquisitions, net of cash acquired, was
$126.6 million in 2012 related to the Easy Choice and Desert Canyon
acquisitions.

In 2011, cash used in investing activities primarily reflects our investment of
proceeds provided by our term loan into higher yielding investment alternatives,
which had a net impact totaling approximately $108.7 million, and purchases of
software and equipment totaling approximately $49.6 million, partially offset by
$46.7 million of proceeds from the maturities of restricted investments net of
purchases.

Net cash provided by (used in) financing activities

Included in financing activities are funds receivable for the benefit of members, which decreased approximately $36.3 million during the year ended December 31, 2012. These funds represent reinsurance, low-income cost sharing, and coverage gap discount subsidies funded by CMS in connection with the Medicare Part D program, for which we assume no risk.


Included in 2011 financing activities are the repurchase of the subordinated
notes in full, which approximated $101.7 million, as well as funds held for the
benefit of members, which increased approximately $129.6 million in 2011. These
funds represent certain subsidies funded by CMS in connection with the Medicare
Part D program for which we assume no risk. This activity is partially offset
with the $147.4 million of proceeds from the issuance of the term loan under the
Amended Credit Agreement, net of issuance costs.

Financial Impact of Government Investigation and Litigation


Under the terms of settlement agreements entered into on April 26, 2011, and
finalized on March 23, 2012, to resolve matters under investigation by the Civil
Division and certain other federal and state enforcement agencies (the
"Settlement"), WellCare agreed to pay the Civil Division a total of $137.5
million over 36 months plus interest accrued at 3.125%. On March 30, 2012, we
made a payment of $39.8 million to the Civil Division, consisting of a $34.4
million principal payment and $5.5 million of accrued interest. The estimated
fair value of the discounted remaining liability, to be paid in three annual
installments of $34.4 million on March 30 of each year, and related interest,
was $105.5 million at December 31, 2012.

The Settlement also provides for a contingent payment of an additional $35.0
million in the event that we are acquired or otherwise experience a change in
control within three years of the effective date of the Settlement, provided
that the change in control transaction exceeds certain minimum transaction value
thresholds as specified in the Settlement.

We currently maintain directors' and officers' liability insurance in the amount of $125.0 million for other matters not addressed above.

Capital Resources

Credit Facility


In August 2011, we entered into a $300.0 million senior secured credit
agreement, amended on July 20, 2012 (the "Amended Credit Agreement") that can be
used for general corporate purposes. The Amended Credit Agreement provides for a
$150.0 million term loan facility as well as a $150.0 million revolving credit
facility. In August 2011, we borrowed $150.0 million pursuant to the term loan
facility. On February 12, 2013, we borrowed an additional $230.0 million in term
loans in connection with the execution of an amended senior secured credit
agreement (the "Second Amended Credit Agreement"). The Second Amended Credit
Agreement provides for an additional $230.0 million in term loans and a total
available credit facility of $515.0 million. As of the date of this 2012 Form
10-K, $365.0 million was outstanding under the Second Amended Credit Agreement.
For additional information, see Note 19 - Subsequent Events to the Consolidated
Financial Statements.

Each of the term loans and revolving credit facility are set to expire in August
2016. Payments of principal on the term loans are due on a quarterly basis
through July 31, 2016. As of December 31, 2012, our remaining term loan balance
was $135.0 million, which is included in the current portion of long-term debt
and long-term debt line items in our consolidated balance sheet. Our term loan
bears interest at 1.75% as of December 31, 2012. For additional information on
our long-term debt, see Note 11 - Debt to the Consolidated Financial Statements.

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Shelf Registration Statement

In August 2012, we filed a shelf registration statement on Form S-3 with the SEC
that became automatically effective covering the registration, issuance and sale
of an indeterminate amount of our securities, including common stock, preferred
stock, senior or subordinated debt securities, depository shares, securities
purchase contracts, units or warrants. We may publicly offer securities in the
future at prices and terms to be determined at the time of the offering.

