Edgar Filing: eHealth, Inc.

EHTH.6.30.14.10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

☐ 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)

_____________________________________________



Delaware (State or other jurisdiction of incorporation or organization)		56-2357876 (I.R.S Employer Identification No)

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):



Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☐

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 August 1, 2014 was 17,767,133 shares.

EHEALTH, INC. FORM 10-Q

TABLE OF CONTENTS



	PART I FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at December 31, 2013 and June 30, 2014	1
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2014	2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2014	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 6.	Exhibits	66
	Signatures	69

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EHEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



	December 31, 2013			June 30, 2014
Assets	(Note 1)			(unaudited)
Current assets:
Cash and cash equivalents	$	107,055		$	70,382
Accounts receivable	4,586			6,863
Deferred income taxes	4,459			4,962
Prepaid expenses and other current assets	8,364			7,647
Total current assets	124,464			89,854
Property and equipment, net	10,283			10,594
Deferred income taxes	4,569			6,141
Other assets	5,518			5,195
Intangible assets, net	7,496			11,595
Goodwill	14,096			14,096
Total assets	$	166,426		$	137,475

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,381		$	4,153
Accrued compensation and benefits	10,291			7,235
Accrued marketing expenses	8,227			2,141
Deferred revenue	1,784			1,512
Other current liabilities	2,561			2,466
Total current liabilities	27,244			17,507
Non-current liabilities	6,165			5,873
Stockholders’ equity:
Common stock	28			29
Additional paid-in capital	252,361			260,207
Treasury stock, at cost	(149,998		)	(178,254		)
Retained earnings	30,466			31,936
Accumulated other comprehensive income	160			177
Total stockholders’ equity	133,017			114,095
Total liabilities and stockholders’ equity	$	166,426		$	137,475

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

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EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts, unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2014			2013			2014
Revenue
Commission	$	34,942		$	38,526		$	73,193		$	84,103
Other	4,858			4,068			9,814			9,431
Total revenue	39,800			42,594			83,007			93,534
Operating costs and expenses:
Cost of revenue	984			892			3,635			3,005
Marketing and advertising	13,761			9,609			28,596			32,718
Customer care and enrollment	7,812			8,984			14,978			18,697
Technology and content	7,727			9,550			14,468			20,017
General and administrative	7,132			6,857			14,651			15,151
Amortization of intangible assets	353			354			707			708
Total operating costs and expenses	37,769			36,246			77,035			90,296
Income from operations	2,031			6,348			5,972			3,238
Other expense, net	(21		)	(29		)	(46		)	(68		)
Income before provision for income taxes	2,010			6,319			5,926			3,170
Provision for income taxes	864			3,296			2,419			1,700
Net income	$	1,146		$	3,023		$	3,507		$	1,470

Net income per share:
Basic	$	0.06		$	0.16		$	0.18		$	0.08
Diluted	$	0.06		$	0.15		$	0.17		$	0.07

Weighted-average number of shares used in per share amounts:
Basic	18,946			18,978			19,754			18,914
Diluted	19,496			19,775			20,324			19,821

Comprehensive income:
Net income	$	1,146		$	3,023		$	3,507		$	1,470
Foreign currency translation adjustment	(15		)	1			(18		)	17
Comprehensive income	$	1,131		$	3,024		$	3,489		$	1,487

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

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EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	Six Months Ended June 30,
	2013			2014
Operating activities
Net income	$	3,507		$	1,470
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(3,449		)	(2,035		)
Depreciation and amortization	1,390			2,061
Amortization of book-of-business consideration	2,548			1,805
Amortization of intangible assets	707			708
Stock-based compensation expense	3,416			4,295
Deferred rent	827			34
Changes in operating assets and liabilities:
Accounts receivable	(866		)	(2,277		)
Prepaid expenses and other assets	(1,176		)	(1,073		)
Accounts payable	(1,541		)	(227		)
Accrued compensation and benefits	(530		)	(3,051		)
Accrued marketing expenses	(575		)	(6,086		)
Deferred revenue	887			(603		)
Other current liabilities	952			(123		)
Net cash provided by (used in) operating activities	6,097			(5,102		)
Investing activities
Purchases of property and equipment	(3,821		)	(2,340		)
Purchase of intangible assets	—			(4,500		)
Net cash used in investing activities	(3,821		)	(6,840		)
Financing activities
Net proceeds from exercise of common stock options	2,549			3,244
Cash used to net-share settle equity awards	(842		)	(3,355		)
Excess tax benefits from stock-based compensation	3,926			3,663
Repurchase of common stock	(59,007		)	(28,256		)
Principal payments in connection with capital leases	(26		)	(40		)
Net cash used in financing activities	(53,400		)	(24,744		)

Effect of exchange rate changes on cash and cash equivalents	(12		)	13

Net decrease in cash and cash equivalents	(51,136		)	(36,673		)
Cash and cash equivalents at beginning of period	140,849			107,055
Cash and cash equivalents at end of period	$	89,713		$	70,382

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

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 - Summary of Business and Significant Accounting Policies

