Register Now
Why register?
Login
 The leading web portal for pharmacy resources, news, education and careers March 24, 2017
Pharmacy Choice - Pharmaceutical News - EHEALTH, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - March 24, 2017

Pharmacy News Article

 3/16/17 - EHEALTH, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading private health insurance exchange for individuals, families and small businesses. Through our website addresses (www.eHealth.com,

 www.eHealthInsurance.com,  www.eHealthMedicare.com, www.Medicare.com and
www.PlanPrescriber.com), consumers can get quotes from leading health insurance
carriers, compare plans side-by-side, and apply for and purchase
Medicare-related, individual and family, small business and ancillary health
insurance plans. Our ecommerce technology also enables us to deliver consumers'
health insurance applications electronically to health insurance carriers. As a
result, we simplify and streamline the complex and traditionally paper-intensive
health insurance sales and purchasing process.

We have invested heavily in technology and content related to our ecommerce
platforms. We have also invested significant time and resources in obtaining
licenses to sell health insurance in all 50 states and the District of Columbia,
developing member acquisition programs, obtaining necessary regulatory approvals
of our websites and establishing relationships and appointments with leading
health insurance carriers, enabling us to offer thousands of health insurance
plans online. Our ecommerce platforms can be accessed directly through our
websites as well as through our network of marketing partners.

During the fourth quarter of 2016, we began evaluating our business performance
and managing our operations as two distinct reporting segments - Medicare and
Individual, Family and Small Business. For more information on segment and
geographic information, see Note1 Summary of Business and Significant Accounting
Policies and Note 9 Operating Segments, Geographic Information and Significant
Customers in the Notes to Consolidated Financial Statements of this Annual
Report on Form 10-K.


Sources of Revenue

Commission Revenues

We generate revenue primarily from commissions we receive from health insurance
carriers whose health insurance policies are purchased through our ecommerce
platforms. Commission revenue represented 88%, 90% and 91% of our total revenue
in the years ended December 31, 2014, 2015 and 2016, respectively.

We typically enter into contractual agency relationships with health insurance
carriers that are non-exclusive and terminable on short notice by either party
for any reason. In addition, health insurance carriers often have the ability to
terminate or amend our agreements unilaterally on short notice, including
provisions in our agreements relating to our commission rates. The amendment or
termination of an agreement we have with a health insurance carrier may
adversely impact the commissions we are paid on health insurance plans that we
have already sold through the carrier. See Critical Accounting Policies and
Estimates for details regarding our recognition of commission revenue.

We actively market a large selection of Medicare-related health insurance plans
through our Medicare ecommerce platforms (www.eHealthMedicare.com,
www.Medicare.com and www.PlanPrescriber.com). Our Medicare ecommerce platforms
and telephonic enrollment capabilities enable consumers to research, compare and
purchase Medicare-related health insurance plans, including Medicare Advantage,
Medicare Supplement and Medicare Part D prescription drug plans. To the extent
that we assist in the sale of Medicare-related insurance plans as a health
insurance agent, either online or telephonically, we generate revenue from
commissions we receive from health insurance carriers. Medicare Advantage and
Medicare Part D prescription drug plan pricing is set by health insurance
carriers and approved by the Centers for Medicare and Medicaid Services or CMS,
an agency of the United States Department of Health and Human Services, and is
not subject to negotiation or discounting by health insurance carriers or our
competitors. Similarly, Medicare Supplement plan pricing is set by the health
insurance carrier and approved by state regulators and is not subject to
negotiation or discounting by health insurance carriers or our competitors.

We have historically sold a significant portion of the Medicare plans that we
sell during the year
in the fourth quarter during the Medicare annual enrollment period, when
Medicare-eligible individuals are permitted to change their Medicare Advantage
and Medicare Part D prescription drug coverage for the following year. During
2014, 2015 and 2016, 62%, 56% and 49%, respectively, of our Medicare
plan-related applications were submitted during the fourth quarter.

                                       44


As a result, we generate a significant portion of our commission revenues
related to new Medicare plan-related enrollments in the fourth quarter. During
the first quarter, we recognize substantially all of our Medicare Advantage and
Medicare Part D prescription drug plan renewal commission revenue as
substantially all Medicare Advantage and Medicare Part D policies renew on
January 1 of each year. CMS recently proposed a rule that would prohibit
carriers from paying administrative fees on a per member basis.  These fees
constitute a significant portion of our Medicare Advantage and Medicare Part D
prescription drug plan commission revenue.  While many have commented on and
objected to the proposed rule, should the rule become final, it is unclear
whether carriers will pay the administrative fees in another manner and when
they would begin to do so and our Medicare Advantage and Medicare Part D
prescription drug plan commission revenue could be adversely impacted, which
would harm our business, operating results and financial condition.

In addition to Medicare plans, we also actively market individual and family,
small business and ancillary health insurance plans through our ecommerce
platforms (www.eHealth.com and www.eHealthInsurance.com), and generate revenue
from commissions we receive from health insurance carriers whose plans are
purchased through us, as well as commission override payments we receive for
achieving sales volume thresholds or other objectives. We market a variety of
ancillary products including but not limited to short-term health insurance,
dental, vision, life, short term disability and long term disability insurance.
These ancillary products are offered to our members on a standalone basis and
with other products.

