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•	Expanding existing markets. Our Health Plans segment enrollment has grown approximately 36% since December 31, 2013, primarily a result of:

◦	Our 2014 growth initiatives associated with the Affordable Care Act (ACA). Since the inception of these programs in January 2014 through the end of fiscal 2014, we have added approximately 385,000 Medicaid expansion members, 18,000 integrated Medicare-Medicaid Plan (MMP) members, and 15,000 Marketplace members;

◦	The inception and growth of operations at our newer health plans in South Carolina and Illinois, adding over 200,000 members in the aggregate in fiscal 2014; and

◦	Acquisition of two Medicaid contracts in Florida, which added approximately 73,000 new members in fiscal 2014.

•	Entering new strategic markets. In 2014, we were awarded a managed care contract in the Commonwealth of Puerto Rico that is expected to enroll its first members April 1, 2015. Total enrollment is expected to be approximately 350,000 new members, with anticipated annualized revenue of $750 million.

•	Funding future growth. Debt financing transactions generated net cash of approximately $123 million; such transactions both extended the maturity date and lowered the rate of our convertible senior notes previously due in 2014.

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Medicaid Expansion. In the states that have elected to participate, the ACA provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington have begun participating in Medicaid expansion. At December 31, 2014, our membership included approximately 385,000 Medicaid expansion members, or 15% of total membership.

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Health Insurance Marketplace. The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in all of the states in which we operate, except Illinois and South Carolina. At December 31, 2014, we had approximately 15,000 Marketplace members.

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Medicare-Medicaid Plans. Policymakers at the federal and state levels are increasingly focused on the design and implementation of programs that improve the coordination of care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to the dual eligible in a more financially efficient manner. As a result of these efforts, 15 states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual-eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014, and we expect to begin offering MMP coverage in South Carolina and Texas in the first quarter of 2015, and in Michigan in the second quarter of 2015.

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Direct Delivery. Growth and aging of the U.S. population foreshadows an increasing shortage of physicians over the next 15 years. Health care reform is expected to worsen this shortage. We believe the shortage will be felt most acutely among already under-served populations, such as the financially vulnerable families and individuals we serve. While we have no plans to become an organization that fully integrates primary care delivery with our health plans, by leveraging our direct delivery capability on a selective basis we can improve access for our plan members in areas that are most under-served by primary care providers. We operate primary care clinics in the states of California, Florida, New Mexico, Utah, Virginia and Washington. In addition, we perform certain medical and administrative management services for a hospital in Long Beach, California, including the assumption of financial benefit and risk for a number of acute care beds at the hospital. We believe that this arrangement improves hospital access for our members in the Long Beach, California area, and enhances our overall direct delivery strategy. We may incur losses while we seek to modify various business operations and patient behaviors under the management services agreement.

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•	Multi-Product Managed Care Organizations - National and regional managed care organizations that have Medicaid members in addition to numerous commercial health plan and Medicare members.

•	Medicaid HMOs - National and regional managed care organizations that focus principally on providing health care services to Medicaid beneficiaries, many of which operate in only one city or state.

•	Prepaid Health Plans - Health plans that provide less comprehensive services on an at-risk basis or that provide benefit packages on a non-risk basis.

•	Primary Care Case Management Programs - Programs established by the states through contracts with primary care providers to provide primary care services to Medicaid beneficiaries, as well as to provide limited oversight of other services.

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Disease Management Programs. We develop specialized disease management programs that address the particular health care needs of our members. "motherhood matters!sm" is a comprehensive program designed to improve pregnancy outcomes and enhance member satisfaction. "breathe with ease!" is a multi-disciplinary disease management program that provides health education resources and case management services to assist physicians caring for asthmatic members between the ages of three and 15. "Healthy Living with Diabetes" is a diabetes disease management program. "Heart Healthy Living" is a cardiovascular disease management program for members who have suffered from congestive heart failure, angina, heart attack, or high blood pressure.

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Educational Programs. Educational programs are an important aspect of our approach to health care delivery. These programs are designed to increase awareness of various diseases, conditions, and methods of prevention in a manner that supports our providers while meeting the unique needs of our members. For example, we provide our members with information to guide them through various episodes of care. This information, which is available in several languages, is designed to educate members on the use of primary care physicians, emergency rooms, and nurse call centers.

