UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

 

 

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

 

For the quarterly period ended March 31, 2014 

 

OR 

 

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

 

For the transition period from                 to 

 

001-33071 

(Commission File Number)  

_____________________________________________ 

EHEALTH, INC. 

(Exact name of registrant as specified in its charter) 

_____________________________________________

440 EAST MIDDLEFIELD ROAD 

MOUNTAIN VIEW, CALIFORNIA 94043 

 (Address of principal executive offices) 

 

(650) 584-2700 

(Registrant’s telephone number, including area code) 

 

Not Applicable 

(Former name, former address and former fiscal year, if changed since last report) 

____________________________________________________________ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒ NO ¨ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐ NO ☒ 

 

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2014 was 19,023,927 shares. 

 

  

 

---

 

EHEALTH, INC. FORM 10-Q 

TABLE OF CONTENTS

 

  

 

 

---

 

PART I 

FINANCIAL INFORMATION 

 

EHEALTH, INC. 

CONDENSED CONSOLIDATED BALANCE SHEETS 

(In thousands)  

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

---

 

 

 

EHEALTH, INC. 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts, unaudited)

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

---

 

 

 

EHEALTH, INC. 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands, unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

 

---

 

 

Description of Business—eHealth, Inc. (the “Company,” “eHealth,” “we” or “us”) is the leading online source of health insurance for individuals, families and small businesses in the United States. 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 individual and family, Medicare-related, small business and ancillary health insurance plans. We actively market the availability of Medicare-related insurance plans and offer Medicare plan comparison tools and educational materials for Medicare-related insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug 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 are licensed to market and sell health insurance in all 50 states and the District of Columbia. 

 

Basis of Presentation—The accompanying condensed consolidated balance sheet as of March 31, 2014, the condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2013 and 2014 and the condensed consolidated statements of cash flows for the three months ended March 31, 2013 and 2014, respectively, are unaudited. The condensed consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 12, 2014. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K.  

 

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013, and include all adjustments necessary for the fair presentation of eHealth’s statement of financial position as of March 31, 2014, its results of operations for the three months ended March 31, 2013 and 2014 and its cash flows for the three months ended March 31, 2013 and 2014. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2014.  

 

Seasonality—In years prior to 2013, the number of individual and family health insurance applications submitted through our ecommerce platform generally increased in our first quarter compared to our fourth quarter and in our third quarter compared to our second quarter. This trend changed in the fourth quarter of 2013 and the first quarter of 2014 as a result of an increase in the number of individual and family applications submitted during the initial open enrollment period, which began on October 1, 2013 and ended on March 31, 2014, as mandated by the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Accordingly, the number of submitted individual and family plan applications increased significantly, relative to historical levels, during the fourth quarter of 2013 and the first quarter of 2014.

 

The majority of Medicare plans are sold in our 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. As a result, we generate a significant amount of Medicare plan-related revenue in the fourth quarter of the year resulting from the sale of new Medicare plans. Additionally, we recognize a majority of our renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in the first quarter of each year as the majority of policies sold during the annual enrollment period typically renew on January 1 of each year.

 

Since a significant portion of our marketing and advertising expenses are driven by the number of health insurance applications submitted on our ecommerce platform, those expenses are influenced by seasonal submitted application patterns. As a result, in years prior to 2013, marketing and advertising expenses related to individual and family health insurance plans have been highest in our first and third quarters, while marketing and advertising expenses related to Medicare-related plans have been highest in our third and fourth quarters. However, the historical trend of marketing and advertising expenses related to individual and family health insurance plans was impacted by the initial open enrollment

---

 

period for individual and family plans that began in October 2013. These expenses increased significantly in the fourth quarter of 2013 and first quarter of 2014, relative to historical levels, consistent with the increase in submitted applications.  

 

Based on these seasonal trends, historically our revenue was highest in the fourth quarter of the year and our profitability was  highest in the first quarter. However, in connection with the initial open enrollment period for individual and family plans which began on October 1, 2013 and ended on March 31, 2014, we experienced a loss in both the fourth quarter of 2013 and the first quarter of 2014 as a result of significantly higher marketing and advertising expenses due to an increase in the number of individual and family health insurance applications during the health care reform annual enrollment period. 

 

Recently Adopted Accounting Standards—Effective January 1, 2014, we adopted an accounting standards update with new guidance on the presentation of unrecognized tax benefits. This standard requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The adoption of this standard did not have a material effect on our condensed consolidated financial statements.

 

Effective January 1, 2014, we adopted an accounting standards update with new guidance with respect to the release of cumulative translation adjustments into net income when a parent sells either a part or all of its investment in a foreign entity. This standard requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, and provides guidance for the acquisition in stages of a controlling interest in a foreign entity. The adoption of this standard did not have a material effect on our condensed consolidated financial statements.

 

 

 

Cash and Cash Equivalents—As of December 31, 2013 and March 31, 2014, our cash equivalents consisted of money market accounts that invested in U.S. government-sponsored enterprise bonds and discount notes, U.S. government treasury bills and notes and repurchase agreements collateralized by U.S. government obligations. At December 31, 2013 and March 31, 2014, our cash equivalents carried no unrealized gains or losses and we did not realize any significant gains or losses on sales of cash equivalents during the three months ended March 31, 2013 and 2014.  