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 June 30, 2014, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2013 and 2014 and the condensed consolidated statements of cash flows for the six months ended June 30, 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 June 30, 2014, its results of operations for the three and six months ended June 30, 2013 and 2014 and its cash flows for the six months ended June 30, 2013 and 2014. All adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 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 periods prior to the fourth quarter of 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, relative to historical levels, increased significantly during the fourth quarter of 2013 and the first quarter of 2014. Additionally, following completion of the initial open enrollment period, the number of submitted individual and family health insurance applications, relative to historical levels, decreased significantly during the second quarter of 2014, when only consumers with qualifying life events were able to transact and buy major medical plans. However, since consumers are able to purchase short-term policies outside of the enrollment period, the number of submitted short-term health insurance applications, relative to historical levels, increased significantly during the second quarter of 2014.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 periods prior to the fourth quarter of 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 and ended on March 31, 2014. These expenses, relative to historical levels, increased significantly in the fourth quarter of 2013 and first quarter of 2014, and decreased significantly during the second quarter, consistent with the respective increases and decreases in submitted applications.

Based on these seasonal trends in years prior to 2013, 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, as well as the Medicare annual enrollment period for Medicare plans in the fourth quarter of 2013, we experienced an increase in revenue in both the fourth quarter of 2013 and the first quarter of 2014. As a result of significantly higher marketing and advertising expenses associated with the increase in the number of individual and family health insurance applications and Medicare applications during these enrollment periods, we incurred a net loss in both the fourth quarter of 2013 and the first quarter of 2014. In the second quarter of 2014, we recorded a net income due to significantly lower marketing and advertising expenses associated with the decrease in the number of individual and family health insurance applications outside of the open enrollment period.

Recent Accounting Pronouncement-In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

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: 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.

Note 2 – Balance Sheet Accounts

Cash and Cash Equivalents—As of December 31, 2013 and June 30, 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 June 30, 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 and six months ended June 30, 2013 and 2014.

As of December 31, 2013 and June 30, 2014, our cash and cash equivalent balances were invested as follows (in thousands):

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



	December 31, 2013		June 30, 2014
Cash	$	16,935	$	33,761
Money market funds	90,120		36,621
Total cash and cash equivalents	$	107,055	$	70,382

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 June 30, 2014.

Accounts Receivable—As of December 31, 2013 and June 30, 2014, our accounts receivable consisted of the following (in thousands):



	December 31, 2013		June 30, 2014
Accounts receivable - from other revenues	$	2,322	$	1,105
Commissions receivable	2,264		5,758
Total accounts receivable	$	4,586	$	6,863

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 June 30, 2014):



	December 31, 2013							June 30, 2014							Weighted Average Remaining Life
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		June 30, 2014
Technology	$	1,752	$	(1,277	)	$	475	$	1,752	$	(1,450	)	$	302	0.9 years
Pharmacy and customer relationships	10,410		(4,267		)	6,143		10,410		(4,757		)	5,653		5.8 years
Trade names, trademarks and website addresses	907		(336		)	571		907		(381		)	526		5.8 years
Total intangible assets subject to amortization	$	13,069	$	(5,880	)	7,189		$	13,069	$	(6,588	)	6,481
Indefinite-lived trademarks and domain names						307							5,114		Indefinite
Intangible assets						$	7,496						$	11,595

During the three and six months ended June 30, 2013, amortization expense related to intangible assets totaled $353,000 and $707,000, respectively. During the three and six months ended June 30, 2014, amortization expense related to intangible assets totaled $354,000 and $708,000, respectively.

As of June 30, 2014, expected amortization expense in future periods is as follows (in thousands):

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



Years Ending December 31,	Technology		Pharmacy and Customer Relationships		Trade Names, Trademarks and Website Address		Total
2014 (six months)	172		489		46		707
2015	118		979		91		1,188
2016	5		979		91		1,075
2017	5		979		91		1,075
2018	2		959		91		1,052
Thereafter	-		1,268		116		1,384
Total	$	302	$	5,653	$	526	$	6,481

Note 3 – Stockholders’ Equity

Stock Plans—On June 12, 2014, upon approval at the Annual Meeting of Stockholders, we adopted the 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan replaced the 2006 Equity Incentive Plan and approved 4,500,000 shares to be authorized for issuance under the 2014 Plan. The 2014 Plan did not include an evergreen provision to automatically increase the number of shares available under it and increases in the number of shares authorized for issuance under the 2014 Plan require stockholder approval. Also, the 2014 Plan included a share counting methodology, which results in the following shares not being recycled for future grant under the 2014 Plan: (i) shares used in connection with the exercise of an option and/or stock appreciation right to pay the exercise price or purchase price of such award or satisfy applicable tax withholding obligations and (ii) gross number of shares subject to stock appreciation rights that are exercised. Furthermore, the 2014 Plan included a provision that prohibits repricing of outstanding stock options or stock appreciation rights and formalized and updated procedures to qualify awards as “performance-based” compensation under Section 162(m) of the Internal Revenue Code in order to preserve full tax deductibility of such awards to the Company.

The following table summarizes activity under our 2014 Equity Incentive Plan, 2006 Equity Incentive Plan, 1998 Stock Plan and 2005 Stock Plan (collectively, the “Stock Plans”) (in thousands):



	Shares Available for Grant
Shares available for grant December 31, 2013	4,085
Additional shares authorized (1)	751
Restricted stock units granted	(458	)
Options granted	(25	)
Restricted stock units cancelled	7
Options cancelled	15
2014 Equity Incentive Plan adjustment (2)	(98	)
Shares available for grant June 30, 2014	4,277


(1)	On January 1, 2014, the number of shares authorized for issuance under the 2006 Equity Incentive Plan was automatically increased pursuant to the terms of the 2006 Equity Incentive Plan.