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Pharmacy Management Programs. Our pharmacy management programs focus on physician education regarding appropriate medication utilization and encouraging the use of generic medications. Our pharmacists and medical directors work with our pharmacy benefits manager to maintain a formulary that promotes both improved patient care and generic drug use. We employ full-time pharmacists and pharmacy technicians who work with physicians to educate them on the uses of specific drugs, the implementation of best practices, and the importance of cost-effective care.

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•	Provider Self Services - Providers have the ability to access information regarding their members and claims. Key functionalities include "Check Member Eligibility," "View Claim," and "View/Submit Authorizations."

•	Member Self Services - Members can access information regarding their personal data, and can perform the following key functionalities: "View Benefits," "Request New ID Card," "Print Temporary ID Card," and "Request Change of Address/PCP."

•	File Exchange Services - Various trading partners, such as service partners, providers, vendors, management companies, and individual IPAs, are able to exchange data files (such as those that may be required by federal health care privacy regulations, or any other proprietary format) with us using the file exchange functionality.

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•	We must measure provider access and availability in terms of the time needed to reach the doctor’s office using public transportation;

•	Our quality improvement programs must emphasize member education and outreach and include measures designed to promote utilization of preventive services;

•	We must have linkages with schools, city or county health departments, and other community-based providers of health care, to demonstrate our ability to coordinate all of the sources from which our members may receive care;

•	We must be able to meet the needs of the disabled and others with special needs;

•	Our providers and member service representatives must be able to communicate with members who do not speak English or who are deaf; and

•	Our member handbook, newsletters, and other communications must be written at the prescribed reading level, and must be available in languages other than English.

•	Our provider network is adequate;

•	Our quality and utilization management processes comply with state requirements;

•	We have adequate procedures in place for responding to member and provider complaints and grievances;

•	We can meet requirements for the timely processing of provider claims;

•	We can collect and analyze the information needed to manage our quality improvement activities;

•	We have the financial resources necessary to pay our anticipated medical care expenses and the infrastructure needed to account for our costs;

•	We have the systems required to process enrollment information, to report on care and services provided, and to process claims for payment in a timely fashion; and

•	We have the financial resources needed to protect the state, our providers, and our members against the insolvency of one of our health plans.

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•	Establish the capability to receive and transmit electronically certain administrative health care transactions, like claims payments, in a standardized format;

•	Afford privacy to patient health information; and

•	Protect the privacy of patient health information through physical and electronic security measures.

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Risks associated with the health care federal excise tax. One notable provision of the ACA is an excise tax or annual fee that applies to most health plans, including commercial health plans and Medicaid managed care plans like Molina Healthcare. While characterized as a "fee" in the text of the ACA, the intent of Congress was to impose a broad-based health insurance industry excise tax, with the understanding that the tax could be passed on to consumers, most likely through higher commercial insurance premiums. However, because Medicaid is a government funded program, Medicaid health plans have no alternative but to look to their respective state partners for payment to offset the impact of this tax. Additionally, when states reimburse us for the amount of the HIF, that reimbursement is itself subject to income tax, the HIF, and applicable state premium taxes. Because the HIF is not deductible for income tax purposes, our net income is reduced by the full amount of the assessment. The state of California has not formally committed to reimburse us for either the HIF itself, or the related tax effects. The states of Michigan and Utah have reimbursed us for the HIF, but have not formally committed to reimbursement for the related tax effect. The total amount of HIF revenue for which agreements were not secured (and revenue was not recognized) amounted to approximately $20 million for fiscal 2014. We expect to collect and recognize this revenue related to 2014 in 2015. We further expect to recognize revenue in 2015 sufficient to reimburse us for the full amount of the HIF we will pay (along with related tax effects) in September of 2015. We expect our 2015 HIF assessment related to our Medicaid business to be approximately $143 million, with an expected tax effect from the reimbursement of the assessment of approximately $88 million. Therefore, the total reimbursement needed as a result of the Medicaid-related HIF is approximately $231

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Risks associated with the duals expansion. Nine million low-income elderly and disabled people are covered under both the Medicare and Medicaid programs. These beneficiaries are more likely than other Medicare beneficiaries to be frail, live with multiple chronic conditions, and have functional and cognitive impairments. Medicare is their primary source of health insurance coverage, as it is for the nearly 50 million elderly and under-65 disabled beneficiaries in 2012. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental care and long-term care services and support, and by helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs. Policymakers at the federal and state levels are increasingly focused on the design and implementation of programs that improve the coordination of care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to the dual eligible in a more financially efficient manner. As a result of these efforts, 15 states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual-eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014, and we expect to begin offering MMP coverage in South Carolina and Texas in the first quarter of 2015, and in Michigan in the second quarter of 2015.