 

As of December 31, 2013 and March 31, 2014, our cash and cash equivalent balances were invested as follows (in thousands): 

 

We used observable prices in active markets in determining the classification of our money market funds as Level 1 as of December 31, 2013 and March 31, 2014. 

 

Accounts Receivable—As of December 31, 2013 and March 31, 2014, our accounts receivable consisted of the following (in thousands): 

 

 

Intangible Assets—On March 31, 2014, we purchased an internet domain name, www.Medicare.com, for $4.8 million. Cash consideration paid in connection with the purchase of the domain name totaled $4.5 million. The consideration paid also included $0.3 million of outstanding receivables from the owner of the domain name that were settled upon completion of the purchase. The related intangible asset was assigned an indefinite useful life. The carrying amounts, accumulated amortization, net carrying value and weighted average remaining life of our definite-lived amortizable intangible assets, as well as our indefinite-lived non-amortizable intangible trademarks and website addresses, are presented in the tables below (dollars in thousands, weighted-average useful life is as of March 31, 2014):

 

During both the three months ended March 31, 2013 and 2014, amortization expense related to intangible assets totaled $354,000.  

 

As of March 31, 2014, expected amortization expense in future periods is as follows (in thousands):

 

 

 

  

 

 

 

Stock Plans—The following table summarizes activity under our 2006 Equity Incentive Plan, 1998 Stock Plan and 2005 Stock Plan (collectively, the “Stock Plans”) (in thousands):

 

 

 

The following table summarizes stock option activity under the Stock Plans (in thousands, except per share amounts and weighted average remaining contractual life data): 

 

 

 

The total grant date fair value of stock options vested during the three months ended March 31, 2013 and 2014 was $1.3 million and  $0.6 million, respectively.

---

 

 

 

The following table summarizes restricted stock unit activity, including performance-based restricted stock unit activity, under the Stock Plans (in thousands, except weighted average remaining contractual life data): 

 

 

 

 

The fair value of the restricted stock units is based on eHealth’s stock price on the date of grant, and compensation expense related to these awards is recognized on a straight-line basis over the vesting period. The fair value of performance-based restricted stock units is based on eHealth’s stock price on the date of grant, and compensation expense related to these awards is recognized on an accelerated basis over the vesting period. The total grant date fair value of restricted stock units vested during the three months ended March 31, 2013 and 2014 was $2.0 million and $8.4 million, respectively.

Stock Repurchase Programs—On September 10, 2012, we announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $30 million of our common stock and on March 6, 2013, we announced that our board of directors increased the approved repurchase amount under this program to $60 million. Purchases under this program were made in the open market. The cost of the repurchased shares was funded from available working capital. We completed repurchasing common stock under this program in June 2013 having repurchased 2,957,179 shares for $60.0 million at an average price of $20.29 per share.  

On March 31, 2014, we announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $50 million of our common stock. We expect to fund the repurchase program from available working capital. As of March 31, 2014, no common stock has been repurchased under this program.

For accounting purposes, common stock repurchased under our stock repurchase programs is recorded based upon the settlement date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. 

There was no stock activity under our stock repurchase programs during the three months ended March 31, 2014. 

In addition to the shares repurchased under our repurchase programs as of March 31, 2014, we have in treasury 274,113 shares that were previously surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2013 and March 31, 2014, we had a total of 9,519,286 shares and 9,583,382 shares, respectively, held in treasury. 

Stock-Based Compensation—There were no stock options granted to employees during the three months ended March 31, 2013 or March 31, 2014.

---

 

 

The following table summarizes stock-based compensation expense recorded during the three months ended March 31, 2013 and 2014 (in thousands): 

 

 

The following table summarizes stock-based compensation expense by operating function for the three months ended March 31, 2013 and 2014 (in thousands): 

 

 

 

  

 

 

---

 

 

 

 

 

 

 

The following table summarizes our provision (benefit) for income taxes and our effective tax rates for the three months ended March 31, 2013 and 2014 (in thousands, except effective tax rate):

 

 

 

Our effective tax rate in the three months ended March 31, 2013 was higher than statutory federal and state tax rates due primarily to non-deductible lobbying expenses, partially offset by a tax benefit resulting from the extension of the federal research tax credit through December 31, 2013. Our effective tax rate in the three months ended March 31, 2014  was higher than statutory federal and state tax rates due primarily to non-deductible lobbying expenses.

 

During the three months ended March 31, 2013 and 2014, excess federal and state tax benefits related to share-based payments, resulted in increases of $3.5 million and $3.2 million, respectively, in Additional Paid-In Capital in the condensed consolidated balance sheets. These amounts are also classified in the condensed consolidated statements of cash flows as both a reduction to operating cash flows and as a financing cash inflow. 

   

  

---

 

 

 

  

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted net income (loss) per share is computed giving effect to all potential dilutive common stock equivalent shares, including options, restricted stock and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted net income (loss) per share by application of the treasury stock method.  