In March 2010, the federal Patient Protection and Affordable Care Act and
related amendments in the Health Care and Education Reconciliation Act were
signed into law. These health care reform laws contain provisions that changed
and will continue to change the health insurance industry in substantial ways.
We have described various aspects of health care reform in Part I, Item 1.,
Business - Health Care Reform and Part I, Item 1A., Risk Factors - Risks Related
to Our Business. Various aspects of health care reform may impact our business
positively. For instance, the mandate that individuals and families have
qualified health insurance or face a tax penalty and the government providing
individuals and families' subsidies in the form of premium tax credits and cost
sharing reductions are provisions in the law that could benefit our business.
Notwithstanding these aspects of health care reform, the implementation of
health care reform has significantly reduced our individual and family health
insurance membership and individual and family health insurance commission
revenue and could in the future have a material adverse effect on our business
and results of operations.

Health care reform established annual open enrollment periods for the purchase
of individual and family health insurance. The initial open enrollment period
under health care reform began in October 2013 and ended in March 2014 for
coverage effective in 2014. Subsequent open enrollment periods for individual
and family health insurance have begun in November and ended on January 31 in
the following year. Individuals and families generally are not able to purchase
individual and family health insurance outside of the annual enrollment periods,
unless they qualify for a special enrollment period as a result of certain
qualifying events, such as losing employer-sponsored health insurance or moving
to another state. The open enrollment period has changed the seasonality of our
individual and family health insurance business and individual and family health
insurance submitted applications. It also presents challenges to our ability to
enroll a significant number of individuals and families into health insurance
over a limited period of time and significantly reduces our ability to obtain
new health insurance members outside of the open enrollment period. In addition,
CMS tightened the requirements for individuals to qualify for a special
enrollment period starting in 2016. We have not enrolled a significant number of
individuals in individual and family health insurance outside of the open
enrollment period.

A substantial number of individuals and families are eligible for subsidies
under health care reform. Health care reform's establishment of government-run
health insurance exchanges through which individuals and families must purchase
qualified health plans to receive government subsidies has increased our
competition as individual and families may purchase qualified health plans
directly from government exchanges. While they are not required to do so,
government-run exchanges are permitted to allow agents and brokers to enroll
individuals and families into qualified health plans through government-run
exchanges. We have entered into an agreement with, and enrolled individuals and
families into qualified health plans through, the Federally Facilitated
Marketplace or FFM, run by CMS. The FFM operated some part of the health
insurance exchange in 36 states during the last health care reform open
enrollment period.

Our ability to act as a health insurance agent for subsidy-eligible individuals
purchasing qualified health plans through the FFM depends upon the FFM
developing and maintaining an efficient, scalable and online enrollment process
and our ability to successfully enter into and maintain our agreement and
integrate with the FFM. CMS has discretion to allow us to enroll individuals in
qualified health plans through the FFM and broad authority over the requirements
that we must meet in order to be able to do so. In order to enroll individuals
in subsidy-eligible plans over the Internet through the FFM, we need to meet a
number of requirements relating to the display of information on our websites as
well as new and comprehensive privacy and security requirements. These
requirements are evolving. Our ability to maintain compliance with the various
requirements to enroll individuals through the FFM has presented, and could in
the future present, significant challenges for us.


                                       45


CMS directed us and other web-based entities to make changes after the end of
the last open enrollment period to the process we developed for enrolling
individuals into qualified health plans through the FFM. As a result of the
changes that we made to our online process in response to CMS requirements,
which require that we use a different and more cumbersome pathway through which
individuals are enrolled in qualified health plans, we experienced a substantial
reduction in the rate at which individuals and families starting the application
process for qualified health plans and subsidies became members. Near the time
CMS directed us to change our process for enrolling individuals in qualified
health plans, CMS indicated that it anticipated it would improve the alternative
process that CMS directed us to use. To date, CMS has not made meaningful
improvements to the process and has indicated that it no longer anticipates
making important improvements. The reduced conversion rates for the process that
CMS has directed us to use for enrolling individuals in qualified health plans
persisted throughout the open enrollment period that began on November 1, 2016
and ended January 31, 2017. These reduced conversion rates resulted in higher
marketing and advertising costs per submitted application and reduced the
cost-effectiveness of our direct and online marketing programs.  As a result, we
reduced our individual and family health insurance marketing expenditures both
outside of the open enrollment period in 2016 as well as during the
recently-ended open enrollment period.  These circumstances resulted in our
enrolling a significantly lower number of individuals and families into
individual and family health insurance plans, which positively impacted our 2016
financial results due to the reduction in marketing and advertising expenses,
but will significantly reduce our individual and family health insurance
membership and commission revenue in 2017 compared to 2016.

Health insurance carriers have the ability to enter into or withdraw from health
insurance markets and unilaterally change their relationship with us in various
ways, including by altering the geographic areas in which they permit us to sell
their products and changing the commission rates they pay us. As a result of
higher medical utilization rates than carriers projected under healthcare reform
and for other reasons related to healthcare reform, several health insurance
carriers for which we have sold individual and family health insurance,
including large national carriers, recently have exited the individual and
family health insurance market altogether or in a large number of states. Some
of these carriers have announced that they will sell individual and family
health insurance through government exchanges, such as the FFM. These
circumstances have resulted in our offering a reduced number of individual and
family health insurance plans on our website, including several states and zip
codes where we have no individual and family health insurance plans to offer.
This reduction in supply has led to a decrease in demand for the individual and
family health insurance that we sell. In addition, a significant number of our
individual and family health insurance members purchased their individual and
family health insurance from carriers exiting the individual and family health
insurance market.  As a result, we anticipate that we will see decreased
retention rates in our individual and family membership, because those members
would need to move to a plan offered by another health insurance carrier if they
desired to maintain individual and family health insurance. If they did not
purchase their new individual and family health insurance plan through us, they
would no longer be our members and we would no longer receive the related
commission revenue. If additional health insurance carriers determine not to
sell individual and family health insurance in certain states or altogether, the
impact on our individual and family membership and commission revenue will
likely be more pronounced. We believe decreased retention rates and a reduction
in the demand for individual and family health insurance plans that we sell will
contribute to significantly reduced individual and family insurance membership
and commission revenue for us in 2017 compared to 2016.