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Risks associated with Medicaid expansion. In the states that have elected to participate, the ACA provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington have begun participating in Medicaid expansion. At December 31, 2014, our membership included approximately 385,000 Medicaid expansion members, or 15% of total membership. The new enrollees in our health plans represent a population that is different from the population of Medicaid enrollees we have historically managed. All of the risk factors described above with regard to the duals demonstration programs apply equally to Medicaid expansion.

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Risks associated with health insurance marketplaces. The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in all of the states in which we operate, except Illinois and South Carolina. At December 31, 2014, we had approximately 15,000 Marketplace members, and that enrollment is expected to grow appreciably in 2015, particularly at our Florida health plan. All of the risk factors described above with regard to the duals demonstration programs apply equally to our participation in the insurance marketplaces.

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Risks associated with the King v. Burwell case. There is a case currently pending before the United States Supreme Court to be argued on March 4, 2015, challenging whether the IRS may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government under Section 1321 of the ACA. In the event the Supreme Court rules against Health and Human Services Secretary Burwell, no federal subsidies would be allowed to be paid to those individuals purchasing health insurance through the federally facilitated exchanges, of which there are currently 36. This would undermine the functioning of those exchanges, and cause major disruption under the entire ACA throughout the nation.

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Risk associated with implementing regulations. There are many parts of the ACA that require further guidance in the form of regulations. Due to the breadth and complexity of the ACA, the lack of implementing regulations and interpretive guidance, and the phased nature of the ACA’s implementation, the overall impact of the ACA on our business and on the health industry in general over the coming years is difficult to predict and not yet fully known, and implementing regulations could contain provisions that have a material adverse effect on our business, financial condition, cash flows, or results of operations.

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•	additional employees who are not familiar with our operations or our corporate culture,

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

•	additional members who may decide to transfer to other health care providers or health plans,

•	disparate information, claims processing, and record-keeping systems,

•	internal controls and accounting policies, including those which require the exercise of judgment and complex estimation processes, such as estimates of claims incurred but not reported, accounting for goodwill, intangible assets, stock-based compensation, and income tax matters, and

•	new regulatory schemes, relationships, practices, and compliance requirements.

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•	a staggered board of directors, so that it would take three successive annual meetings to replace all directors,

•	prohibition of stockholder action by written consent, and

•	advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.

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(1)	During the quarter we withheld 4,356 shares of common stock under our 2002 Equity Incentive Plan and 2011 Equity Incentive Plan to settle our employees' income tax obligations.

(2)	Effective as of September 30, 2013, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. This repurchase program expired December 31, 2014.

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(1)	Service revenue and cost of service revenue represent revenue and costs generated by our Molina Medicaid Solutions segment. Because we acquired this business on May 1, 2010, results for the year ended December 31, 2010 include eight months of results for this segment.

(2)

As previously reported, in February 2012 the Division of Purchasing of the Missouri Office of Administration notified our Missouri health plan that it was not awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, the Missouri health plan’s existing contract with the state expired without renewal on June 30, 2012. In connection with this notification, the Missouri health plan recorded a non-cash impairment charge of $64.6 million in the fourth quarter of 2011. Results relating to the Missouri health plan have been reported as discontinued operations for all periods presented. (Loss) income from discontinued operations is presented net of income tax (benefit) expense of $(203), $(9,912), $(1,238), $922, and $4,011, respectively.

(3)

Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a key operating indicator used to measure our performance in delivering efficient and cost effective health care services. Changes in the medical care ratio from period to period result from changes in Medicaid funding by the states, utilization of medical services, our ability to effectively manage costs, contract changes, and changes in accounting estimates related to incurred but not paid claims. See Item 7 in this Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," for further discussion.

(4)	General and administrative expense ratio represents such expenses as a percentage of total revenue.

(5)	Premium tax ratio represents such expenses as a percentage of premium revenue plus premium tax revenue.

(6)	Number of members at end of period.

(7)	Includes convertible senior notes, lease financing obligations, and other long-term debt.