(2)	On June 12, 2014, shares available for grant were adjusted to 4,500,000 pursuant to the terms of the 2014 Plan.

We maintain our 2006 Equity Incentive Plan, 2005 Stock Plan and 1998 Stock Plan, under which we previously granted options to purchase shares of our common stock and restricted stock units. These plans were terminated with respect to the grant of additional awards on June 12, 2014, upon adoption of our 2014 Plan. We will continue to issue new shares of common stock upon vesting of restricted stock units and the exercise of stock options previously granted under the 2006 Equity Incentive Plan, 2005 Stock Plan and 1998 Stock Plan.

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

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



	Number of Stock Options		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (1)
Balance outstanding at December 31, 2013	1,979		$	17.91	4.20	$	56,569
Granted	25		$	44.43
Exercised	(198	)	$	16.32		$	5,946
Cancelled	(16	)	$	21.18
Balance outstanding at June 30, 2014	1,790		$	18.43	3.74	$	35,214
Vested and expected to vest at June 30, 2014	1,730		$	18.27	3.68	$	34,288
Exercisable at June 30, 2014	1,175		$	16.45	2.94	$	25,272


(1)	The aggregate intrinsic value is calculated as the difference between eHealth’s closing stock price as of December 31, 2013 and June 30, 2014 and the exercise price of in-the-money options as of those dates.

The total fair value of stock options vested during the three and six months ended June 30, 2013 was $0.7 million and $2.0 million, respectively. The total fair value of stock options vested during the three and six months ended June 30, 2014 was $0.5 million and $1.2 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):



	Number of Restricted Stock Units (1)		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (2)
Balance outstanding as of December 31, 2013	779		$	19.57	2.30	$	36,220
Granted	458		40.78
Vested	(203	)	$	18.96
Cancelled	(7	)	$	19.33
Balance outstanding as of June 30, 2014	1,027		$	29.16	2.54	$	39,010


(1)	Includes restricted stock units with both service and performance-based vesting criteria granted to our executive officers.


(2)	The aggregate intrinsic value is calculated as eHealth’s closing stock price as of December 31, 2013 and June 30, 2014 multiplied by the number of restricted stock units outstanding as of December 31, 2013 and June 30, 2014, respectively.

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 amount of expense recorded for performance-based restricted stock units is based on expected attainment of performance criteria. The total fair value of restricted stock units vested during the three and six months ended June 30, 2013 was $1.2 million and $3.2 million, respectively. The total fair value of restricted stock units vested during the three and six months ended June 30, 2014 was $1.4 million and $9.8 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

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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. Purchases under this program are made in the open market. As of June 30, 2014, 769,332 shares have been repurchased under this program at an average price of $36.73. In July 2014, we completed this stock repurchase program, having repurchased in the aggregate 1.4 million shares for approximately $50.0 million at an average price of $36.91 per share including commissions. The cost of the repurchase was funded from available working capital.

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.

Stock repurchase activity under our stock repurchase programs during the six months ended June 30, 2014 is summarized as follows (dollar in thousands, except share and per share amounts):



	Total Number of Shares Repurchased	Average Price Paid Per Share (3)		Amount of Repurchase
Cumulative balance at December 31, 2013 (1)	9,309,269	$	16.11	$	149,998
Repurchases of common stock during 2014	769,332	$	36.73	$	28,256
Cumulative balance at June 30, 2014 (2)	10,078,601	$	17.69	$	178,254


(1)	Cumulative balances at December 31, 2013 consist of shares repurchased in connection with our previous stock repurchase plans announced in 2013, 2012, 2011, 2010 and 2008.


(2)	Cumulative balances at June 30, 2014 consist of shares repurchased in connection with our stock repurchase program announced on March 31, 2014, as well as previous stock repurchase plans announced in 2013, 2012, 2011, 2010 and 2008.


(3)	Average price paid per share includes commissions.

In addition to the shares repurchased under our repurchase programs as of June 30, 2014, we have in treasury 275,493 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 June 30, 2014, we had a total of 9,519,286 shares and 10,354,094 shares, respectively, held in treasury.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Stock-Based Compensation—The fair value of stock options granted to employees for the three and six months ended June 30, 2013 and 2014 was estimated using the following weighted average assumptions:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2014			2013			2014
Expected term	4.3 years			4.2 years			4.3 years			4.2 years
Expected volatility	39.7		%	45.9		%	39.7		%	45.9		%
Expected dividend yield	—		%	—		%	—		%	—		%
Risk-free interest rate	0.62		%	1.42		%	0.62		%	1.42		%
Weighted-average fair value	$	6.32		$	17.01		$	6.32		$	17.01

The following table summarizes stock-based compensation expense recorded during the three and six months ended June 30, 2013 and 2014 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Common stock options	$	656	$	564	$	1,448	$	1,206
Restricted stock units	1,126		1,286		1,968		3,089
Total stock-based compensation expense	$	1,782	$	1,850	$	3,416	$	4,295