Given the significant losses that carriers have sustained in connection with
their sale of individual and family health insurance, several health insurance
carriers with which we have a relationship, including large national health
insurance carriers, have made changes to the commissions they pay us in markets
that they have not exited, including reducing or eliminating our commissions for
individual and family health insurance enrollments outside of the open
enrollment period, reducing or eliminating our commissions for individual and
family health insurance plans sold during the recently ended open enrollment
period and/or reducing our 2017 renewal commissions for individual and family
health insurance plans we previously sold in prior years. As a result, we expect
to see a meaningful reduction in our average commission rates for plans sold
during the recently ended open enrollment period compared to the last open
enrollment period and for our aggregate individual and family health insurance
plan membership in 2017 compared to 2016. Many carriers have increased premiums
on the individual and family health insurance that they sell as a result of the
health care reform. While we do expect to see premium inflation to offset some
of the negative impact of lower commission rates, given that some of the
carriers pay us based on percentage of premiums, increased premiums have, and
may continue to adversely impact demand for the individual and family health
insurance that we sell.

Our commission revenue is influenced by a number of factors including:

?          the number of applications for Medicare-related, individual, family
           and small business and ancillary health insurance we submit to health
           insurance carriers;

? the number of members on submitted applications;


?          the rate at which the individuals on those applications turn into
           paying members;



                                       46


?          the commission rates we receive for the health insurance plans that we
           sell; and


? our membership retention.



Submitted Applications. Historically, we have experienced a significant increase
in the number of Medicare-related submitted applications during the Medicare
annual enrollment period, which occurs during the fourth quarter of each year.
During 2016, we also experienced an increase in the number of Medicare-related
applications submitted during the first, second and third quarters compared to
the fourth quarter. Medicare Advantage applications submitted during the first,
second and third quarters accounted for 54% of our total Medicare submitted
applications in 2016, compared to 45% in 2015. Total Medicare product
applications submitted outside of the annual enrollment period accounted for 51%
of our total Medicare submitted applications in 2016, while 49% were submitted
during the annual enrollment period in 2016. In 2016, submitted applications for
Medicare Advantage products grew 26% compared to 2015, while submitted
applications for all Medicare products, which also include Medicare Supplement
and Medical Part D prescription drug plans, grew 38%. These growth rates
represent a deceleration compared to strong growth rates we experienced in our
Medicare business in the first half of 2016. The deceleration was driven in
large part by the lingering impact of changes we made to our sales and marketing
processes in response to compliance requirements issued by CMS, which impacted
the effectiveness of our call center agents in converting leads into submitted
applications during 2016.

The number of individual and family health insurance applications submitted
through us has historically been highest during the Affordable Care Act open
enrollment period, which has begun in the fourth quarter and run into the first
quarter of the following year. Individual and family applications submitted
through us during the first quarter of 2016 were lower than the number of
applications submitted through us during the fourth quarter of 2015, and 47%
below the number of applications submitted through us during the first quarter
of 2015. During the second and third quarters of 2016, individual and family
applications submitted through us decreased 59% and 60%, respectively, compared
to the second and third quarters of 2015. The second and third quarters are
outside of the Affordable Care Act open enrollment period and the number of
individual and family health insurance submitted applications submitted during
these periods has historically decreased compared to the first and fourth
quarters. In connection with the recently completed open enrollment period that
began on November 1, 2016, the number of individual and family health insurance
submitted applications during the fourth quarter of 2016 increased significantly
compared to the second and third quarters of 2016, but decreased 61% compared to
the fourth quarter of 2015.

Members per Submitted Application. For Medicare-related health insurance, there
is only one individual on a submitted application. However, for individual and
family and certain ancillary health insurance plans, there may be more than one
member per submitted application. We experienced a decline in the average number
of members on individual and family health insurance applications submitted in
the first quarter of 2015 compared to the second through fourth quarters of
2014, but consistent with the first quarter of 2014. The average improved in the
second through fourth quarters of 2015 compared to the first quarter of 2015,
but did not return to the same levels as the second through fourth quarters of
2014, and did not return to historical pre healthcare reform rates. In the first
quarter of 2016, we experienced a decline in the average number of members on
individual and family health insurance applications submitted through us
compared to the first quarter of 2015, but again experienced an increase during
the second through fourth quarters of 2016 compared to the second through fourth
quarters of 2015.

Approval Rates and Initial Payment Rates. Approval rates for Medicare-related
health insurance remained relatively consistent in 2014, 2015 and 2016. Initial
payment rates for approved Medicare-related health insurance plans remained
relatively consistent in 2014 and 2015, but declined slightly in 2016 due to a
change in carrier mix. As a result of the health care reform prohibition on
using pre-existing health conditions as a reason to deny health insurance
applications, we have experienced higher approval rates on individual and family
plan applications submitted during the open enrollment periods compared to
periods before health care reform implementation. Individual and family health
insurance approval rates have historically been lower outside of the open
enrollment period than for applications submitted during the open enrollment
period. In addition, during the first and second quarters of 2015, our
individual and family plan commission revenue benefited from carriers paying us
earlier on policies approved during the open enrollment period that ended in
2015 compared to the prior open enrollment period. The timing of carrier
payments received during 2016 were similar to 2015. We believe that the more
timely payment of commissions resulted from carriers being better prepared to
handle large application volumes, and we also took steps to work with health
insurance carriers to ensure that their processes resulted in more timely
commission payments to us in 2015 and 2016.