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•	Net income from continuing operations increased to $62.6 million in 2014, from $44.8 million in 2013 due to increases in enrollment and revenue, and improved administrative cost efficiency; which offset higher medical costs and higher tax rates.

•	Strong enrollment growth across all of our programs combined with an 18% increase in premium revenue per member, generated almost $3 billion, or 46%, more premium revenue in 2014 compared with 2013.

•	General and administrative expenses as a percentage of revenue declined to 7.9% in 2014, versus 10.1% in 2013.

•	Medical care costs as a percentage of premium revenue increased to 89.5% in 2014, from 87.1% in 2013.

•	Debt financing transactions generated net cash of $122.6 million; such transactions both extended the maturity date and lowered the rate of our convertible senior notes previously due in 2014.

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Medicaid Expansion. In the states that have elected to participate, the ACA provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington have begun participating in Medicaid expansion. At December 31, 2014 our membership included approximately 385,000 Medicaid expansion members, or 15% of total membership.

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Marketplace. The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in all of the states in which we operate, except Illinois and South Carolina. At December 31, 2014, we had approximately 15,000 Marketplace members, and that enrollment is expected to grow appreciably in 2015, particularly at our Florida health plan.

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Medicare-Medicaid Plans. Policymakers at the federal and state levels are increasingly focused on the design and implementation of programs that improve the coordination of care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to the dual eligible in a more financially efficient manner. As a result of these efforts, 15 states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual-eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014, and we expect to begin offering MMP coverage in South Carolina and Texas in the first quarter of 2015, and in Michigan in the second quarter of 2015.

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(1)	CHIP stands for Children's Health Insurance Program.

(2)	MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.

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(1)	Our South Carolina health plan began serving members under the state of South Carolina’s new full-risk Medicaid managed care program effective January 1, 2014.

(2)	Medicaid expansion membership phased in, and the Marketplace became available for consumers to access coverage, beginning January 1, 2014.

•	Fee-for-service expenses: Nearly all hospital services and the majority of our primary care and physician specialist services and LTSS costs are paid on a fee-for-service basis. Under fee-for-service arrangements, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of services. Such expenses are

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•	Pharmacy expenses: All drug, injectibles, and immunization costs paid through our pharmacy benefit manager are classified as pharmacy expenses. As noted above, drugs and injectibles not paid through our pharmacy benefit manager are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.

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Capitation expenses: Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under capitated arrangements, we remain liable for the provision of certain health care services. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.

•	Direct delivery expenses: All costs associated with our direct delivery of medical care are separately identified.

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Other medical expenses: All medically related administrative costs, certain provider incentive costs, reinsurance costs and other health care expenses are classified as other medical expenses. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of these expenses. For the years ended December 31, 2014, 2013, and 2012, medically related administrative costs were $262.6 million, $153.0 million, and $125.2 million, respectively.

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•	Much of our revenue growth has come from participation in Medicaid programs covering LTSS. Percentage profit margins for LTSS benefits are generally lower than percentage profit margins for acute medical benefits.

•	Increases to our base premiums in recent years have not kept pace with medical cost trends.

•	Lack of coordination in the design of profit caps and medical cost floors in some of our state Medicaid contracts is resulting in counterproductive outcomes. In some instances, givebacks due to profitable performance in one product cannot be offset against losses in other products.

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(1)	A member month is defined as the aggregate of each month’s ending membership for the period presented.

(2)	"MCR" represents medical costs as a percentage of premium revenue.

(3)	"Other" medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.

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(1)

Premium revenue for our former Missouri health plan was $0.2 million and $114.4 million for the years ended December 31, 2013 and 2012, respectively. Medical care costs for the plan were $1.5 million and $105.6 million for the years ended December 31, 2013 and 2012, respectively. These amounts are excluded from the tables above because the results of this health plan are classified as discontinued operations.

(2)	A member month is defined as the aggregate of each month’s ending membership for the period presented.

(3)	"MCR" represents medical costs as a percentage of premium revenue.

(4)	"Other" medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.

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•	$441.8 million increase in amounts due to government agencies, due to a significant increase in amounts accrued for medical cost floor contract provisions primarily associated with our Medicaid expansion membership; and

•	$355.5 million increase in medical claims and benefits payable due to significant membership growth in 2014.

