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Health Net | 12 Months Ended
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Dec. 31, 2017
Business Combinations [Abstract] |
Health Net | Health Net On March 24, 2016, the Company acquired all of the issued and outstanding shares of Health Net, a publicly traded managed care organization that delivers healthcare services through health plans and government-sponsored managed care plans. The transaction was valued at approximately $5,990 million, including the assumption of $703 million of outstanding debt. The acquisition allows the Company to offer a more comprehensive and scalable portfolio of solutions and provides opportunity for additional growth across the combined company's markets. The total consideration for the acquisition was $5,287 million, consisting of Centene common shares valued at $3,038 million (based on Centene's stock price of $62.70), $2,247 million in cash, and $2 million related to the fair value adjustment to stock based compensation associated with pre-combination service. Each Health Net share was converted into 0.622 of a validly issued, fully paid, non-assessable share of Centene common stock and $28.25 in cash. In total, 48,449 thousand shares of Centene common stock were issued in connection with the transaction. The cash portion of the acquisition consideration was funded through the issuance of long-term debt as further discussed in Note 11, Debt. For the years ended December 31, 2017, 2016 and 2015, the Company also recognized acquisition related expenses of $7 million, $234 million, $27 million respectively, related to the Health Net acquisition, which were recorded in selling, general and administrative (SG&A) expense in the Consolidated Statements of Operations. The acquisition of Health Net has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of all the assets acquired and liabilities assumed was finalized in the fourth quarter of 2016. The Company's allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of March 24, 2016, is as follows ($ in millions):
Assets Acquired and Liabilities Assumed |  |
Cash and cash equivalents |  | $ | 956 |
Premium and trade receivables (a) |  | 1,890 |
Short-term investments |  | 74 |
Other current assets |  | 524 |
Long-term investments |  | 2,037 |
Restricted deposits |  | 30 |
Property, software and equipment, net |  | 41 |
Intangible assets (b) |  | 1,530 |
Other long-term assets |  | 136 |
Total assets acquired |  | 7,218 |
Medical claims liability (c) |  | 1,482 |
Borrowings under revolving credit facility |  | 285 |
Accounts payable and accrued expenses (c) (d) |  | 2,297 |
Return of premium payable |  | 435 |
Unearned revenue |  | 130 |
Long-term deferred tax liabilities (e) |  | 311 |
Long-term debt (f) |  | 418 |
Other long-term liabilities |  | 432 |
Total liabilities assumed |  | 5,790 |
Total identifiable net assets |  | 1,428 |
Goodwill (g) |  | 3,859 |
Total assets acquired and liabilities assumed |  | $ | 5,287 |
Significant fair value adjustments are noted as follows:
(a) | The fair value of premium and trade receivables approximated their historical cost, with the exception of the risk corridor receivable associated with the Health Insurance Marketplace. The fair value of the risk corridor receivable was estimated at $9 million.
(b) | The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after-tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also utilized in estimating the fair value of certain intangible assets. The Company determined the fair value of intangibles to be $1,530 million with a weighted average life of 12 years. Intangible assets include purchased contract rights, provider contracts, trade names and developed technologies.
(c) | Medical claims liability and accounts payable and accrued expenses include $160 million of reserves associated with substance abuse rehabilitation claims primarily related to periods prior to the acquisition date.
(d) | Accounts payable and accrued expenses include approximately $253 million related to premium deficiency reserves based on cost trends existing prior to the acquisition date. The premium deficiency reserves are primarily associated with losses in the individual commercial business, largely in California, unfavorable performance in the Arizona commercial business as well as unfavorable performance in the Medicare business primarily in Oregon and Arizona.
(e) | The deferred tax liabilities are presented net of $365 million of deferred tax assets.
(f) | Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of Health Net's $400 million Senior Notes assumed in the acquisition was $418 million. The $18 million increase was initially being amortized as a reduction to interest expense over the remaining life of the debt; however, in November 2016, this debt was redeemed. See further discussion in Note 11, Debt.
(g) | The acquisition resulted in $3,859 million of goodwill related primarily to buyer specific synergies expected from the acquisition and the assembled workforce of Health Net. This goodwill is not deductible for income tax purposes. The Company assigned $3,643 million of goodwill to the Managed Care segment and $216 million of goodwill to the Specialty Services segment.