 

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):  

 

---

 

 

For each of the three-month periods ended March 31, 2013 and 2014, we had securities outstanding that could potentially dilute net income (loss) per share, but the shares from the assumed exercise of these securities were excluded in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive. The number of outstanding weighted average anti-dilutive shares that were excluded from the computation of diluted net income (loss) per share consisted of the following (in thousands): 

 

 

 

 

  

 

 

Geographic Information—As of December 31, 2013 and March 31, 2014, our long-lived assets consisted primarily of property and equipment, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area were as follows (in thousands):  

 

 

Significant Customers—Substantially all revenue for the three months ended March 31, 2013 and 2014 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue in the three months ended March 31, 2013 and 2014 are presented in the table below: 

 

 

 

Commission revenue attributable to major medical individual and family health insurance plans was approximately 67%  and 60% of our commission revenue in the three months ended March 31, 2013 and 2014, respectively. We define our individual and family plan offerings as major medical individual and family health insurance plans, which do not include small business, Medicare-related health insurance plan offerings and other ancillary products such as short-term, stand-alone dental, life, vision, accident and student insurance plan offerings. 

---

 

 

As of December 31, 2013,  two customers represented 37% and 15%, respectively, of our $4.6 million outstanding accounts receivable balance. As of March 31, 2014,  three customers represented 60%, 12% and 10%, respectively of our $8.4 million outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at December 31, 2013 and March 31, 2014. We believe the potential for collection issues with any of our customers is minimal as of March 31, 2014. Accordingly, our estimate for uncollectible amounts at March 31, 2014 was not material.   

 

 

 

 

 

---

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements regarding our expectations relating to submitted applications; increasing customer care center staff in the second and third quarters; our expectations relating to average commission dollars per policy for individual and family policies that we sell in 2014; the impact of health care reform laws on the health insurance industry, on our business and on the adoption of the Internet for the purchase of health insurance; our ability to leverage our technology to expand our marketplace; our strategies; the impact of open enrollment periods; seasonality, including the seasonality of our marketing and advertising expenses and their relation to the Medicare and individual and family health insurance open enrollment periods; revenue growth rates for each quarter of 2014; expansion of the individual and family health insurance market and increase in demand for individual and family health insurance; our ability to enter into agreements with and meet requirements to offer qualified health plans through state and federal health insurance exchanges; the impact of the technology and integration challenges of the health insurance exchanges on health insurance enrollment; expectations relating to revenue (including commission revenue, lead referral revenue, advertising revenue and other revenue), sources of revenue, cost of revenue, the collectability of our accounts receivable, profitability, operating expenses, marketing and advertising expenses, customer care and enrollment employees and expenses, technology and content expenses,  general and administrative expenses and profitability; our future commission rate structure; our overall individual and family health insurance commission rate structure; our expectations regarding the timing of our recognition of revenue; proposed changes relating to payments made to health insurance carriers and agents by the Centers of Medicare and Medicaid Services; the timing of accurate reporting of commission revenue and membership from health insurance carriers;  an increase in our commission revenue in absolute dollars in 2014 relative to 2013; an increase in our average commission revenue per policy for individual and family policies in 2014; the amount of fees we pay to marketing partners; seasonal and absolute increases in our customer care and enrollment costs; investments and increases in technology and content expenses; increases in general and administrative expenses; our estimate of the number of continuing members on all policies; our ability to convert subsidy-eligible individuals and families into members; the sufficiency of our cash generated from operations and our current cash and cash equivalents; the timing and amount of our future lease obligations; the timing of open enrollment periods including restrictions on changes outside of such periods and our readiness therefore; our ability to sell individual and family health insurance outside of open enrollment periods; our expectations and projections relating to membership and commission rates; changes to our significant customers; the timing and source of our Medicare-related revenue; estimates relating to critical accounting policies and related impact on our financial statements; future capital requirements; expansion into new business areas and additional geographic regions; as well as other statements regarding our future operations, financial condition, prospects and business strategies.  These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and those discussed in our other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Annual Report on Form 10-K as filed with the Securities and Exchange Commission in March 2014, and the audited consolidated financial statements and related notes contained therein. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. 

  

Overview 

We are the leading online source of health insurance 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 individual and family, Medicare-related, 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 platform. 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 diverse member acquisition programs, obtaining necessary regulatory approvals of our websites and establishing relationships and appointments with leading insurance carriers, enabling us to offer thousands of health insurance plans

---

 

online. Our ecommerce platforms can be accessed directly through our website as well as through our network of marketing partners. 

We generate revenue primarily from commissions we receive from health insurance carriers whose health insurance policies are purchased through our ecommerce platform. Commission revenue represented 89% of total revenue in both the three months ended March 31, 2013 and 2014. Historically, the commission payments we receive on individual and family, small business and ancillary health insurance policies we sold were a percentage of the premium on the policy. During 2013, we received communications from many carriers indicating that in 2014 our individual and family health insurance commissions would change from being calculated on a percentage-of-premium basis to a flat amount per-member-per-month. The commission payments that we receive for individual and family, small business and ancillary health insurance policies are typically made to us on a monthly basis for as long as the policy remains active with us.  

We actively market the availability of Medicare-related health insurance plans through our online Medicare plan platforms www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com. Our Medicare plan platforms enable consumers to research and compare Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. Commission payments we receive for Medicare Advantage and Medicare Part D prescription drug plans sold by us are typically fixed and are earned over a period of at least six years, depending on the carrier arrangement, and are paid to us either monthly or annually.

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. Additionally, health insurance pricing, which is set by the health insurance carrier and approved by regulators, is not subject to negotiation or discounting by health insurance carriers or our competitors. 