Issuance and Repurchase of Subordinated Notes


On September 30, 2011, we issued tradable unsecured subordinated notes having an
aggregate par value of $112.5 million, in connection with the settlement of
putative class action complaints filed against us in 2007. On December 15, 2011,
we paid $101.7 million to repurchase the subordinated notes at a 10% discount
and paid accrued interest of approximately $4.1 million. For further information
regarding the subordinated notes, refer to Note 11 - Debt to the Consolidated
Financial Statements.

Initiatives to Increase Our Unregulated Cash
We are pursuing alternatives to raise additional unregulated cash. Some of these
initiatives include, but are not limited to, consideration of obtaining
dividends from certain of our regulated subsidiaries to the extent that we are
able to access any available excess capital and/or accessing the debt and equity
capital markets. However, we cannot provide any assurances that we will obtain
applicable state regulatory approvals for additional dividends to our
non-regulated subsidiaries by our regulated subsidiaries or be successful in
accessing the capital markets if we determine to do so.
Regulatory Capital and Dividend Restrictions

Each of our HMO and insurance subsidiaries must maintain a minimum amount of
statutory capital determined by statute or regulation. The minimum statutory
capital requirements differ by state and are generally based on a percentage of
annualized premium revenue, a percentage of annualized health care costs, a
percentage of certain liabilities, a statutory minimum, risk-based capital
("RBC") requirements or other financial ratios. The RBC requirements are based
on guidelines established by the NAIC, and have been adopted by most states. As
of December 31, 2012, our operating HMO and insurance company subsidiaries in
all states except California, New York and Florida were subject to RBC
requirements. The RBC requirements may be modified as each state legislature
deems appropriate for that state. The RBC formula, based on asset risk,
underwriting risk, credit risk, business risk and other factors, generates the
authorized control level ("ACL"), which represents the amount of capital
required to support the regulated entity's business. For states in which the RBC
requirements have been adopted, the regulated entity typically must maintain a
minimum of the greater of 200% of the required ACL or the minimum statutory net
worth requirement calculated pursuant to pre-RBC guidelines. Our subsidiaries
operating in Texas and Ohio are required to maintain statutory capital at RBC
levels equal to 225% and 300%, respectively, of the applicable ACL. Failure to
maintain these requirements would trigger regulatory action by the state. At
December 31, 2012, our HMO and insurance subsidiaries were in compliance with
these minimum capital requirements. The combined statutory capital and surplus
of our HMO and insurance subsidiaries was approximately $926.0 million and
$858.0 million at December 31, 2012 and 2011, respectively, compared to the
required surplus of approximately $383.0 million and $310.0 million at December
31, 2012 and 2011, respectively.

The statutory framework for our regulated subsidiaries' minimum capital
requirements changes over time. For instance, RBC requirements may be adopted by
more of the states in which we operate. These subsidiaries are also subject to
their state regulators' overall oversight powers. For example, the state of New
York adopted regulations that increase the reserve requirement annually until
2018. In addition, regulators could require our subsidiaries to maintain minimum
levels of statutory net worth in excess of the amount required under the
applicable state laws if the regulators determine that maintaining such
additional statutory net worth is in the best interest of our members and other
constituencies. Moreover, if we expand our plan offerings in a state or pursue
new business opportunities, we may be required to make additional statutory
capital contributions.

In addition to the foregoing requirements, our regulated subsidiaries are
subject to restrictions on their ability to make dividend payments, loans and
other transfers of cash. Dividend restrictions vary by state, but the maximum
amount of dividends which can be paid without prior approval from the applicable
state is subject to restrictions relating to statutory capital, surplus and net
income for the previous year. Some states require prior approval of all
dividends, regardless of amount. States may disapprove any dividend that,
together with other dividends paid by a subsidiary in the prior 12 months,
exceeds the regulatory maximum as computed for the subsidiary based on its
statutory surplus and net income. For the years ended December 31, 2012, 2011
and 2010, we received $192.0 million, $92.0 million and $45.7 million
respectively, in cash dividends from our regulated subsidiaries.