The following table summarizes stock-based compensation expense by operating function for the three and six months ended June 30, 2013 and 2014 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Marketing and advertising	$	470	$	579	$	929	$	1,236
Customer care and enrollment	81		71		169		167
Technology and content	385		429		704		991
General and administrative	846		771		1,614		1,901
Total stock-based compensation expense	$	1,782	$	1,850	$	3,416	$	4,295

Note 4 – Income Taxes

The following table summarizes our provision for income taxes and our effective tax rates for the three and six months ended June 30, 2013 and 2014 (in thousands, except effective tax rate):



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2014			2013			2014
Income before provision for income taxes	$	2,010		$	6,319		$	5,926		$	3,170
Provision for income taxes	$	864		$	3,296		$	2,419		$	1,700
Effective tax rate	43.0		%	52.2		%	40.8		%	53.6		%

Our effective tax rate in the three and six months ended June 30, 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 and six months ended June 30, 2014 was higher than statutory federal and state tax rates due primarily to non-deductible lobbying expenses.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

During the three and six months ended June 30, 2013, excess federal and state tax benefits related to share-based payments, resulted in increases of $0.5 million and $3.9 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. During the three and six months ended June 30, 2014, excess federal and state tax benefits related to share-based payments, resulted in increases of $0.4 million and $3.7 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.

Note 5 – Net Income Per Share

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Basic:
Numerator:
Net income allocated to common stock	$	1,146	$	3,023	$	3,507	$	1,470
Denominator:
Net weighted average number of common stock shares outstanding	18,946		18,978		19,754		18,914
Net income per share—basic:	$	0.06	$	0.16	$	0.18	$	0.08
Diluted:
Numerator:
Net income allocated to common stock	$	1,146	$	3,023	$	3,507	$	1,470
Denominator:
Net weighted average number of common stock shares outstanding	18,946		18,978		19,754		18,914
Weighted average number of options	445		623		453		702
Weighted average number of restricted stock units	105		174		117		205
Total common stock shares used in diluted per share calculation	19,496		19,775		20,324		19,821
Net income per share—diluted:	$	0.06	$	0.15	$	0.17	$	0.07

For each of the three- and six-month periods ended June 30, 2013 and 2014, we had securities outstanding that could potentially dilute net income per share, but the shares from the assumed exercise of these securities were excluded in the computation of diluted net income 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 per share consisted of the following (in thousands):

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2014	2013	2014
Common stock options	290	130	312	27
Restricted share units	12	65	6	—
Total	302	195	318	27

Note 6 – Geographic Information and Significant Customers

Geographic Information—As of December 31, 2013 and June 30, 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):



	As of		As of
	December 31, 2013		June 30, 2014
United States	$	37,046	$	41,136
China	347		344
Total	$	37,393	$	41,480

Significant Customers—Substantially all revenue for the three and six months ended June 30, 2013 and 2014 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue in the three and six months ended June 30, 2013 and 2014 are presented in the table below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Humana	17	%	21	%	20	%	24	%
WellPoint (1)	13	%	11	%	12	%	11	%
UnitedHealthcare (2)	11	%	9	%	11	%	10	%
Aetna (3)	8	%	10	%	8	%	10	%

(1)Wellpoint also includes other carriers owned by Wellpoint.

(2)UnitedHealthcare also includes other carriers owned by UnitedHealthcare.

(3)Aetna also includes other carriers owned by Aetna.

Commission revenue attributable to major medical individual and family health insurance plans was approximately 75% and 70% of our commission revenue in the three and six months ended June 30, 2013, respectively. Commission revenue attributable to major medical individual and family health insurance plans was approximately 68% and 64% of our commission revenue in the three and six months ended June 30, 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, and accident 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 June 30, 2014, one customer represented 58% of our $6.9 million outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at December 31, 2013 and June 30, 2014. We believe the potential for collection issues with any of our customers is minimal as of June 30, 2014. Accordingly, our estimate for uncollectible amounts at June 30, 2014 was not material.

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ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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; 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; our ability to enroll members through government-run health insurance exchanges; the impact of health insurance carrier processing; the impact of the technology development, implementation 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; the expected reasons for changes in our expenses our future commission rate structure; our overall individual and family health insurance commission rate structure; the ratio of member-per-month commission policies sold compared to percentage-of-premium commission; the mix of our members by health insurance carrier; our expectations regarding the timing of our recognition of revenue; proposed changes relating to the definition of a plan year and 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; the ability to purchase ancillary health plans as standalone products outside of open enrollment periods 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 the acceptance rate by members of approved policies; ;our ability to convert subsidy-eligible individuals and families into members; our estimates of membership churn; 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 ability to market and sell individual and family health insurance during the open enrollment period; our expectations and projections relating to membership and commission rates; changes to our significant customers; the timing and source of our Medicare-related revenue; the impact of the health care reform laws on the health care industry in future periods; the impact of litigation in our industry related to regulatory matters; 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 risks associated with the impact of healthcare reform and medical loss ratio requirements; changes in consumer behavior and their selection of individual and family health insurance products, including the selection of products for which we receive lower commissions; changes in competitive landscape and product offerings among carriers and the resulting impact on our commission revenue; increased competition from state and federal insurance exchanges; the impact of increased health insurance costs on demand; our ability to retain existing members and limit member turnover; our ability to attract new members and to convert online visitors into paying members; our ability to timely receive and accurately predict the amount of commission payments from health insurance carriers; changes in member conversion rates; our ability to sell qualified health insurance plans to subsidy-eligible individuals; our ability to align its expenses with its revenue; the impact of annual enrollment periods for the purchase of individual and family health insurance and its timing on our recognition of revenue; our ability to accurately estimate membership; the evolving nature of Affordable Care Act implementation; our ability to enter into and maintain relationships with health insurance carriers; our success in marketing and selling health insurance plans; our ability to hire, train and retain licensed health insurance agents; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; costs of acquiring new members; lack of membership growth and retention rates; changes in products offered on our ecommerce platform; changes in commission rates; maintaining and enhancing our brand identity; our ability to derive desired benefits from its investments in its business, including its membership growth initiatives and development of private exchange