 

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 have changed and will continue to change, the health insurance industry in substantial ways. Among several other provisions, these laws and the regulations implementing them include a mandate requiring individuals to maintain health insurance or face tax penalties; a mandate that certain employers offer and contribute to their employees group health insurance coverage or face tax penalties if they do not do so in 2015 and thereafter; prohibitions against insurance companies using pre-existing health conditions as a reason to deny an application for health insurance; requirements for minimum individual and small business health insurance benefit levels, including prohibitions on lifetime coverage limits and limitations on annual coverage limits; medical loss ratio requirements that require each health insurance carrier to spend a certain percentage of their premium revenue on reimbursement for clinical services and activities that improve health care quality; establishment of state and/or federal government-run health insurance exchanges to facilitate access to, and the purchase of, health insurance; open enrollment periods for the purchase of individual health insurance during specified times of the year; Medicaid expansion so that a greater number of individuals will be insured under Medicaid programs; and subsidies and cost-sharing credits to make health insurance more affordable for those below certain income levels if they are eligible and purchase individual or small group health insurance through the state or federal health insurance exchange. While many aspects of health care reform became effective in 2014, health insurance carriers have been required as a part of health care reform to maintain medical loss ratios of eighty percent in their individual and family health insurance business since the beginning of 2011. Under health care reform an eighty-five percent medical loss ratio requirement for Medicare Advantage plans became effective in 2014.

 

The initial open enrollment period under health care reform began in October 2013 and ended in March 2014.  Individuals and families cannot purchase individual and family health insurance outside this period until the open enrollment period for the following year, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance, moving to another state or becoming eligible or ineligible for a government subsidy for their health insurance. Moreover, in order to be eligible for a subsidy, qualified individuals must purchase subsidy-qualifying health plans through a government-run health insurance exchange during the open enrollment period or a  special enrollment period. A substantial number of our existing members may be eligible for subsidies in connection with their purchase of health insurance.  During the third quarter of 2013, we entered into two agreements with the Centers for Medicare and Medicaid Services, or CMS, to allow us to enroll subsidy-eligible individuals in qualified health insurance plans online in the 36 states where the federal government is operating an exchange during the initial open enrollment period.  Pursuant to the agreements as well as applicable law and regulations, we must satisfy a number of conditions and requirements to enroll subsidy eligible individuals in qualified health plans. We may experience difficulty in satisfying the conditions and requirements to offer qualified health plans. If we are not able to satisfy these conditions and requirements as well as enter into functioning relationships with government-run health insurance exchanges to offer qualified health plans that are required for individuals to receive a subsidy, we may lose existing members and new

---

 

members. Approximately 5% of our total submitted applications in the first quarter of 2014 related to enrollment of subsidy-eligible individuals into qualified health plans, almost all of which were submitted through the health insurance exchange in states where the federal government is operating the exchange. The online customer experience in the federal exchange driven process was cumbersome and often required significant telephonic interaction between the customer and our customer care. We continue to push the federal exchange to adopt a website and processes that are efficient, scalable and online. If the federal exchange does not do so, our ability to enroll individuals who are eligible for subsidies will be negatively impacted. Additionally, we have not entered into a similar relationship with any of the states that are operating their own exchanges.

 

 While aspects of health care reform may positively impact our business, the aggregate future impact of the implementation of health care reform on our business and financial results is uncertain. Our ability to continue to act as a health insurance agent for our members who switch to a new health insurance product will be dependent upon a number of factors, including health insurance company practices, individual financial circumstances, our members’ existing health insurance plans, the price of health insurance and our ability to expand our offering to include subsidy-eligible health insurance plans. Moreover, we are facing new competition in the form of government run health insurance exchanges. Our ability to act as a health insurance agent to health care reform subsidy-eligible individuals is dependent upon government run health insurance exchanges developing and implementing an efficient, scalable and online enrollment process, and our ability to successfully enter into agreements and integrate with those government-run exchanges. In order to enroll individuals in subsidy-eligible plans, we also 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. Our ability to maintain compliance with these and other requirements could present significant challenges for us. The implementation of open enrollment periods for the purchase of individual health insurance also presents challenges to our ability to enroll a significant number of individuals into health insurance over a limited period of time. We expect the restriction on individuals being able to make plan changes outside of open enrollment periods will result in a reduction in the number of health insurance policies purchased through us outside of the open enrollment period. The impact of health care reform on our health insurance carrier partners and their reaction is also unclear. For instance, health insurance carriers have the ability to unilaterally change their relationship with us, including the commission rates we receive for acting as a health insurance agent and may reduce the amount they pay us, alter the manner and geographic areas in which they permit us to sell their products and change our relationship with them in any number of ways. Given the disruption that the implementation of health care reform may have on the health insurance market, health care reform could in the aggregate have a material adverse effect on our business and results of operations.

 We derive 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. In return, we are typically paid a monthly fee and a performance-based fee based on metrics such as submitted health insurance applications. We also offer Medicare advertising services, which allow Medicare plan carriers to purchase advertising on a separate website developed, hosted and maintained by us. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue over the service period. 

We derive revenue from licensing the use of our health insurance ecommerce technology and typically receive a fixed, up-front fee or performance-based fees, or a combination of both. Our technology platform enables health insurance carriers and agents to market and distribute health insurance plans online. We also have licensed our ecommerce technology for use by government agencies.  