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For additional information on regulatory requirements, see Note 16 - Regulatory Capital and Dividend Restrictions to the Consolidated Financial Statements.

Commitments and Contingencies


The following table sets forth information regarding our contractual obligations
as of December 31, 2012.

                                               Payments due to period
                                         Less Than      1 - 3      3 - 5     More than
                              Total        1 Year       Years      Years      5 Years
                                                    (In millions)
Operating leases             $  70.9    $      19.3    $  37.5    $  9.6    $       4.5
Capital leases                   3.3            1.6        1.7         -              -
Purchase obligations (1)       148.9           78.7       70.2         -              -
Amounts accrued related to
investigation resolution (2)   105.5           37.3       68.2         -              -
Long-term debt                 135.0           15.0      120.0         -              -
Total                        $ 463.6    $     151.9    $ 297.6    $  9.6    $       4.5





(1) Our purchase obligations include commitments under contracts for equipment

leases, software maintenance and the purchase of pharmaceuticals from our

       pharmacy benefit manager.


(2)    Based on the terms of the settlement agreement reached with the Civil
       Division effective as of March 23, 2012, as discussed in Note 12 -

Commitments and Contingencies to the Consolidated Financial Statements.




We are not an obligor under or guarantor of any indebtedness of any other party;
however, we may have to pay referral claims of health care providers under
contract with us who are not able to pay costs of medical services provided by
other providers.

OFF BALANCE SHEET ARRANGEMENTS

At December 31, 2012, we did not have any off-balance sheet financing arrangements except for operating leases as described in the table above.

CRITICAL ACCOUNTING ESTIMATES


In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of our results of operations and financial
condition in conformity with GAAP. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that our
accounting estimates relating to premium revenue recognition and premiums
receivable, medical benefits expense and medical benefits payable, and goodwill
and intangible assets, are those that are most important to the portrayal of our
financial condition and results and require management's most difficult,
subjective and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.

Premium Revenue Recognition and Premiums Receivable


Our Medicare contracts with CMS renew annually. Our contracts with various state
Medicaid programs generally are multi-year contracts subject to annual renewal
provisions. Our Medicare and Medicaid contracts establish fixed, monthly rates
per member ("PMPM"). However, our Medicare contracts also have additional
provisions as described in the Medicare section below. The premiums we receive
for each member vary according to the specific government program and are
generally determined at the beginning of each new contract renewal period or
each state's fiscal year; however, premiums may be adjusted by CMS and state
agencies throughout the terms of the contracts in certain cases, as described
below. Annual rate changes are recorded when they become effective. For a full
description of the revenue elements related to our segments, see Part I - Item 1
- Business - OUR PRODUCT SEGMENTS.


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We recognize premium revenue in the period in which we are obligated to provide
services to our members. We are generally paid by CMS and state agencies in the
month in which we provide services. On a monthly basis, we bill members for any
premiums for which they are responsible according to their respective plan. Any
amounts that have been earned and have not been received are recorded in our
consolidated balance sheets as premiums receivable. Any amounts received by us
in advance of the period of service are recorded as unearned premiums in the
consolidated balance sheets and are not recognized as revenue until the
respective services have been provided. We estimate, on an ongoing basis, the
amount of member billings that may not be fully collectible based on historical
trends. An allowance is established for the estimated amount that may not be
collectible. Historically, the allowance for member premiums receivable has not
been significant relative to premium revenue. In addition, we routinely monitor
the collectability of specific premiums receivable, including Medicaid
receivables for obstetric deliveries and newborns (see "Medicaid" below) and net
receivables for member retroactivity as described below, and reflect any
required adjustments in current operations.