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capabilities; system failures, capacity constraints, data loss or online commerce security risks; dependence on acceptance of the Internet as a marketplace for the purchase and sale of health insurance; dependence upon Internet search engines; reliance on marketing partners; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; competition; dependence on our operations in China; success of our sponsorship and advertising business; protection of intellectual property and defense against intellectual property rights claims; legal liability and regulatory penalties; changes in our management and key employees; seasonality; maintenance of relationships with business development partners; maintenance of proper and effective internal controls; impact of provisions for income taxes; changes in laws and regulations, including in connection with healthcare reform and/or with respect to the marketing and sale of Medicare plans; compliance with insurance and other laws and regulations; exposure to security risks; and the performance, reliability and availability of our ecommerce platform and underlying network infrastructure. Other risks include 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 88% of total revenue in the three and six months ended June 30, 2013 and represented 90% of total revenue in the three and six months ended June 30, 2014. Historically, the commission payments we received on individual and family, small business and ancillary health insurance policies we sold were a percentage of the premium on the policy. Effective January 1, 2014, many carriers began paying our individual and family health insurance commissions at 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

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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. The second annual 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. 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 while holding a healthcare reform health insurance plan. 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 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 operated 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. Notwithstanding our entering into agreements with the federal exchange, the online customer experience in the federal exchange driven process for enrollment into qualified health plans was cumbersome during the last open enrollment period and often required significant telephonic interaction between the customer and our customer care center. We continue to urge 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 could be negatively impacted. Additionally, we have not entered into a similar relationship with any of the states that are operating their own exchanges. We do not expect government run health insurance exchanges to modify their processes and consumer experience for individuals to enroll in qualified health plans online through agents and brokers for the upcoming open enrollment period. As a result, we intend to utilize a combination of our technology and call centers to offer an improved experience compared to the last open enrollment period for consumers who wish to enroll in qualified health plans through the federal health insurance exchange and certain state health insurance 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 depend 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 depends upon government-run health insurance exchanges developing and maintaining 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 over the Internet, 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. In addition, 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, as we experienced during the second quarter of 2014 and expect to continue through the third quarter of 2014. The impact of health care reform on our health insurance carrier partners and their reaction is also unclear. For

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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. A reduction in the number of health insurance policies purchased through us outside of the open enrollment period, as we experienced during the second quarter of 2014 and expect to continue through the third quarter of 2014, results in a corresponding decrease in revenue from our online sponsorship program. 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. A reduction in the number of health insurance policies processed by our technology platform outside of the open enrollment period, as we experienced during the second quarter of 2014 and expect to continue through the third quarter of 2014, results in a corresponding decrease in revenue from our technology licensing program.

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 historically 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, by geography and by the type of plan purchased by a member. Commission rates commonly 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. However, some carriers postpone payment of commission to us for qualified health insurance plans where the member holding the plan is receiving a subsidy, until the health insurance carrier receives the premium payment from the member and the subsidy payment from the federal government, which further delays our ability to recognize revenue from the sale of these policies. 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. The actual average 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. Additionally, the health insurance products that our members selected during open enrollment period, and especially in the first quarter of 2014, represented a change from our historic product and carrier mix. Together, this shift in the concentration of our members by carrier and differing health insurance products and carriers chosen by our members, after incorporating the positive impact of premium inflation, slightly reduced our commissions per member in the second quarter of 2014 and will have some impact on our revenue for remainder of the year. We may experience adjustments to our average commission dollars per-member-per-month in the future,

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particularly after the healthcare reform open enrollment period given that we anticipate a large amount of individual and family health insurance purchasing activity during that period.

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.

Our individual and family health insurance commission revenue is influenced by the number of applications for individual and family health insurance we submit to health insurance carriers and the rate at which those applications turn into paying members. In periods prior to the fourth quarter of 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. 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 a significant increase, relative to historical levels, in the number of individual and family applications submitted during the initial open enrollment period under health care reform that began on October 1, 2013 and ended on March 31, 2014. Additionally, following completion of the initial open enrollment period, the number of submitted individual and family health insurance applications decreased significantly during the second quarter of 2014, relative to historical levels, when only consumers with qualifying life events were able to purchase individual and family health insurance. However, since consumers are able to purchase short-term policies during the supplement enrollment period, which began on April 1, 2014 and ends on November 14, 2014, the number of submitted short-term health insurance applications, relative to historical levels, increased significantly during the second quarter of 2014. We expect the number of submitted individual and family applications in the third quarter of 2014 to decline compared to the same period in 2013, consistent with the decline we experienced in the second quarter of 2014. Conversely, we expect the number of submitted short-term applications in the third quarter of 2014 to increase compared to the same period in 2013. Revenue related to 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. For example, 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 but returned to historical rates in the second quarter of 2014. Our individual and family health insurance commission revenues are earned from each paying member. In the first quarter of 2014, we experienced higher approval rates on submitted individual and family plan applications when compared to applications submitted prior to the implementation of health care reform. Notwithstanding, in the second quarter of 2014, we experienced a decrease in the rate at which these approvals resulted in paying members, which adversely impacted our individual and family plan membership as of the end of the quarter ended June 30, 2014.