Commission Rates. The average commission dollars per-member-per-month that we
receive for new health insurance plan members varies based upon a number of
factors, including the ratio of policies that we sold for which we receive per
member-per-month commissions compared to percentage-of-premium commissions, the
premiums on the policies we sold, the mix of our members by health insurance
carrier and the commission rates we receive from each carrier. Additionally,
commission rates may vary by carrier, by geography and by the type of plan
purchased by a member.

                                       47



In the first plan year of a Medicare Advantage and Medicare Part D prescription
drug plan, after the health insurance carrier approves the application but
during the effective year of the plan, we are paid a fixed annual commission
that is prorated for the number of months remaining in the calendar year.
Additionally, if the plan is the first Medicare Advantage or Medicare Part D
prescription drug plan issued to the member, we may receive a higher commission
rate that covers a full twelve-month period, regardless of the month the plan
was effective. Beginning with and subsequent to the second plan year, we
typically receive fixed, monthly or annual commissions. During 2015 and 2016,
for certain categories of enrollments that occur outside of the annual
enrollment period, CMS allowed carriers to either prorate the commission payment
for the number of months remaining in the calendar year or pay the broker a full
year of commissions up-front. During 2016, a number of carriers for which we
sell Medicare products recently changed from paying us a full-year of
commissions up-front to pro-rating their payments based on the number of months
remaining in the calendar year, which negatively impacted our Medicare
commission revenue in second half of 2016 compared to the same period in 2015.
We earn commission revenue for Medicare Advantage and Medicare Part D
prescription drug plans for which we are the broker of record, typically until
either the policy is cancelled or we otherwise do not remain the agent on the
policy. Commission payments we receive for Medicare Supplement policies sold by
us are typically a percentage of the premium on the policy and paid to us until
the policy is cancelled or we otherwise do not remain the agent on the policy.
CMS recently proposed a rule that would prohibit carriers from paying
administrative fees on a per member basis.  These fees constitute a significant
portion of our Medicare Advantage and Medicare Part D prescription drug plan
commission revenue.  While many have commented on and objected to the proposed
rule, should the rule become final, it is unclear whether carriers will pay the
administrative fees in another manner and when they would begin to do so and our
Medicare Advantage and Medicare Part D prescription drug plan commission revenue
could be adversely impacted, which would harm our business, operating results
and financial condition. See Critical Accounting Policies and Estimates in Part
II, Item 7 of our Annual Report on Form 10-K for the year ended December 31,
2016 for details regarding our recognition of Medicare plan commission revenue.

Historically, the commission payments we receive for individual and family,
small business and ancillary health insurance plans we sold were a percentage of
the premium our customers pay for those plans. Effective January 1, 2014, many
carriers began paying our individual and family health insurance commissions at
a flat amount per member per month. Commission payments are typically made until
either the policy is cancelled or we otherwise do not remain the agent on the
policy.

As a result of our commission structure, much of our revenue for a given
financial reporting period relates to health insurance plans that we sold prior
to the beginning of the period and is recurring in nature. However, the
increased volume of health insurance applications submitted during the annual
open enrollment periods compared to applications submitted outside of the annual
open enrollment period has caused us to experience shifts in the concentration
of our membership by health insurance carrier and type of plan purchased and
corresponding fluctuations in our average commission rate. For example, we
observed higher commissions on many of the individual and family health
insurance plans that we sold during the 2015 open enrollment period for coverage
effective in 2016 compared to policies that we sold during the 2014 open
enrollment period for coverage effective in 2015. Recently, given the
significant losses that carriers have sustained in connection with their sale of
individual and family health insurance, several health insurance carriers with
which we have a relationship, including large national health insurance
carriers, made changes to the commissions they pay us, including reducing or
eliminating our commissions for individual and family health insurance
enrollments outside of the open enrollment period, reducing or eliminating our
commissions for individual and family health insurance plans sold during the
recently ended open enrollment period and/or reducing our 2017 renewal
commissions for individual and family health insurance plans we previously sold
in prior years. As a result, we expect to see a meaningful reduction in our
average commission rates for plans sold during the recently ended open
enrollment period compared to the last open enrollment period and for our
aggregate individual and family health insurance plan membership in 2017
compared to 2016.

Retention Rates. Our commission revenue is also influenced by our member
retention rates. Retention rates are typically lower in the first policy year.
Our individual and family plan membership retention rates were negatively
impacted by health care reform throughout 2014, 2015 and 2016. The number of new
individual and family health insurance members added during the second, third
and fourth quarters of 2016 and the second, third and fourth quarters of 2015
was not enough to offset the loss of existing members, resulting in a decline in
our individual and family health insurance estimated membership during those
periods. As described in greater detail in Summary of Selected Metrics, our
individual and family plan membership estimates are based on historical member
retention rates as we do not learn of membership cancellations for a period of
time. Our actual retention rates during 2016 were less than the retention rates
we experienced in our individual and family health insurance business in prior
years. We believe the decreased retention rates related to premium inflation in
the individual and family plan market and carriers exiting the individual and
family health insurance market altogether or in certain jurisdictions.

                                       48


We still have not received sufficient information from carriers to have a view
of the retention rates that resulted during the annual open enrollment period
for individual and family health insurance.

Other Revenue

In addition to our core business of marketing health insurance products to individuals and small businesses where we generate revenue, we earn non-commission revenue including from online sponsorship and advertising commission, technology licensing and lead referrals.