Premium payments are based upon eligibility lists produced by CMS and state
agencies. We verify these lists to determine whether we have been paid for the
correct premium category and program. From time to time, CMS and state agencies
require us to reimburse them for premiums that we received for individuals who
were subsequently determined by us, or by CMS or state agencies, to be
ineligible for any government-sponsored program or to belong to a plan other
than ours. Additionally, the verification of membership may result in additional
premiums due to us from CMS and state agencies for individuals who were
subsequently determined to belong to our plan for periods in which we received
no premium for those members. We estimate the amount of outstanding
retroactivity adjustments each period and adjust premium revenue accordingly. As
applicable, the estimates of retroactivity adjustments are based on historical
trends, premiums billed, the volume of member and contract renewal activity and
other information. The amounts receivable or payable identified by us through
reconciliation and verification of membership eligibility lists, which relate to
current and prior periods, are included in premiums receivable, net and other
accrued expenses and liabilities in the accompanying consolidated balance
sheets.

Medicaid


In some instances, our Medicaid fixed base PMPM premiums are subject to risk
score adjustments based on the health profile of our membership. Generally, the
risk score is determined by the state agency's analysis of encounter submissions
of processed claims data to determine the acuity of our membership relative to
the entire state's Medicaid membership. In some states, supplemental payments
are received for certain services such as high cost drugs and early childhood
prevention screenings. In contracts with certain states, we are eligible to
receive supplemental payments for obstetric deliveries and newborns. Each
contract is specific as to how and when these supplemental payments are earned
and paid. Upon delivery of a newborn, the state agency is notified according to
the contract terms. Revenue is recognized in the period that the delivery occurs
and the related services are provided to our member.

We have settled with the Georgia Department of Community Health (the "Georgia
DCH") regarding retroactive premium adjustments related to a reconciliation of
duplicate member records dating back to the beginning of the program in 2006. As
a result, we revised our previous estimate for additional premium revenue
receivable related to a previous settlement negotiated with the Georgia DCH in
2011 and we have recorded related reductions of premium revenue totaling
approximately $21.4 million during the third and fourth quarters of 2012. The
settlement resolved issues with certain premium payments that covered the period
from the inception of the program through the settlement, and resulted from a
comprehensive review and negotiation involving the three health plans that
operate in the program.

Minimum Medical Expense Provisions


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


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Medicare Advantage (MA)


The amount of premiums we receive for each MA member is established by contract,
although the rates vary according to a combination of factors, including upper
payment limits established by CMS, a member's geographic location, age, gender,
medical history or condition, or the services rendered to the member. Changes to
monthly premiums are also based upon a member's health status as described under
"Medicare Risk-Adjusted Premiums" below. We also offer coverage of prescription
drug benefits under the Medicare Part D program as a component of most of our MA
plans. See further discussion of revenue recognition policies specific to
Medicare Part D in "PDP" below.

Medicare Risk-Adjusted Premiums


CMS employs a risk-adjustment model to determine the premium amount it pays for
each Medicare member. The risk-adjustment model apportions premiums paid to all
plans according to the health status of each beneficiary enrolled and pays more
for MA members with predictably higher costs. We collect claims and encounter
data from inpatient and ambulatory treatment settings and submit the data to
CMS, within prescribed deadlines, which are used to calculate the risk-adjusted
premiums we receive. CMS establishes the premium payments to MA plans generally
at the beginning of the plan year, and then adjusts premium levels on two
separate occasions on a retroactive basis. The first retroactive adjustment for
a given plan year generally occurs during the third quarter of that year. This
initial settlement represents the update of risk scores for the current plan
year based on the severity of claims incurred in the prior plan year. CMS then
issues a final retroactive risk-adjusted premium settlement for that plan year
in the following year.