Our individual and family health insurance commission revenue is also influenced by our individual and family health insurance member retention rates. Our member retention rate on our individual and family membership was negatively impacted by health care reform during the fourth quarter of 2013 and the first and second quarters of 2014 primarily due to the transition from health insurance plans that were not compliant with the requirements of health care reform on January 1, 2014 and to the assumed purchase of health insurance plans by our members directly from other sources. 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, due in part to delays in health insurance carrier processing, we will not have a full view of the impact of the open enrollment period on our membership until later in the year. Our estimated individual and family health insurance membership as of June 30, 2014, slightly increased compared to June 30, 2013, as a result of the increased individual and family health insurance purchasing activity during the health care reform annual enrollment period, offset by a decrease in our membership retention rates compared to periods prior to health care reform implementation.

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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, but were originally set to be October 15 through December 7. 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. Open enrollment periods have changed the seasonality of our individual and family health insurance business and individual and family health insurance submitted applications. Additionally, we expect that applications submitted for individual and family health insurance to decline during the third quarter of 2014, compared to the same period in 2013, consistent with the decline we experienced in the second quarter of 2014.

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 have generated 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. As a result of a new regulation issued by the Center for Medicare and Medicaid Studies (“CMS”), which changed the definition of a plan year from being 12-months from the effective date of a policy to January 1 through December 31 of each year, effective January 2015, all Medicare Advantage and Medicare Part D prescription drug policies will renew on January 1, 2015, resulting in our recording of all Medicare Advantage and Medicare Part D prescription drug plan renewal commission revenue in the first quarter of each year. This plan year change will result in lower renewal commission revenue in the second, third and fourth quarters of 2014, compared to the same periods in 2013, and no renewal commission revenue in the second, third or fourth quarters of 2015. CMS also issued a regulation prohibiting carriers from paying commissions during the fourth quarter on Medicare Advantage and Medicare Part D prescription drug policies sold during the fourth quarter with an effective date in the following year. While we do not anticipate that this will have a significant adverse effect on our ability to recognize revenue in the fourth quarter, it will significantly reduce our operating cash flows for the fourth quarter as a result of our receipt of the commission payments being received from the carriers in the first quarter of the following year.

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We market and sell ancillary health insurance plans, which include short-term, dental, life, vision, and accident 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 29% and 61% during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013, respectively. This increase was due primarily to consumers being able to purchase short-term policies outside of the open enrollment period. As a result, the number of submitted short-term health insurance applications increased significantly during the second quarter of 2014, relative to historical levels. Similarly, we expect the number of submitted short-term applications in the third quarter of 2014 to increase compared to the same period in 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 75% and 70% of commission revenue in the three and six months ended June 30, 2013, respectively, and was 68% and 64% of commission revenue in the three and six months ended June 30, 2014, respectively. The decline in the percentage of commission revenue attributable to major medical individual and family health insurance plans in the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 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 short term, 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 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 allow 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 both online sponsorship and advertising revenue and technology licensing revenue, largely due to a decline in individual and family submitted health insurance applications in the second quarter of 2014 and expected decline in individual and family submitted health insurance applications in the third quarter of 2014.

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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, through algorithmic natural search listings on Internet search engines and directories, or other forms of direct marketing, such as email. For the three and six months ended June 30, 2013, applications submitted through us for individual and family health insurance from our direct channel constituted 49% and 48%, respectively, of all individual and family health insurance applications submitted on our website. For the three and six months ended June 30, 2014, applications submitted through us for individual and family health insurance from our direct channel constituted 61% and 39%, 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 both the three and six months ended June 30, 2013, applications submitted through us for individual and family health insurance plans from our marketing partner member acquisition channel constituted approximately 32% of all individual and family health insurance applications submitted on our website. For the three and six months ended June 30, 2014, applications submitted through us for individual and family health insurance plans from our marketing partner member acquisition channel constituted approximately 27% and 42%, 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. For the three and six months ended June 30, 2013, applications submitted through us for individual and family health insurance plans from our online advertising channel constituted approximately 19% and 20%, respectively, of all individual and family health insurance applications submitted on our website. For the three and six months ended June 30, 2014, applications submitted through us for individual and family health insurance plans from our online advertising channel constituted approximately 12% and 19%, respectively, 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 decrease in absolute dollars in 2014 compared to 2013 due primarily to a decrease in payments for referrals to our website by marketing partners with whom we have revenue-sharing arrangements.