Online Sponsorship and Advertising. We generate revenue from our online
sponsorship and advertising program that allows carriers to purchase advertising
space in specific markets in a sponsorship area on our website and allows
Medicare-related carriers to purchase advertising on a separate website
developed, hosted and maintained by us. In return, we are typically paid a flat
fee or, with respect to individual and family health insurance plans, a monthly
fee and a performance-based fee based on metrics such as submitted health
insurance applications. Health insurance carriers commit to sponsorship and
advertising on a quarterly basis, if at all, and generally determine prior to
the quarter whether to purchase sponsorship and advertising from us and how much
they are willing to spend.

Technology Licensing. We generate revenue from licensing the use of our health
insurance ecommerce technology. Our technology platform enables health insurance
carriers to market and distribute health insurance plans online. Health
insurance carriers that license our technology typically pay us implementation
fees and performance-based fees that are based on metrics such as submitted
health insurance applications.

Lead Referrals. We generate revenue from referral fees paid to us based on Medicare-related and individual and family health insurance leads generated by our ecommerce platforms that are delivered and sold to third parties.


See Critical Accounting Policies and Estimates in Part II, Item 7 of this Annual
Report on Form 10-K for details regarding our recognition of online sponsorship
and advertising revenue, technology licensing revenue and lead referral revenue.

Member Acquisition


Marketing initiatives are an important component of our strategy to increase
revenue. Our marketing initiatives are focused on three primary member
acquisition channels: direct, marketing partners and online advertising and are
primarily designed to encourage consumers to complete an application for health
insurance. For the years ended December 31, 2014, 2015 and 2016, applications
submitted through us for Medicare-related, individual and family, small business
and ancillary health insurance from our three member acquisition channels as a
percentage of all health insurance applications submitted on our websites were
as follows:

                                                           Year Ended December 31,
                                                         2014        2015        2016
Source of total submitted applications
(as a percentage of total submitted applications for
the year):
Direct                                                   53%         51%         53%
Marketing partners                                       30%         37%         34%
Online advertising                                       17%         12%         13%
Total                                                    100%        100%        100%




Direct. Our direct member acquisition channel consists of consumers who access
our website addresses, (www.eHealth.com, www.eHealthInsurance.com,
www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com) either
directly, through algorithmic natural search listings on Internet search engines
and directories, or other forms of marketing, such as retargeting campaigns,
television advertising, direct mail and email marketing.

Marketing Partners. Our marketing partner member acquisition channel consists of
consumers who access our websites through a network of affiliate partners and
financial services and other companies. We compensate a significant number of
our marketing partners by paying a fee each time a consumer referral from a
partner results in a submitted health

                                       49


insurance application, regardless of whether the consumer's application is
approved by the health insurance carrier. Some of our marketing partners have
tiered arrangements in which the amount of the fee increases as the volume of
submitted applications we receive from the marketing partner increases over a
particular period. We recognize these expenditures in the period when a
marketing partner's referral results in the submission of a health insurance
application. Growth in our marketing partner channel depends upon our expanding
marketing programs with our existing marketing partners and adding new marketing
partners. While we have relationships with a large number of marketing partners,
we depend upon referrals from a limited number of marketing partners for a
significant portion of the submitted applications we receive from our marketing
partner customer acquisition channel. Moreover, a significant portion of our
referrals for the purchase of Medicare plans comes from a single marketing
partner.

Online Advertising. Our online advertising member acquisition channel consists
of consumers who access our websites through paid keyword search advertising
from search engines such as Google, Bing and Yahoo!, as well as various Internet
marketing programs such as display advertising. We incur expenses associated
with search advertising in the period in which the consumer clicks on the
advertisement.


Operating Costs and Expenses

Cost of Revenue

Included in cost of revenue are payments related to health insurance policies
sold to members who were referred to our website by marketing partners with whom
we have revenue-sharing arrangements. In order to enter into a revenue-sharing
arrangement, marketing partners must be licensed to sell health insurance in the
state where the policy is sold. Costs related to revenue-sharing arrangements
are expensed as the related revenue is recognized.

Additionally, cost of revenue includes the amortization of consideration we paid
to certain broker partners in connection with the transfer of their health
insurance members to us as the new broker of record on the underlying policies.
These transfers include primarily Medicare plan members. Consideration for all
book-of-business transfers is being amortized to cost of revenue as we recognize
commission revenue related to the transferred members.

Marketing and Advertising


Marketing and advertising expenses consist primarily of member acquisition
expenses associated with our direct, marketing partner and online advertising
member acquisition channels, in addition to compensation and other expenses
related to marketing, business development, partner management, public relations
and carrier relations personnel who support our offerings.

Since a significant portion of our marketing and advertising expenses consists
of expenses incurred as a result of payments owed to our marketing partners in
connection with health insurance applications submitted on our ecommerce
platforms and other forms of marketing, such as direct mail, email marketing,
television, radio and retargeting campaigns, those expenses are influenced by
seasonal submitted application patterns. As a result of the annual open
enrollment periods for both Medicare-related and individual and family health
insurance, marketing and advertising expenses have increased during the fourth
quarter of each year. Additionally, since the health care reform open enrollment
periods for individual and family health insurance has continued into the
following year, marketing and advertising expenses increase during the first
quarter of each year, but to a lesser extent than the fourth quarter. During the
second and third quarters, marketing and advertising expenses decrease,
consistent with the decrease in submitted applications compared to periods
during the open enrollment periods. We expect these seasonal trends to continue
in 2017.

Because the total volume of submitted applications that we receive from our
marketing partners is largely outside of our control, particularly during any
short-term period, and because of our tiered marketing partner arrangements, we
could incur expenses in excess of, or below, the amounts we had planned in
periods of rapid change in the volume of submitted applications from marketing
partner referrals. Similar to our marketing partner channel, expenses in our
online advertising channel will increase or decrease in relation to any increase
or decrease in consumers referred to our website as a result of search engine
advertising. Increases in submitted applications resulting from marketing
partner referrals or visitors to our website from our online advertising channel
has in the past and could in the future result in marketing and advertising
expenses significantly higher than our expectations. This has in the past and
could in the future negatively impact our profitability during such periods
because the revenue (if any) derived from submitted applications that are
approved by health insurance carriers is not recognized until future periods.