We develop our estimates for MA risk-adjusted premiums utilizing historical
experience, or other data, and predictive models as sufficient member risk score
data becomes available over the course of each CMS plan year. Our estimates are
periodically updated as additional diagnosis code information is reported to CMS
and are adjusted to actual amounts when the ultimate adjustment settlements are
either received from CMS or we receive notification from CMS of such settlement
amounts. Historically, we have not experienced significant differences between
the amounts that we have recorded and ultimately received; however, it is
possible that adjustments to premium revenue could have a material effect on our
results of operations, financial position and cash flows in a particular period.

The data provided to CMS to determine members' risk scores is subject to audit
by CMS even after the annual settlements occur. An audit may result in the
refund of premiums to CMS. While our experience to date has not resulted in a
material refund payable to CMS, future refunds could materially reduce premium
revenue in the year in which CMS determines a refund is required.

PDP


Substantially all the premium that we receive for Medicare Part D coverage is
paid by CMS, and the balance is due from enrolled members. The premium amounts
received from CMS are based on the plan year bid submitted to CMS. The monthly
payment is a risk-adjusted amount per member and is based upon the member's
health status as determined by CMS, as more fully described above under
"Medicare Risk Adjusted Premiums". As we do not have access to diagnosis data
with respect to our stand-alone PDP members, we cannot anticipate changes in our
members' risk scores. Changes in CMS premiums related to risk-score adjustments
for our stand-alone PDP membership are recognized when the amounts become
determinable and collectability is reasonably assured, which occurs when we are
notified by CMS of such adjustments.

Low-income cost sharing, catastrophic reinsurance and coverage gap discount subsidies


Low-income cost sharing, catastrophic reinsurance and coverage gap discount
subsidies represent funding from CMS for which we assume no risk. The receipt of
these subsidies and the payments of the actual prescription drug costs related
to the low-income cost sharing, catastrophic reinsurance and coverage gap
discounts are not recognized as premium revenues or benefits expense, but are
reported on a net basis as funds receivable/held for the benefit of members in
the consolidated balance sheets. These receipts and payments are reported as a
financing activity in our consolidated statements of cash flows. Approximately
nine months after the close of the annual plan year, except for the coverage gap
discount which has a longer settlement timeframe, CMS reconciles actual
experience to prospective payments paid to our plans and any differences are
settled between CMS and our plans. Historically, we have not experienced
material adjustments related to the CMS annual reconciliation of prior plan year
low-income cost sharing and catastrophic reinsurance subsidies or coverage gap
discount subsidies, due to its recent implementation.


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CMS risk corridor


Premiums received from CMS are subject to risk sharing through the Medicare
Part D risk corridor provisions. The CMS risk corridor calculation compares our
actual experience to the target amount of prescription drug costs, limited to
costs under the standard coverage as defined by CMS, less rebates included in
our submitted plan year bid. Variances of more than 5% above the target amount
result in additional payments by CMS to us. Variances of more than 5% below the
target amount require us to refund amounts to CMS. We estimate the risk corridor
receivable or payable throughout the year as if the annual contract were to
terminate at the end of the reporting period and reflect any adjustments to
premium in current operations. This estimate provides no consideration of future
pharmacy claims experience, but does require us to consider factors that may not
be certain, including membership, risk scores, prescription drug events, and
rebates. Approximately nine months after the close of the annual plan year, CMS
reconciles actual experience to the target amount and any differences are
settled between CMS and our plans. Historically, we have not experienced
material adjustments related to the CMS settlement of prior years' risk corridor
estimates.