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(1)	Amounts in the table include the full economic impact of the excise tax including premium tax and the income tax effect.

•	Health Plans segment medical claims and benefits payable (see discussion below).

•	Health Plans segment contractual provisions that may adjust or limit revenue or profit. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2, "Significant Accounting Policies."

•	Health Plans segment quality incentives. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2, "Significant Accounting Policies."

•	Molina Medicaid Solutions segment revenue and cost recognition. For a comprehensive discussion of this topic, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 2, "Significant Accounting Policies."

(1)

"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. As of December 31, 2014 and 2013, we recorded non-risk provider payables relating to such intermediary arrangements of approximately $119.3 million and $151.3 million, respectively.

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(1)	As of December 31, 2014, we have recorded approximately $2.6 million of unrecognized tax benefits. The table does not contain this amount because we cannot reasonably estimate when or if such amount may be settled. For further information, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 14, "Income Taxes."

(2)

Represents the principal amounts due on our 1.125% Cash Convertible Senior Notes due 2020, and our 1.625% Convertible Senior Notes due 2044 (1.625% Notes). The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, as described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note 12, "Long-Term Debt."

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•	Health plan contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;

•	Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are met;

•	The determination of medical claims and benefits payable of our Health Plans segment;

•	The valuation of certain investments;

•	Settlements under risk or savings sharing programs;

•	The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and goodwill for impairment;

•	The determination of professional and general liability claims, and reserves for potential absorption of claims unpaid by insolvent providers;

•	The determination of reserves for the outcome of litigation;

•	The determination of valuation allowances for deferred tax assets; and

•	The determination of unrecognized tax benefits.

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•	Amortization of purchased intangibles relating to customer relationships is reported as amortization within the heading "Depreciation and amortization;"

•	Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of "Service revenue;" and

•	Amortization of capitalized software is recorded within the heading "Cost of service revenue."

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The contract backlog intangible asset comprises all contractual cash flows anticipated to be received during the remaining contracted period for each specific contract relating to work that was performed prior to acquisition. Because each acquired contract constitutes a single revenue stream, amortization of the contract backlog intangible is recorded to contra-service revenue so that amortization is matched to any revenues associated with contract performance that occurred prior to the acquisition date. The contract backlog intangible asset is amortized on a

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•	The customer relationship intangible asset comprises all contractual cash flows that are anticipated to be received during the option periods of each specific contract as well as anticipated renewals of those contracts. The customer relationship intangible is amortized on a straight-line basis for each specific contract over periods generally ranging from four to nine years.

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Fee-for-service expenses: Nearly all hospital services and the majority of our primary care and physician specialist services and LTSS costs are paid on a fee-for-service basis. Under fee-for-service arrangements, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of services. Such expenses are recorded in the period in which the related services are dispensed. The costs of drugs administered in a physician or hospital setting that are not billed through our pharmacy benefit manager are included in fee-for-service costs.

•	Pharmacy expenses: All drug, injectibles, and immunization costs paid through our pharmacy benefit manager are classified as pharmacy expenses. As noted above, drugs and injectibles not paid through our pharmacy benefit manager are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.

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Capitation expenses: Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under capitated arrangements, we remain liable for the provision of certain health care services. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.

•	Direct delivery expenses: All costs associated with our direct delivery of medical care are separately identified.

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Other medical expenses: All medically related administrative costs, certain provider incentive costs, reinsurance costs and other health care expenses are classified as other medical expenses. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of these expenses. For the years ended December 31, 2014, 2013, and 2012, medically related administrative costs were $262.6 million, $153.0 million, and $125.2 million, respectively.

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•	Each contract calls for the provision of its own specific set of services. While all contracts support the system of record for state MMIS, the actual services we provide vary significantly between contracts; and

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•	The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our new contracts (commercial off-the-shelf technology solutions).

•	Transaction processing costs;

•	Employee costs incurred in performing transaction services;

•	Vendor costs incurred in performing transaction services;

•	Costs incurred in performing required monitoring of and reporting on contract performance;

•	Costs incurred in maintaining and processing member and provider eligibility; and

•	Costs incurred in communicating with members and providers.

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(1)	For more information regarding the 3.75% Exchange and 3.75% Notes, refer to Note 12, "Long-Term Debt."