The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
|  | Fair Value |  | Weighted Average Useful Life (in years)
Purchased contract rights |  | $ | 1,095 |  |  | 13
Provider contracts |  | 181 |  |  | 11
Trade names |  | 150 |  |  | 10
Developed technologies |  | 104 |  |  | 5
Total intangible assets acquired |  | $ | 1,530 |  |  | 12
Statement of Operations From the acquisition date through December 31, 2016, the Company's Consolidated Statements of Operations include total Health Net revenues of $13,454 million. It is impracticable to determine the effect on net income resulting from the Health Net acquisition for the year ended December 31, 2016, as the Company immediately integrated Health Net into its ongoing operations. Unaudited Pro Forma Financial Information The unaudited pro forma total revenues for the year ended December 31, 2016 were $44,280 million. The following table presents supplemental pro forma information for the year ended December 31, 2015 ($ in millions, except per share data).
|  | December 31, 2015
Total revenues |  | $ | 38,826 |
Net earnings attributable to Centene Corporation |  | $ | 245 |
Diluted earnings per share |  | $ | 1.43 |
The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2015 and is not a projection of future results. It is impracticable for the Company to determine the pro forma earnings information for the year ended December 31, 2016 due to the nature of obtaining that information as the Company immediately integrated Health Net into its ongoing operations. The unaudited pro forma financial information reflects the historical results of Centene and Health Net adjusted as if the acquisition had occurred on January 1, 2015, primarily for the following:
• | additional interest income associated with adjusting the amortized cost of Health Net's investment portfolio to fair value;
• | elimination of historical Health Net intangible asset amortization expense and addition of amortization expense based on the current values of identifiable intangible assets;
• | adjustments to premium revenues related to the risk corridor receivables associated with the Health Insurance Marketplace to align with Centene's accounting policies;
• | interest expense associated with financing the acquisition and amortization of the fair value adjustment to Health Net's debt;
• | additional stock compensation expense related to the amortization of the fair value increase to Health Net rollover stock awards.
• | increased tax expense due to the assumption that Centene would be subject to the IRS Regulation 162(m)(6) beginning in 2015; and
• | elimination of acquisition related costs.
Restructuring Related Charges In connection with the Health Net acquisition, the Company undertook a restructuring plan as a result of the integration of Health Net's operations into its business, resulting in a reduction in workforce beginning in 2016 and expected to continue through early 2017. The restructuring related costs are classified as SG&A expenses in the Consolidated Statements of Operations. Changes in the restructuring liability for the years ended December 31, 2016 and 2017 were as follows ($ in millions):
|  | Employee Termination Costs |  | Stock Based Compensation |  | Total
Total accrued restructuring costs as of December 31, 2015 |  | $ | — |  |  | $ | — |  |  | $ | — |
Charges incurred |  | 46 |  |  | 43 |  |  | 89 |
Paid/settled |  | (28 | ) |  | (43 | ) |  | (71 | )
Total accrued restructuring costs as of December 31, 2016 |  | $ | 18 |  |  | $ | — |  |  | $ | 18 |
Charges incurred |  | 4 |  |  | 3 |  |  | 7 |
Paid/Settled |  | (20 | ) |  | $ | (3 | ) |  | (23 | )
Total accrued restructuring costs as of December 31, 2017 |  | $ | 2 |  |  | $ | — |  |  | $ | 2 |
The Company recorded employee termination costs of $46 million and $4 million for the years ended December 31, 2016 and 2017, respectively, and stock based compensation of $43 million and $3 million for the years ended December 31, 2016 and 2017, respectively, in the Managed Care Segment. The Company does not expect to incur any further material employee termination or stock based compensation costs related to the acquisition. Commitments In connection with obtaining regulatory approval of the Health Net acquisition from the California Department of Insurance and th e California Department of Managed Health Care, the Company committed to certain undertakings (the Undertakings). The Undertakings included, among other items, operational commitments around premiums, dividend restrictions, minimum Risk Based Capital (RBC) levels, local offices, growth, accreditation, HEDIS scores and other quality measures, network adequacy, certifications, investments and capital expenditures. Specifically, the Company agreed to, among other things:
• | invest an additional $30 million through the California Organized Investment Network over the five years following completion of the acquisition;
• | build a service center in an economically distressed community in California, investing $200 million over 10 years and employing at least 300 people;
• | contribute $65 million to improve enrollee health outcomes ($10 million over five years), support locally based consumer assistance programs ($5 million over five years) and strengthen the healthcare delivery system ($50 million over five years), of which the present value of $61 million was expensed in the year ended December 31, 2016, and classified as SG&A expenses in the Consolidated Statements of Operations; and
• | invest $75 million of its investment portfolio in vehicles supporting California’s healthcare infrastructure.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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