Estimating Medical Benefits Expense and Medical Benefits Payable


The cost of medical benefits is recognized in the period in which services are
provided and includes an estimate of the cost of incurred but not reported
("IBNR") medical benefits. Medical benefits payable represents amounts for
claims fully adjudicated but not yet paid and estimates for IBNR, and includes
direct medical expenses and medically-related administrative costs. Direct
medical expenses include amounts paid or payable to hospitals, physicians and
providers of ancillary services, such as laboratories and pharmacies. Recorded
direct medical expenses are reduced by the amount of pharmacy rebates earned,
which are estimated based on historical utilization of specific pharmaceuticals,
current utilization and contract terms. Pharmacy rebates earned but not yet
received from pharmaceutical manufacturers are included in pharmacy rebates
receivable in the accompanying consolidated balance sheets. Direct medical
expenses may also include reserves for estimated referral claims related to
health care providers under contract with us who are financially troubled or
insolvent and who may not be able to honor their obligations for the costs of
medical services provided by other providers. In these instances, we may be
required to honor these obligations for legal or business reasons. Based on our
current assessment of providers under contract with us, such losses have not
been and are not expected to be significant. Also, included in direct medical
expense are estimates for provider settlements due to clarification of contract
terms, out-of-network reimbursement, claims payment differences and amounts due
to contracted providers under risk-sharing arrangements. Medically-related
administrative costs such as preventive health and wellness, care management,
case and disease management, and other quality improvement costs are included in
medical benefits expense. Other medically-related administrative costs such as
utilization review services, network and provider credentialing and claims
handling costs, are recorded in selling, general, and administrative expenses.

The following table provides a detail of the components of medical benefits
payable:
                                                      % of                           % of
                                December 31, 2012     Total    December 31, 2011     Total
                                                      (In millions)
IBNR                           $             547.4     75%    $             526.7     71%
Other medical benefits payable               185.6     25%                  218.1     29%
Total medical benefits payable $             733.0    100%    $             

744.8 100%




Medical benefits payable is the most significant estimate included in the
consolidated financial statements. We use a consistent methodology to record
management's best estimate of medical benefits payable based on the experience
and information available to us at the time. This estimate is determined
utilizing standard actuarial methodologies based upon historical experience and
key assumptions consisting of trend factors and completion factors using an
assumption of moderately adverse conditions, which vary by business segment.
These standard actuarial methodologies include using, among other factors,
contractual requirements, historic utilization trends, the interval between the
date services are rendered and the date claims are paid, denied claims activity,
disputed claims activity, benefits changes, expected health care cost inflation,
seasonality patterns, maturity of lines of business and changes in membership.

The factors and assumptions described above that are used to develop our
estimate of medical benefits expense and medical benefits payable inherently are
subject to greater variability when there is more limited experience or
information available to us. The ultimate claims payment amounts, patterns and
trends for new products and geographic areas cannot be precisely predicted at
their onset, since we, the providers and the members do not have experience in
these products or geographic areas. Standard accepted actuarial methodologies,
discussed above, would allow for this inherent variability. This can result in
larger differences between the originally estimated medical benefits payable and
the actual claims amounts paid.

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Conversely, during periods where our products and geographies are more stable
and mature, we have more reliable claims payment patterns and trend experience.
With more reliable data, we should be able to more closely estimate the ultimate
claims payment amounts; therefore, we may experience smaller differences between
our original estimate of medical benefits payable and the actual claim amounts
paid.

In developing our estimates, we apply different estimation methods depending on
the month for which incurred claims are being estimated. For the more recent
months, which constitute the majority of the amount of the medical benefits
payable, we estimate claims incurred by applying observed trend factors to the
fixed fee PMPM costs for prior months, which costs have been estimated using
completion factors, in order to estimate the PMPM costs for the most recent
months. We validate our estimates of the most recent PMPM costs by comparing the
most recent months' utilization levels to the utilization levels in prior months
and actuarial techniques that incorporate a historical analysis of claim
payments, including trends in cost of care provided and timeliness of submission
and processing of claims.