                                       50


We experienced substantially reduced conversion rates for qualified health plans
during the recently completed open enrollment period, compared to the open
enrollment period before it. As a result, we reduced our individual and family
health insurance marketing expenditures during the recently completed open
enrollment period and enrolled a significantly lower number of individuals into
individual and family health plans as a result, which will significantly and
negatively impact our individual and family health insurance commission revenue
in 2017.

Customer Care and Enrollment

Customer care and enrollment expenses primarily consist of compensation and
benefits costs for personnel engaged in assistance to applicants who call our
customer care center and for enrollment personnel who assist applicants during
the enrollment process. In preparation for the Medicare annual enrollment period
during 2014, 2015 and 2016, and to a lesser extent the open enrollment period
for individual and family health insurance plans during 2014, 2015 and 2016, we
began ramping up our customer care center staff during our second and third
quarters to handle the anticipated increased volume of health insurance
transactions. Additionally, in the first quarter of 2015, we retained some
Medicare sales and enrollment personnel to handle the increased volume of
individual and family plan applications during the annual open enrollment period
for individual and family health insurance that ended on February 15, 2015. In
the first quarter of 2016 and 2017, we retained substantially all of our
Medicare sales and enrollment personnel to handle the anticipated increased
volume of Medicare-related applications outside of the open enrollment period.

Technology and Content


Technology and content expenses consist primarily of compensation and benefits
costs for personnel associated with developing and enhancing our website
technology as well as maintaining our website. A majority of our technology and
content group is located at our wholly-owned subsidiary in China, where
technology development costs are generally lower than in the United States.

General and Administrative


General and administrative expenses include compensation and benefits costs for
staff working in our executive, finance, investor relations, government affairs,
legal, human resources, internal audit, facilities and internal information
technology departments. These expenses also include fees paid for outside
professional services, including audit, tax, legal, government affairs and
information technology fees. We incurred significant general and administrative
expenses in the second and third quarters of 2016 in connection with the
departure of our chief executive officer and chief financial officer, a
strategic review of our business as well as government affairs and lobbying
expenses relating to our individual and family health insurance business.

Restructuring Charge


On March 10, 2015, we implemented an organizational restructuring and cost
reduction plan. As part of the plan, we eliminated approximately 160 full-time
positions, representing approximately 15% of our workforce primarily in our
technology and content and customer care and enrollment groups, and to a lesser
extent, in our marketing and advertising and general and administrative
groups. We incurred a pre-tax restructuring charge of approximately $3.9 million
for employee termination benefits and related costs and $0.6 million for
facility and other termination costs. The majority of the restructuring charge
was recorded in the first quarter of 2015, when the activities comprising the
plan were substantially completed.

In the second and third quarters of 2016, we reversed $0.3 million related to
facility exit costs as we reoccupied office space we had previously vacated and
were also released from a lease for other office space we had previously
vacated.

Changes in Senior Management


In May 2016, we announced the resignation of Gary L. Lauer from his positions as
chairperson of our board of directors and chief executive officer and the
appointment of Scott N. Flanders, a member of our board of directors, as our
chief executive officer. These executive changes increased general and
administrative expenses, including severance costs, other personnel costs and
stock-based compensation in the second quarter of 2016.

In June 2016, we announced the resignation of William T. Shaughnessy from his
positions as president, chief operating officer and a member of our board of
directors. This executive departure increased marketing and advertising
expenses, including severance costs, other personnel costs and stock-based
compensation in the second quarter of 2016. The

                                       51

cost of this executive's departure, including severance costs, other personnel costs and stock-based compensation was charged to marketing and advertising.


In July 2016, we announced the resignation of Stuart M. Huizinga from his
positions as our senior vice president and chief financial officer and the
appointment of David K. Francis as our senior vice president and chief financial
officer. Mr. Huizinga continued to serve as our principal financial officer and
principal accounting officer to help finalize our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2016, and he resigned such roles on September 30,
2016, at which time Mr. Francis began his service as our principal financial
officer and Jay W. Jennings, senior vice president of finance, began his service
as our principal accounting officer. These executive changes resulted in
increased general and administrative expenses, including severance costs, other
personnel costs and stock-based compensation in the third quarter of 2016.

In October 2016, we announced the appointment of Robert S. Hurley as president
of our Medicare segment and Tom G. Tsao as president of our Individual, Family
and Small Business segment. Mr. Hurley previously served as executive vice
president of sales and operations, and Mr. Tsao previously served as executive
vice president, chief technology and product officer. We also announced that Mr.
Francis added the responsibilities of chief operations officer to his current
responsibilities as senior vice president and chief financial officer. Among his
other responsibilities, Mr. Francis heads key operational aspects of our
business, including telesales and product and technology development.

Strategic Review

In connection with recent changes in our executive management team, we conducted a strategic review of our business operations, examining potential areas of investment and strategic emphasis. As a result of this review, we have identified the following three key growth opportunities:

? Leverage our technology strength and marketing expertise to accelerate our

       growth in Medicare product sales, including Medicare Advantage and
       Medicare Supplement plans.


? Utilize the strong platform built for our individual and family health

insurance business to pursue large, attractive opportunities in the small

       business group insurance market.


? Pursue cross-selling and adjacent revenue opportunities in our Medicare

and small business group businesses.