(2)	Potentially dilutive shares issuable pursuant to certain of our employee stock options, 1.125% Warrants (defined in Note 13, "Derivative Financial Instruments"), and 1.625% Notes (defined in Note 12, "Long-Term Debt") were not included in the computation of diluted net income per share because to do so would have been anti-dilutive.

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The addition since January 1, 2014, of 385,000 members under Medicaid expansion in six of our health plans. Because these members are transitioning into managed care, and have different demographics than those of our legacy membership, we have little insight into their utilization of medical services. Additionally, as of December 31, 2014, we have relatively little medical claims payment history related to Medicaid expansion membership in Illinois, Michigan and Ohio because such members were enrolled in these states later in the year. Accordingly, our estimates of the claims liability for this population are subject to a higher degree of uncertainty.

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The addition of approximately 6,000 to 8,000 members per month on a retroactive basis during the last several months of 2014 at our New Mexico health plan. Because we have no claims payment history for these members, our estimates of the claims liability for this population are subject to a higher degree of uncertainty. However, for these members, the state will reimburse the health plan for claims with dates of services during the retroactive period on a cost-plus basis (claims paid plus an administration fee).

•	The addition of new membership to our MMP and aged, blind or disabled (ABD) programs at several of our health plans whose benefits include a substantial amount of managed LTSS benefits. Because these are newer members with substantially different benefits than our legacy members, our estimates of the claims liability for this population are subject to a higher degree of uncertainty.

•	At our Ohio health plan, we entered new regions in the state, and a new product, ABD Kids, in July 2013. Since we did not have enough historical claims data to use the pattern of paid and incurred claims, we initially estimated the reserves for these new members by applying an estimated medical care ratio (MCR). This resulted in an overstatement of our reserve liability as of December 31, 2013.

•	At our Michigan health plan, we overestimated the impact of certain unpaid potentially high-dollar claims. In addition, we overestimated the impact of the flu season on the outpatient claims for November and December 2013, which caused an overestimation in our outpatient reserve liability as of December 31, 2013.

•	At our Washington health plan certain high-cost newborns, as well as other high-cost disabled members, were covered by the health plan effective July 1, 2012. At the end of 2012, we had limited claims history with which to estimate the claims liability of these members, and overstated the liability for such members.

•	At our New Mexico health plan, we overestimated the impact of certain high-dollar outstanding claim payments as of December 31, 2012.

•	At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to our ABD members.

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(1)	The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, or we may redeem any or all of the 1.625% Notes.

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during any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•	during the five business day period immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.125% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;

•	upon the occurrence of specified corporate events; or

•

at any time on or after July 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of 1.125% Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Notes prior to the maturity date.

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during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•	during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.625% Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;

•	upon the occurrence of specified corporate events;

•	if we call any 1.625% Notes for redemption, at any time until the close of business on the business day immediately preceding the redemption date;

•	during the period from, and including, May 15, 2018 to the close of business on the business day immediately preceding August 19, 2018; or

•	at any time on or after February 15, 2044 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 1.625% Notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

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•	The ongoing activities of the VIE—collecting and remitting interest and fees and NMTC compliance—were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE;

•	Contractual arrangements obligate us to comply with NMTC rules and regulations and provide various other guarantees to Investment Fund and CDEs;

•	Wells Fargo lacks a material interest in the underling economics of the project; and

•	We are obligated to absorb losses of the VIE.

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(1)

Potentially dilutive shares issuable pursuant to our 1.125% Warrants and 1.625% Notes were not included in the computation of diluted net income per share, because to do so would have been anti-dilutive. Potentially dilutive shares issuable pursuant to our 3.75% Notes were not included in the computation of diluted net income per share for the quarter ended March 31, 2013, because to do so would have been anti-dilutive.

(2)	We abandoned our equity interests in the Missouri health plan during the second quarter of 2013, resulting in the recognition of a tax benefit of $9.5 million, which is reported in (loss) income from discontinued operations.

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(1)	Options to purchase shares of our common stock issued under the 2002 Equity Incentive Plan and 2011 Equity Incentive Plan. Further grants under the 2002 Equity Incentive Plan have been suspended.

(2)	Includes shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011 Employee Stock Purchase Plan.

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(a)	The consolidated financial statements and exhibits listed below are filed as part of this report.

(1)	The financial statements included in Item 8 of this Form 10-K, Financial Statements and Supplementary Data, above are filed as part of this annual report.

(2)	Financial Statement Schedules

(3)	Exhibits

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