Many aspects of the managed care business are not predictable. These aspects
include the incidences of illness or disease (such as congestive heart failure
cases, cases of upper respiratory illness, the length and severity of the flu
season, diabetes cases, the number of full-term versus premature births and the
number of neonatal intensive care babies). Therefore, we must continually
monitor our historical experience in determining our trend assumptions to
reflect the ever-changing mix, needs and size of our membership. Among the
factors considered by management are changes in the level of benefits provided
to members, seasonal variations in utilization, identified industry trends and
changes in provider reimbursement arrangements, including changes in the
percentage of reimbursements made on a capitation as opposed to a
fee-for-service basis. These considerations are reflected in the trends in our
medical benefits expense. Other external factors such as government-mandated
benefits or other regulatory changes, catastrophes and epidemics may impact
medical cost trends. Other internal factors such as system conversions and
claims processing interruptions may impact our ability to accurately predict
estimates of historical completion factors or medical cost trends. Medical cost
trends potentially are more volatile than other segments of the economy.
Management uses considerable judgment in determining medical benefits expense
trends and other actuarial model inputs. We believe that the amount of medical
benefits payable as of December 31, 2012 is adequate to cover our ultimate
liability for unpaid claims as of that date; however, actual payments may differ
from established estimates. If the completion factors we used in estimating our
IBNR for the year ended December 31, 2012 were decreased by 1%, our net income
would decrease by approximately $73.1 million. If the completion factors were
increased by 1%, our net income would increase by approximately $71.5 million.

After determining an estimate of the base reserve, actuarial standards of
practice require that a margin for uncertainty be considered in determining the
estimate for unpaid claim liabilities. If such a margin is included, the claim
liabilities should be adequate under moderately adverse conditions. Therefore,
we make an additional estimate in the process of establishing the IBNR, which
also uses standard actuarial techniques, to account for moderately adverse
conditions that may cause actual claims to be higher than estimated compared to
the base reserve. We refer to this additional liability as the provision for
moderately adverse conditions. The provision for moderately adverse conditions
is a component of our overall determination of the adequacy of our IBNR reserve
and is intended to capture the potential adverse development from factors such
as our entry into new geographical markets, our provision of services to new
populations such as the aged, blind and disabled, the variations in utilization
of benefits and increasing medical cost, changes in provider reimbursement
arrangements, variations in claims processing speed and patterns, claims
payment, the severity of claims, and outbreaks of disease such as the flu.
Because of the complexity of our business, the number of states in which we
operate, and the need to account for different health care benefit packages
among those states, we make an overall assessment of IBNR after considering the
base actuarial model reserves and the provision for moderately adverse
conditions. We consistently apply our IBNR estimation methodology from period to
period. We review our overall estimates of IBNR on a monthly basis. As
additional information becomes known to us, we adjust our assumptions
accordingly to change our estimate of IBNR. Therefore, if moderately adverse
conditions do not occur, evidenced by more complete claims information in the
following period, then our prior period estimates will be revised downward,
resulting in favorable development. However, when a portion of the development
related to the prior year incurred claims is offset by an increase determined to
address moderately adverse conditions for the current year incurred claims, we
do not consider that development amount as having any impact on net income
during the period. If moderately adverse conditions occur and are more than we
estimated, then our prior period estimates will be revised upward, resulting in
unfavorable development, which would decrease current period net income.


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Changes in medical benefits payable estimates are primarily the result of
obtaining more complete claims information and medical expense trend data over
time. Volatility in members' needs for medical services, provider claims
submissions and our payment processes result in identifiable patterns emerging
several months after the causes of deviations from assumed trends occur. Since
our estimates are based upon PMPM claims experience, changes cannot typically be
explained by any single factor, but are the result of a number of interrelated
variables, all of which influence the resulting medical cost trend. Differences
between actual experience and estimates used to establish the liability, which
we refer to as prior period developments, are recorded in the period when such
differences become known and have the effect of increasing or decreasing the
reported medical benefits expense in such periods.