 

Sources of Revenue  

 

Commission Revenue  

 

We generate revenue primarily from commissions we receive from health insurance carriers whose health insurance policies are purchased through us. Commissions for individual and family and small business health insurance plans have generally represented a percentage of the insurance premium and, to a much lesser extent, commission override payments that insurance carriers pay us for achieving sales volume thresholds or other objectives. Commission rates vary by carrier and by the type of plan purchased by a member. Commission rates can vary based upon the amount of time that the policy has been active, with commission rates for individual and family plans typically being higher in the first twelve months of the policy. After the first twelve months, commission rates generally decline significantly. As a result, if we do not add a sufficient number of members on new policies, our revenue growth will be negatively impacted. Individuals, families and small businesses purchasing health insurance through us typically pay their premiums on a monthly basis. Insurance carriers typically pay commissions to us on these policies monthly, after they receive the premium payment from the member. We

---

 

generally continue to receive the commission payment from the relevant insurance carrier until the health insurance policy is cancelled or we otherwise do not remain the agent on the policy. As a result, the majority of our commission revenue is recurring in nature. 

 

Many health insurance carriers amended our individual and family health insurance commission rates effective in January 2014 and changed the basis on which they pay commissions from a percentage-of-premium to a flat amount per-member-per-month. Similar to percentage-of-premium commissions, the amount paid per-member-per-month generally declines after the initial policy year.  We conducted an analysis on individual and family health insurance policies that we sold between July 2011 and June 2012 to estimate the impact of these commission changes.  The analysis indicated that the average commission dollars per-member-per-month calculated using the 2014 rates on these policies would be equal to, or slightly higher than, our actual average commission dollars per-member-per-month that we received under the rates in effect prior to the commission changes. We selected the policies sold between July 2011 and June 2012 to conduct the analysis, because the commissions we were receiving on these policies were at the commission rates in effect after the 2011 reduction in commission rates that we experienced as a result of the health care reform medical loss requirements and the use of these policies for the analysis allowed for us to experience the payment of both first year and renewal commissions on the policies.  Notwithstanding our analysis, the actual commission dollars per-member-per-month that we receive for new members in 2014 and beyond will depend upon a number of factors, including the ratio of policies that we sell for which we receive per member-per-month commissions compared to percentage-of-premium commissions, the premiums on the policies we sell, the mix of our members by health insurance carrier and the commission rates we receive from the carrier.  We experienced a shift in the concentration of our members by carrier as a result of the health care reform annual enrollment period that ended on March 31, 2014.  Due to healthcare reform, some health insurance carriers exited or reduced selling efforts in certain markets during the annual enrollment period, while expanding in others.  The overall impact of the change in the concentration of our membership by carrier is unknown, but it could positively or negatively impact our average commission dollars per member.

  

We generally recognize individual and family and small business health insurance plan revenue when commissions are reported to us by a health insurance carrier, net of an estimate for future forfeiture amounts payable to carriers due to policy cancellations. Commissions are reported to us by a cash payment and commission statement.  We generally receive these communications simultaneously. In instances when we receive the cash payment and commission statement separately and in different accounting periods, we recognize revenue in the period that we receive the earliest communication, provided we receive the second corroborating communication shortly after the end of the accounting period. If the second corroborating communication is not received shortly after the end of the accounting period, we recognize revenue in the period the second communication is received. We use the data in the commission statements to help identify the members for which we are receiving a commission payment, the amount received for each member and to estimate forfeitures payable to carriers. As a result, we recognize the net amount of compensation earned as the agent in the transaction. Commission override revenue, which we recognize on the same basis as premium commissions, is generally reported to us in a more irregular pattern than premium commissions. As a result, our revenue for a particular quarter could be higher or lower than expectations due to the timing of the reporting of commission override revenue to us.

 

Historically, the number of individual and family health insurance applications submitted through our ecommerce platform generally increased in our first quarter compared to our fourth quarter and in our third quarter compared to our second quarter. Conversely, we generally experienced a decline or flattening of individual and family submitted applications in our second quarter compared to our first quarter and in our fourth quarter compared to our third quarter. This trend changed in the fourth quarter of 2013 and the first quarter of 2014 as a result of an increase in the number of individual and family applications submitted during the initial open enrollment period under health care reform which began on October 1, 2013 and ended on March 31, 2014. The number of submitted individual and family plan applications increased significantly, relative to historical levels, during the fourth quarter of 2013 and first quarter of 2014.  We expect the number of submitted individual and family applications in the second and third quarters of 2014 to decline compared to prior periods. Revenue for the increased number of submitted individual and family plan applications in the fourth quarter of 2013 and the first quarter of 2014 was generally not recognized in those same respective quarters due to many of the submitted applications occurring at the end of each quarter. Approximately 50% of the submitted individual and family plan applications in the first quarter of 2014 were submitted during the last two weeks of March 2014. Also, the number of individual and family plan members per submitted application declined during the first quarter of 2014 as a higher percentage of individuals and smaller sized families submitted individual and family health insurance applications than in prior periods. At the same time, for plans effective in 2014 we have experienced higher approval rates on submitted individual and family plan applications when compared to prior periods.