In each of these areas of strategic growth emphasis, we intend to invest in and
expand our technology-based product offerings, update our technology platform,
utilize strategic partnerships to expand our product and market reach, and
invest in optimizing our brand and our websites. In our individual and family
health insurance business, we plan to continue to focus on profitability and
cash flow maximization, while further reducing our individual and family
plan-related marketing expenses. We anticipate that the significant level of
investment required to implement these strategic plans will have a negative
impact on our earnings in 2017.

                                       52

Summary of Selected Metrics


The following table shows certain selected quarterly metrics for 2015 and 2016:

Key Metrics:                                                            Three Months Ended
                                                        Sept. 30,     Dec. 31,                                          Sept. 30,     Dec. 31,
                    Mar. 31, 2015     Jun. 30, 2015       2015          2015        Mar. 31, 2016     Jun. 30, 2016       2016          2016
Submitted
applications:
Medicare submitted
applications (1)          20,200            18,600        19,200        74,300            30,900            32,700        24,100        85,300
IFP submitted
applications (2)         140,000            23,900        22,500       114,600            74,300             9,800         8,900        45,100
Other submitted
applications (3)         101,100            66,800        70,200       107,900            97,400            60,600        56,400        62,100
Total submitted
applications (4)         261,300           109,300       111,900       296,800           202,600           103,100        89,400       192,500

Medicare Advantage
submitted
applications (5)          15,100            13,700        14,800        52,600            23,126            24,923        17,100        56,000

Estimated
membership:
Medicare products
(6)                      155,600           169,100       182,700       228,900           220,300           242,700       242,500       304,900
IFP products (7)         584,900           568,400       518,000       503,300           523,000           481,300       390,400       360,600
Other products (8)       421,700           404,900       397,400       412,300           409,600           381,900       355,400       349,700
Total estimated
membership (9)         1,162,200         1,142,400     1,098,100     1,144,500         1,152,900         1,105,900       988,300     1,015,200


Notes:

(1) Medicare-related health insurance applications submitted on our website or

through our customer care center during the period, including Medicare

Advantage, Medicare Part D prescription drug and Medicare Supplement plans.

Applications are counted as submitted when the applicant completes the

application and either clicks the submit button on our website or provides

      verbal authorization to submit the application. The applicant may have
      additional actions to take before the application will be reviewed by the

insurance carrier, such as providing additional information. In addition, an

      applicant may submit more than one application.
(2)   Major medical Individual and Family plan ("IFP") health insurance
      applications submitted on our website during the period. Applications are

counted as submitted when the applicant completes the application, clicks

the submit button on our website and submits the application to us. The

applicant may have additional actions to take before the application will be

reviewed by the insurance carrier, such as providing additional information.

In addition, an applicant may submit more than one application. We define

our IFP offerings as major medical individual and family health insurance

plans, which does not include Medicare-related, small business or ancillary

plans (primarily consisting of short-term, dental, life, vision, and

      accident insurance plans).
(3)   Applications for health insurance plans other than Medicare and IFP

submitted on our website during the period. Applications for ancillary plans

are counted as submitted when the applicant completes the application,

clicks the submit button on our website and submits the application to us.

Applications for small business plans are counted as submitted when the

applicant completes the application, the employees complete their

applications, the applicant submits the application to us and we submit the

application to the carrier. The applicant may have additional actions to

take before the application will be reviewed by the insurance carrier, such

as providing additional information. In addition, an applicant may submit

more than one application. (4) Applications for all health insurance plans submitted on our website or

through our customer care center during the period. See notes (1), (2) and

      (3) above for more information as to what constitutes a submitted
      application.
(5)   Medicare Advantage plan health insurance applications submitted on our

website or through our customer care center during the period. Applications

are counted as submitted when the applicant completes the application and

either clicks the submit button on our website or provides verbal

authorization to submit the application. The applicant may have additional

actions to take before the application will be reviewed by the insurance

carrier, such as providing additional information. In addition, an applicant

may submit more than one application. Medicare Advantage submitted

applications are included in Medicare submitted applications - See Note1

above for more detail. (6) Estimated number of members active on Medicare-related health insurance as

      of the date indicated. See the note below for additional information
      regarding our calculation of Medicare estimated membership.



                                       53


Notes:

(7) Estimated number of members active on IFP health insurance plans as of the

date indicated. See the note below for additional information regarding our

      calculation of IFP estimated membership.
(8)   Estimated number of members active on insurance plans other than

Medicare-related health insurance and IFP health insurance plans as of the

date indicated. See the note below for additional information regarding our

calculation of other estimated membership. (9) Estimated number of members active on all insurance plans as of the date

indicated. See the note below for additional information regarding our

calculation of total estimated membership.

Note:

Health insurance carriers bill and collect insurance premiums paid by our
members. Health insurance carriers do not report to us the number of members
that we have as of a given date. The majority of our members who terminate their
policies do so by discontinuing their premium payments to the carrier and do not
inform us of the cancellation. Also, some of members pay their premiums less
frequently than monthly. Given the number of months required to observe
non-payment of commissions in order to confirm cancellations, we estimate the
number of members who are active on insurance policies as of a specified date.
We estimate the number of continuing members on all policies as of a specific
date as follows:

? For Medicare-related health insurance plans, we take the number of members

for whom we have received or applied a commission payment during the month

       of estimation.


? For IFP health insurance plans, we take the sum of (i) the number of IFP

members for whom we have received or applied a commission payment for a

month that is up to six months prior to the date of estimation after

reducing that number using historical experience for assumed member

cancellations over the period being estimated; and (ii) the number of

approved members over that period (after reducing that number by the

percentage of members who do not accept their approved policy from the

same month of the previous year for estimated member cancellations through

the date of the estimate). To the extent we determine we have received

substantially all of the commission payments related to a given month

during the period being estimated, we will take the number of members for

whom we have received or applied a commission payment during the month of

       estimation.