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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, email marketing and retargeting campaigns redirecting consumers to our websites 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. In periods prior to fourth quarter of 2013, 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. During the second quarter of 2014, outside of the initial open enrollment period, there was a significant decrease in the number of individual and family applications submitted compared to the same period in 2013. As a result, we experienced a decrease in marketing and advertising expenses related to the individual and family plans and an increase in profitability. We expect marketing and advertising costs to decrease in the third quarter of 2014 compared to the same period in 2013 as a result of a decrease in submitted individual and family plan applications outside of the annual open enrollment period, consistent with the decline we experienced in the second 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.

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 seasonal 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. 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. We decreased our discretionary spending on online advertising during the second quarter of 2014, outside of the open enrollment period for individual and family plans and the Medicare annual enrollment period, which had a positive impact on profitability during the second quarter of 2014. The seasonal patterns caused by the individual and family health insurance is new and is subject to change in future periods,

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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 the first quarter of 2014. During the second quarter of 2014, with the decrease in submitted individual and family plan applications outside of the initial open enrollment period, our source of submitted individual and family plan applications shifted to our direct marketing channel. However, the cost per submitted application increased further, particularly in our online advertising channel.

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 demand for Medicare and individual and family plans during the open enrollment periods for these products 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 June 30, 2013 and 2014 and as of June 30, 2013 and 2014:

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	Three Months Ended		Three Months Ended
Key Metrics:	June 30, 2013		June 30, 2014
Operating cash flows (1)	$	6,635,000	$	308,000
IFP submitted applications (2)	110,600		24,800
IFP approved members (3)	100,700		95,100
Total approved members (4)	190,400		208,000
Commission revenue (5)	$	34,942,000	$	38,526,000
Commission revenue per estimated member for the period (6)	$	32.58	$	30.40
	As of		As of
	June 30, 2013		June 30, 2014
IFP estimated membership (7)	748,000		751,000
Medicare estimated membership (8)	80,400		113,200
Other estimated membership (9)	263,000		384,600
Total estimated membership (10)	1,091,400		1,248,800



	Three Months Ended		Three Months Ended
	June 30, 2013		June 30, 2014
Source of IFP submitted applications (as a percentage of total IFP applications for the period):
Direct (11)	49	%	61	%
Marketing partners (12)	32	%	27	%
Online advertising (13)	19	%	12	%
Total	100	%	100	%


(1)	Net cash provided by operating activities for the period from the condensed consolidated statements of cash flows.

(2)

IFP applications submitted on eHealth’s website during the period. Applications are counted as submitted when the applicant completes the application, provides a method for payment and clicks the submit button on our website and submits the application to us. The applicant generally has additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information and providing an electronic signature. In addition, an applicant may submit more than one application. We include applications for IFP plans for which we receive commissions as well as other forms of payment. We define our “IFP” offerings as major medical individual and family health insurance plans, which does not include small business, short-term, stand-alone dental, life, accident or Medicare-related health insurance plans.


(3)	New IFP members reported to eHealth as approved during the period. Some members that are approved by a carrier do not accept the approval and therefore do not become paying members.


(4)	New members for all products reported to eHealth as approved during the period. Some members that are approved by a carrier do not accept the approval and therefore do not become paying members.


(5)	Commission revenue (from all sources) recognized during the period from the condensed consolidated statements of comprehensive income.


(6)	Calculated as commission revenue recognized during the period (see note (5) above) divided by average estimated membership for the period (calculated as beginning and ending estimated membership for all plans for the period, divided by two).


(7)	Estimated number of members active on IFP insurance policies as of the date indicated.


(8)	Estimated number of members active on Medicare-related insurance policies as of the date indicated.


(9)	Estimated number of members active on insurance policies other than IFP and Medicare-related policies as of the date indicated.


(10)	Estimated number of members active on all insurance policies, including Medicare-related policies, as of the date indicated.


(11)	Percentage of IFP submitted applications from applicants who came directly to the eHealth website through algorithmic search engine results or otherwise. See note (2) above for further information as to what constitutes a submitted application.


(12)	Percentage of IFP submitted applications from applicants sourced through eHealth’s network of marketing partners. See note (2) above for further information as to what constitutes a submitted application.

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(13)	Percentage of IFP submitted applications from applicants sourced through paid search and other online advertising activities. See note (2) above for further information as to what constitutes a submitted application.

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:

•

Historically, to calculate the estimated number of members active on individual and family health insurance policies, we take the sum of (i) the number of individual and family health insurance members for whom we have received or applied a commission payment for the month that is six months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the six-month period); and (ii) the number of approved members over the six-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). Historically, the percentage of our members who did not accept their approved policy remained relatively constant. However, for policies that were submitted in the quarter ended March 31, 2014, we have observed an increase in the number of members who ultimately did not accept their approved policies, compared to our historical experience. This lower acceptance rate was used to estimate the assumed number of members who did not accept their approved policy for the six months ended June 30, 2014. As a result, for the purpose of estimating the number of members active on individual and family plan insurance policies as of June 30, 2014, we have assumed and applied a higher percentage of members who do not accept their approved policy as compared to the assumption we used in prior periods. We also estimated a potentially higher membership churn as compared to historical levels on January 1, 2014 due to policy terminations on December 31, 2013 as a result of the Affordable Care Act. As a result, consistent with our estimation process for the quarter ended March 31, 2014, we have used January 1, 2014 (rather than December 31, 2013) as the beginning of our six-month period for purpose of estimating the number of members active on individual and family plan insurance policies as of June 30, 2014.