 

---

 

Member retention rates on our individual membership base were negatively impacted by health care reform during the fourth quarter of 2013 and the first quarter of 2014 primarily due to the transition from health care insurance plans that are not compliant with the requirements of health care reform to compliant health care insurance plans on January 1, 2014 and from the assumed purchase of qualified health care plans by our members directly from government run health insurance exchanges.  Based on our estimated individual and family health insurance membership as of March 31, 2014 our new membership growth during the health care reform open enrollment period offset the impact of the decrease in our membership retention rate during the open enrollment period. However, given the large amount of health insurance purchasing activity that occurred at the end of the open enrollment period and the amount of time it takes for us to learn of changes in our membership, we will not have a full view of the impact of the open enrollment period on our membership until later in the year.

 

The second annual open enrollment period for individual and family health insurance is scheduled to run from November 15, 2014 through February 15, 2015 for coverage effective in 2015.  Thereafter, the scheduled dates for the annual open enrollment period are unknown.  Individuals and families generally will not be able to purchase individual and family health insurance outside of these open enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance, moving to another state or becoming eligible or ineligible for a government subsidy for their health insurance.  We expect that open enrollment periods will change the seasonality of our individual and family health insurance business and individual and family health insurance submitted applications.  We expect that applications submitted for individual and family health insurance to decline during the second and third quarters of the year, outside of the annual open enrollment periods compared to the same periods in 2013.

We actively market the availability of Medicare-related insurance plans through our online Medicare plan platforms, including www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com. These platforms enable consumers to research and compare Medicare-related insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. We offer online application and telephonic enrollment capabilities for certain Medicare plans. To the extent that we assist in the sale of Medicare-related insurance plans as a health insurance agent, through either online applications or telephonically, we generate revenue from commissions we receive from health insurance carriers. The commission payments we receive for Medicare Supplement plans are typically a percentage of the premium on the policy that we sold and are paid to us on a monthly basis for as long as a policy remains active with us. For both Medicare Advantage and Medicare Part D prescription drug plans, we receive a fixed, annual commission from insurance carriers after the policy is approved by the carrier and either a fixed, monthly commission beginning with and subsequent to the second policy year for a Medicare Advantage policy or a fixed, annual commission beginning with and subsequent to the second policy year for a Medicare Part D prescription drug policy. Additionally, these commission rates may be higher in the first twelve months of a policy if the policy is the first Medicare-related policy issued to the member. We may earn commission revenue for both Medicare Advantage and Medicare Part D prescription drug plans typically for a period of at least six years, depending on the carrier arrangement, provided that the policy remains active with us. 

We recognize commission revenue for both Medicare Advantage and Medicare Part D prescription drug plans for the entire policy year once the annual or first monthly commission amount for the policy year is reported to us by the carrier, net of an estimate for future forfeiture amounts due to policy cancellations. For commissions paid to us on a monthly basis, we record a receivable for the commission amounts to be received over the remainder of the policy year, net of an estimate for commission amounts not expected to be collected due to policy cancellations, which is included in Accounts Receivable in the accompanying consolidated balance sheets.  We continue to receive the commission payments from the relevant insurance carrier until the earlier of the cancellation of the policy, our no longer remaining the agent on the policy, or our commission term with the carrier expires, typically for a period of at least six years from the effective date of the policy, depending on the carrier arrangement. We determine that there is persuasive evidence of an arrangement when we have a commission agreement with a health insurance carrier. Our services are complete when a carrier has approved an application in the initial year and when a member has renewed in a renewal year. The seller’s price is fixed or determinable and collectability is reasonably assured when a carrier has approved an application and the carrier reports to us the annual or first monthly renewal commission amount for each policy year. 

The majority of Medicare plans are sold in our 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. As a result, we generate a significant amount of Medicare plan-related revenue in the fourth quarter resulting from the sale of new Medicare plans. During the years 2013 and 2012, 64% and 59%, respectively, of our new Medicare approved members were enrolled during the fourth quarters of 2013 and 2012. Additionally, we recognize a majority of our renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in the first

---

 

quarter of each year as the majority of policies sold during the annual enrollment period typically renew on January 1 of each year.   

We market and sell ancillary health insurance plans, which include short-term, dental, life, vision, accident and student insurance plans, on our website www.eHealthinsurance.com. Historically, we have sold ancillary health insurance plans alongside individual and family health insurance plans and also as standalone products.   Ancillary health insurance plans are not subject to the same open enrollment period as individual and family health insurance. We recognize commission revenue for ancillary health insurance plans similar to our recognition of individual and family health insurance plan commission revenues. Revenue is recognized when commissions are reported to us by a health insurance carrier, net of an estimate for future forfeiture amounts payable to carriers due to policy cancellations.  Submitted applications for ancillary health insurance plans increased 92% during the first quarter of 2014 compared to the first quarter of 2013.  Since ancillary health insurance plans have traditionally been sold with individual and family plans, which are now mainly sold during open enrollment periods, but can also be bought as standalone products outside of open enrollment periods, the seasonality of our sale of ancillary health insurance plans is unclear.

Commission revenue attributable to major medical individual and family health insurance plans was 67% and 60% of commission revenue in the three months ended March 31, 2013 and 2014, respectively. The decline in the percentage of commission revenue attributable to major medical individual and family health insurance plans in the three months ended March 31, 2014, compared to the three months ended March 31, 2013, was due primarily to an increase in commission revenue attributable to Medicare-related insurance plans and, to a lesser extent, ancillary health insurance plans, consisting primarily of dental, accident and vision insurance plan offerings.   