? For ancillary health insurance plans (such as short-term, dental, vision,

accident and student), we take the sum of (i) the number of members for

whom we have received or applied a commission payment for a month that is

up to three months prior to the date of estimation (after reducing that

number using historical experience for assumed member cancellations over

the period being estimated); and (ii) the number of approved members over

that period (after reducing that number using historical experience for an

assumed number of members who do not accept their approved policy from the

same month of the previous year and for estimated member cancellations

through the date of the estimate). To the extent we determine we have

received substantially all of the commission payments related to a given

month during the period being estimated, we will take the number of

members for whom we have received or applied a commission payment during

the month of estimation. The one to three-month period varies by insurance

product and is largely dependent upon the timeliness of commission payment

and related reporting from the related carriers. For small business health

       insurance plans, we estimate the number of members using the number of
       initial members at the time the group is approved, and we update this

number for changes in membership if such changes are reported to us by the

group or carrier in the period it is reported. However, groups generally

notify the carrier directly of policy cancellations and increases or

decreases in group size without informing us. Health insurance carriers

       often do not communicate policy cancellation information or group size
       changes to us. We often are made aware of policy cancellations and group
       size changes at the time of annual renewal and update our membership
       statistics accordingly in the period they are reported.



A member who purchases and is active on multiple standalone insurance plans will
be counted as a member more than once. For example, a member who is active on
both an individual and family health insurance plan and a standalone dental plan
will be counted as two continuing members.

After we have estimated membership for a period, we may receive information from
health insurance carriers that would have impacted the estimate if we had
received the information prior to the date of estimation. We may receive
commission payments or other information that indicates that a member who was
not included in our estimates for a prior period was in fact an active member at
that time, or that a member who was included in our estimates was in fact not an
active member of ours. For instance, we reconcile information carriers provide
to us and may determine that we were not historically paid commissions owed to
us, which would cause us to have underestimated membership. Conversely, carriers
may require us to return commission payments paid in a prior period due to
policy cancellations for members we previously estimated as being active. We do
not update our estimated membership numbers reported in previous periods.
Instead, we reflect updated information regarding our historical membership in
the membership estimate for the current period. As a result of the delay in our
receipt of information from insurance carriers, actual trends in our membership
are most discernible over periods longer than from one quarter to the next. In
addition, and as a result of the delay we experience in receiving information
about our membership, it is difficult for us to determine with any certainty the
impact of current conditions on our membership retention. Health care reform and
its impacts as well as other factors could cause the assumptions and estimates
that we make in connection with estimating our membership to be inaccurate,
which would cause our membership estimates to be inaccurate.



                                       54

Critical Accounting Policies and Estimates


The preparation of financial statements and related disclosures in conformity
with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to
make judgments, assumptions, and estimates that affect the amounts reported in
the consolidated financial statements and the accompanying notes. These
estimates and assumptions are based on current facts, historical experience, and
various other factors that we believe are reasonable under the circumstances to
determine reported amounts of assets, liabilities, revenue and expenses that are
not readily apparent from other sources. To the extent there are material
differences between our estimates and the actual results, our future
consolidated results of operations may be affected.

An accounting policy is considered to be critical if the nature of the estimates
or assumptions is material due to the levels of subjectivity and judgment
necessary to account for highly uncertain matters or the susceptibility of such
matters to change, and the effect of the estimates and assumptions on financial
condition or operating performance. The accounting policies we believe to
reflect our more significant estimates, judgments and assumptions and are most
critical to understanding and evaluating our reported financial results are as
follows:

? Revenue Recognition;

? Stock-Based Compensation;

? Realizability of Long-Lived Assets and;

? Accounting for Income Taxes;

During the year ended December 31, 2016, there were no significant changes to our critical accounting policies and estimates.

Revenue Recognition


We recognize revenue for our services when each of the following four criteria
is met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the seller's price to the buyer is fixed or
determinable; and collectability is reasonably assured. Our revenue is primarily
comprised of compensation paid to us by health insurance carriers related to
insurance plans that have been purchased by a member who used our service. We
define a member as an individual currently covered by an insurance plan,
including Medicare-related, individual and family, small business and ancillary
plans, for which we are entitled to receive compensation 
						



Pharmacy News Index
  Drug Delivery Systems
  Drugstores
  FDA Final Approvals
  Front Page Healthcare News
  Generic Drugs
  Hospital Industry
  Internet Pharmacy
  IT in Healthcare
  Medicare & Medicaid
  Over-the-Counter Drugs
  Pharm Industry Trends and Policy
  Pharmaceutical Development
  Pharmaceutical Industry

LIVE ONLINE CE

Mar 27: HIV Medications: Newer Drugs, Newer Guidelines
Mar 28: Adverse Drug Events: Risk Reduction and Reporting
Mar 30: Know Your Value, Know Your Worth: Provider Status in Pharmacy
Mar 31: Medication Safety & Drug Safety Alerts
Apr 03: Headache Disorders: Focus on Migraines & Tension Headaches
Click for entire Webinar Calendar

Special Announcement

Free Membership
Enjoy Drug Search, industry newsletters and more...

Nursing Jobs
Are you a nurse looking for a job?

Check out the Nursing Job Source.

Your number one choice for nursing jobs.



Websites » RxCareerCenter.comRxSchool.comClubStaffing.comNursingJobSource.comRN.com
Copyright © 2017 Pharmacy Choice - All rights reserved.
Terms and Conditions | Privacy Statement
888-682-4415