The following table provides a reconciliation of the beginning and ending balance of medical benefits payable:

                                             Years Ended December 31,
                                         2012          2011          2010
                                                   (In millions)

Balances as of beginning of period $ 744.8$ 743.0$ 802.5 Medical benefits incurred related to: Current period

                          6,450.5       5,200.1       4,711.2
Prior periods                            (146.6 )      (252.1 )      (116.3 )
Total                                   6,303.9       4,948.0       4,594.9
Medical benefits paid related to:
Current period                         (5,754.9 )    (4,533.9 )    (4,084.6 )
Prior periods                            (560.8 )      (412.3 )      (569.8 )
Total                                  (6,315.7 )    (4,946.2 )    (4,654.4 )

Balances as of end of period $ 733.0$ 744.8$ 743.0




Medical benefits payable recorded at December 31, 2011, 2010 and 2009 developed
favorably by approximately $146.6 million, $252.1 million and $116.3 million in
2012, 2011 and 2010, respectively. A portion of the prior period development was
attributable to the release of the provision for moderately adverse conditions,
which is included as part of the assumptions. The release of the provision for
moderately adverse conditions was substantially offset by the provision for
moderately adverse conditions established for claims incurred in the current
year. Accordingly, the change in the amount of the incurred claims related to
prior years in the Medical benefits payable does not directly correspond to an
increase in net income recognized during the period.

In addition to the release of the provision for moderately adverse conditions,
medical benefits expense for the years ended December 31, 2012, 2011 and 2010
was impacted by approximately $76.7 million, $191.2 million and $56.2 million
respectively, of net favorable development related to prior years. The net
favorable development in 2012 was due to the medical cost trend emerging
favorably, mostly in our Medicaid segment and to a lesser extent in our MA and
PDP segments, primarily due to lower than projected utilization, partially
offset by higher than expected medical services in Kentucky. The net favorable
development during 2011 was attributable to the 2010 medical cost trend emerging
favorably than we originally estimated, mostly in our Medicaid segment and to a
lesser extent in our MA segment, primarily due to lower than projected
utilization. The net favorable development in 2010 was primarily associated with
the exit of the PFFS product on December 31, 2009. The factors impacting the
changes in the determination of medical benefits payable discussed above were
not discernible in advance. The impact became clearer over time as claim
payments were processed and more complete claims information was obtained.


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Goodwill and Other Intangible Assets


We review goodwill and intangible assets for impairment at least annually, or
more frequently if events or changes in our business climate occur that may
potentially affect the estimated useful life or the recoverability of the
remaining balance of goodwill or intangible assets. Events or changes in
circumstances would include significant changes in membership, state funding,
federal and state government contracts and provider networks. Goodwill is
evaluated for impairment by first performing a qualitative assessment to
determine whether a quantitative assessment is necessary. If, based on the
qualitative assessment, we determine the fair value of the reporting unit is
more likely than not less than the carrying value, we perform a two-step
quantitative goodwill impairment test. The first step is to determine the fair
value of the reporting unit using both the income and market approach. In doing
so, we must make assumptions and estimates, such as projected revenues and the
discount factor, in estimating fair values. While we believe these assumptions
and estimates are appropriate, other assumptions and estimates could be applied
and may produce significantly different results. If the fair value of the
reporting unit is less than its carrying value, we measure and record the amount
of the goodwill impairment, if any, by comparing the implied fair value of the
reporting unit's goodwill with the carrying value. We select the second quarter
of each year for our annual goodwill impairment test, which generally coincides
with the finalization of federal and state contract negotiations and our initial
budgeting process, with the test completed during the third quarter of that
year. Based on the results of the qualitative assessments performed as of our
most recent testing date in 2012, and our review at December 31, 2012, we
determined that the fair value of our Medicaid reporting unit is more likely
than not greater than the carrying value as of December 31, 2012. Our review
included consideration of the termination of our Missouri and Ohio Medicaid
contracts as discussed in Part I - Item 1 - Business - "OUR PRODUCT SEGMENTS."

RECENTLY ADOPTED ACCOUNTING STANDARDS


Refer to Note 2 - Summary of Significant Accounting Policies, included in the
Consolidated Financial Statements for information and disclosures related to new
accounting standards which are incorporated herein by reference.
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