 

We expect commission revenue to increase in absolute dollars in 2014 compared to 2013, primarily as a result of increases in Medicare plan, individual and family plan and ancillary plan commission revenues. 

 

Other Revenue  

 

In addition to the commission revenue we derive from the sale of health insurance plans, we derive other revenue from our online sponsorship and advertising program, from licensing the use of our ecommerce technology and from generating and delivering leads, primarily for Medicare plans. 

Online Sponsorship and Advertising.  We offer advertising services for our Medicare plan carriers to purchase advertising on separate websites developed, hosted and maintained by us for a pre-determined amount of time. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue over the service period. We also derive revenue from online sponsorship and advertising programs that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. In return, we are typically paid a monthly fee and a performance-based fee based on metrics such as submitted health insurance applications.

Technology Licensing.  We derive revenue from licensing the use of our health insurance ecommerce technology. Our technology platform enables health insurance carriers and agents to market and distribute health insurance plans online.  In our technology licensing business, we are paid implementation fees and performance-based fees that are based on metrics such as submitted health insurance applications. Typically, we are paid a one-time implementation fee commencing once the technology is available for use by the third party, which we recognize on a straight-line basis over the term of the agreement. In addition, we generate revenue based on performance criteria that are either measured based on data tracked by us, or based on data tracked by the third party. In instances where the performance criteria data are tracked by us, we recognize revenue in the period of performance. In instances where the performance criteria data are tracked by the third party, we recognize revenue when the amounts earned are fixed or determinable and collection is reasonably assured. Typically, this occurs through our receipt of a cash payment from the third party along with a detailed statement containing the data that is tracked by the third party. 

 

We expect other revenue to decline in absolute dollars in 2014 compared to 2013 due primarily to a decrease in online sponsorship and advertising revenue.  

 

Member Acquisition  

 

An important factor in our revenue growth is the growth of our member base. Our marketing initiatives are an important component of our strategy to grow our member base and are focused on three primary member acquisition channels: direct,

---

 

marketing partners and online advertising. Our marketing initiatives are primarily designed to encourage consumers to complete an application for health insurance. Our marketing channels are as follows: 

 

Direct.  Our direct member acquisition channel consists of consumers who access our website addresses, including www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com, either directly or through algorithmic natural search listings on Internet search engines and directories. For the three months ended March 31, 2013 and 2014, applications submitted through us for individual and family health insurance from our direct channel constituted 48% and 36%, respectively, of all individual and family health insurance applications submitted on our website. 

 

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. Growth in our marketing partner channel depends upon our expanding marketing programs with existing partners and adding new partners to our network.  For the three months ended March 31, 2013 and 2014, applications submitted through us for individual and family health insurance plans from our marketing partner member acquisition channel constituted approximately 32% and 44%, respectively, of all individual and family health insurance applications submitted on our website.

 

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 banner advertising and email marketing. For both the three months ended March 31, 2013 and 2014, applications submitted through us for individual and family health insurance plans from our online advertising channel constituted approximately 20% of all individual and family health insurance applications submitted on our website.

 

In addition to our marketing channels, we have acquired health insurance members through transactions with broker partners. We have entered into several agreements, whereby the partners have transferred certain of their existing health insurance members to us as the broker of record on the underlying policies. These transfers included primarily Medicare plan members. The first of these transferred books-of-business occurred in February 2009 and the most recent in June 2012.

 

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. Total consideration paid in connection with these transfers amounted to $13.9 million. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.

  

We expect cost of revenue to increase in absolute dollars in 2014 due primarily to an increase in payments for referrals to our website by marketing partners with whom we have revenue-sharing arrangements.

 

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. Our direct channel expenses primarily consist of costs for direct mail and email marketing and may also include costs for television, radio, and print advertising.  

 

Our marketing partner channel expenses consist primarily of fees paid to marketing partners with which we have a relationship. 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 insurance application, regardless of whether the consumer’s application is

---

 

approved by the health insurance carrier. Many 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. Since a significant portion of our marketing and advertising expenses are driven by the number of health insurance applications submitted on our ecommerce platform, those expenses are influenced by seasonal submitted application patterns. As a result, marketing and advertising expenses related to individual and family health insurance plans has historically been highest in our first and third quarters, while marketing and advertising expenses related to Medicare-related plans has historically been highest in our third and fourth quarters.  However, as a result of an increase in the number of individual and family applications submitted during the initial open enrollment period under health care reform, which began on October 1, 2013 and ended on March 31, 2014, we experienced a substantial increase in marketing and advertising expenses related to individual and family plans during the fourth quarter of 2013 and the first quarter of 2014.  We expect marketing and advertising costs to decrease in the second and third quarters with a  decrease in submitted individual and family plan applications outside of the annual open enrollment period. We expect profitability to increase in the second and third quarters of the year as a result of these lower marketing and advertising costs.

 

The majority of Medicare plans are sold in our 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. Since a significant portion of our marketing and advertising expenses are driven by the number of health insurance applications submitted on our website, those expenses are influenced by these patterns. In addition, 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. An increase in submitted applications resulting from marketing partner referrals could cause our net income to be lower than our expectation, since the revenue to be derived from submitted applications that are approved by health insurance carriers will not be recognized until future periods. 

  

Paid keyword search advertising on search engines represents the majority of expenses in our online advertising channel. We incur expenses associated with search engine advertising in the period in which the consumer clicks on the advertisement.  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.  For example, due to the substantial increase in the number of consumers referred to our website from paid keyword search advertising during the Medicare annual enrollment period in the fourth quarter of 2013, as well as the initial open enrollment period for individual and family plans during the fourth quarter of 2013 and the first quarter of 2014, we experienced a significant increase in online advertising expenses during both the fourth quarter of 2013 and first quarter of 2014 compared to the other quarters of 2013. We also increased our discretionary spending for Medicare plan-related online advertising in the third and fourth quarters of 2013 compared to the first and second quarters in conjunction with the Medicare annual enrollment period.  Because the majority of our Medicare plan-related revenue for new sales is not generated until the fourth quarter, our discretionary online advertising expenses had a negative impact on our profitability during the third quarter of 2013. For individual and family plans, we increased our discretionary spending in both the fourth quarter of 2013 and the first quarter of 2014 in conjunction with the initial open enrollment period. Because the revenue related to new individual and family plan members is recognized over the life of the policy, our discretionary online advertising for individual and family plans had a negative impact on our profitability during both the fourth quarter of 2013 and the first quarter of 2014. The seasonal patterns caused by the individual and family health insurance is new and is subject to change in future periods, particularly in connection with any change in the timing of the open enrollment periods. The Medicare plan-related seasonal patterns also occurred in 2012, and we expect them to occur again in 2014.

 

During the fourth quarter of 2013 and the first quarter of 2014, the source of our submitted individual and family plan applications shifted from our lower cost direct marketing channel to our higher cost marketing partner channel. Additionally, the cost per submitted individual and family plan application increased for our direct marketing, online advertising and marketing partner channels in Q1 2014.  

 

We expect our marketing and advertising expenses to increase in absolute dollars in 2014 compared to 2013 due primarily to increases in submitted individual and family plan applications and Medicare-related plan applications from both our online advertising and marketing partner channels during 2014.

  

Customer Care and Enrollment  

---

 

Customer care and enrollment expenses primarily consist of compensation and benefits costs for personnel engaged in pre-sales assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the underwriting process. In preparation for the Medicare annual enrollment period and to a lesser extent the initial open enrollment period for individuals and family plans, we begin ramping up our customer care center staff during our second and third quarters to handle the anticipated increased volume of health insurance transactions during the fourth quarter. Accordingly, our customer care center staffing costs are significantly higher in our third and fourth quarters compared to the first and second quarters. In the first quarter of 2014, we retained some enrollment personnel during the initial open enrollment period under health care reform that ended on March 31, 2014 to handle the increased volume of individual and family plan applications. Because the majority of our Medicare plan-related revenue related to new sales is not generated until the fourth quarter, our temporary customer care center staffing costs incurred in the third quarter has had a significant negative impact on our profitability during that quarter. These seasonal trends are expected to continue in 2014.  

We expect customer care and enrollment expenses to increase in absolute dollars in 2014 compared to 2013 as a result of additional personnel we have hired and expect to hire to service the expected increase in the volume of Medicare demand and the expected increase in the volume of individual and family demand in 2014 and due to an increase in expenditures to further develop our sales capabilities. 

 

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.  

 

We expect to increase our technology and content spending throughout 2014 in absolute dollars compared in 2013 as a result of an increase in labor and personnel costs in our product management and engineering departments in order to increase functionality to meet the conditions required to offer and sell subsidy-eligible health insurance plans, to enhance our online user experience, and for our planned investment in the development of employer-based health insurance exchange technology. We expect that technology and content spending will be impacted in future years by additional infrastructure necessary to maintain compliance with these conditions. 

 

General and Administrative  

 

General and administrative expenses include compensation and benefits costs for staff working in our executive, finance, corporate development, 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 expect our general and administrative expenses to increase in absolute dollars in 2014 compared to 2013 as we add infrastructure to support company growth.

 

Summary of Selected Metrics 

 

The following table shows certain selected quarterly metrics for the three months ended March 31, 2013 and 2014 and as of March 31, 2013 and 2014: 

 

 

---

 

 

 

---

 

Notes: 

 

Our insurance carrier partners bill and collect insurance premiums paid by our members. Carrier partners do not report to us the number of members that we have as of a given date. The majority of our non-Medicare 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 our non-Medicare 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:

 

 

 

 

A member who purchases and is active on multiple standalone insurance policies will be counted as a member more than once.  For example, a member who is active on both an individual and family health insurance policy and a standalone dental policy 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 our 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 reflect updated information regarding our membership in the membership estimate for the period we receive such updated information, if applicable. 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 economic and other conditions on our membership retention. Health care reform could cause the assumptions and estimates we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.

 

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:   

 

---

 

During the three months ended March 31, 2014, there were no significant changes to our critical accounting policies and estimates. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013, for a complete discussion of our critical accounting policies and estimates. 

---

 

Results of Operations  

 

The following table sets forth our operating results and the related percentage of total revenues for the three months ended March 31, 2013 and 2014 (dollars in thousands):  

 

Operating costs and expenses include the following amounts of stock-based compensation expense  (in thousands): 

 

---

 

 

Three Months Ended March 31, 2013 and 2014 

 

Revenue  

The following table presents our commission, other revenue and total revenue for the three months ended March 31, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):