•

For ancillary insurance policies (such as short-term, dental, vision, and accident), we take the sum of (i) the number of members for whom we have received or applied a commission payment for the month that is one to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the one to three-month period); and (ii) the number of approved members over the one to three-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). 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 Medicare-related insurance policies, we take the number of members for whom we have received or applied a commission payment prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations, including rapid disenrollment).

•

For small business health insurance policies, 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. Additionally, our carrier partners often do not communicate this information to us. We often are made aware of policy cancellations 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 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.

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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 reflect updated information regarding our membership in the membership estimate for the period when 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 conditions such as health care reform implementation on our membership retention. Health care reform and 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.

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 three and six months ended June 30, 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.

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Results of Operations

The following table sets forth our operating results and the related percentage of total revenues for the three and six months ended June 30, 2013 and 2014 (dollars in thousands):



	Three Months Ended June 30,										Six Months Ended June 30,
	2013					2014					2013					2014
Revenue:
Commission	$	34,942		88	%	$	38,526		90	%	$	73,193		88	%	$	84,103		90	%
Other	4,858			12		4,068			10		9,814			12		9,431			10
Total revenue	39,800			100		42,594			100		83,007			100		93,534			100
Operating costs and expenses:
Cost of revenue	984			2		892			2		3,635			4		3,005			3
Marketing and advertising	13,761			35		9,609			23		28,596			34		32,718			35
Customer care and enrollment	7,812			20		8,984			21		14,978			18		18,697			20
Technology and content	7,727			19		9,550			22		14,468			17		20,017			21
General and administrative	7,132			18		6,857			16		14,651			18		15,151			16
Amortization of intangible assets	353			1		354			1		707			1		708			1
Total operating costs and expenses	37,769			95		36,246			85		77,035			93		90,296			97
Income from operations	2,031			5		6,348			15		5,972			7		3,238			3
Other expense, net	(21		)	—		(29		)	—		(46		)	—		(68		)	—
Income before provision for income taxes	2,010			5		6,319			15		5,926			7		3,170			3
Provision for income taxes	864			2		3,296			8		2,419			3		1,700			2
Net income	$	1,146		3	%	$	3,023		7	%	$	3,507		4	%	$	1,470		2	%

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2014		2013		2014
Marketing and advertising	$	470	$	579	$	929	$	1,236
Customer care and enrollment	81		71		169		167
Technology and content	385		429		704		991
General and administrative	846		771		1,614		1,901
Total stock-based compensation expense	$	1,782	$	1,850	$	3,416	$	4,295

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Three and Six Months Ended June 30, 2013 and 2014

Revenue

The following table presents our commission, other revenue and total revenue for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2013			2014			$			%		2013			2014			$			%
Commission	$	34,942		$	38,526		$	3,584		10	%	$	73,193		$	84,103		$	10,910		15	%
Percentage of total revenue	88		%	90		%						88		%	90		%
Other	$	4,858		$	4,068		$	(790	)	(16	)%	$	9,814		$	9,431		$	(383	)	(4	)%
Percentage of total revenue	12		%	10		%						12		%	10		%
Total revenue	$	39,800		$	42,594		$	2,794		7	%	$	83,007		$	93,534		$	10,527		13	%

Three Months Ended June 30, 2013 and 2014—Commission revenue increased $3.6 million, or 10%, in the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due in part to a $1.7 million increase in ancillary health insurance related commission revenue, consisting primarily of short-term, vision, dental and accident plan offerings. Additionally, Medicare-related commission revenue increased $1.8 million. The increases in Medicare-related and ancillary commission revenues are due to increased membership for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Other revenue decreased $0.8 million, or 16%, in the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due primarily to a $0.8 million decrease in sponsorship revenue related to the decreased number of individual and family health insurance applications outside of the initial open enrollment period.

Six Months Ended June 30, 2013 and 2014—Commission revenue increased $10.9 million or 15%, in the six months ended June 30, 2014, compared to the six months ended June 30, 2013, due primarily to a $6.0 million increase in Medicare-related commission revenue. Additionally, ancillary health insurance commission revenue, consisting primarily of short-term, dental, vision and accident plan offerings increased $3.2 million and commission override revenue increased by $1.8 million, primarily due to an increase in annual commission override payments received in the first quarter of 2014. The increases in Medicare-related and ancillary commission revenues are due to increased membership for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Other revenue decreased $0.4 million, or 4%, in the six months ended June 30, 2014, compared to the six months ended June 30, 2013, due to a $0.8 million decrease in sponsorship revenue related to the decreased number of individual and family health insurance applications outside of the initial open enrollment period, partially offset by a $0.5 increase in technology licensing revenue during the first quarter of 2014.

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Operating Costs and Expenses

Cost of Revenue

The following table presents our cost of revenue for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2013			2014			$			%		2013			2014			$			%
Cost of revenue	$	984		$	892		$	(92	)	(9	)%	$	3,635		$	3,005		$	(630	)	(17	)%
Percentage of total revenue	2		%	2		%						4		%	3		%

Three Months Ended June 30, 2013 and 2014—Cost of revenue decreased $0.1 million, or 9%, in the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due to a decrease in amortization expense associated with consideration we paid in connection with several book-of-business transactions in which we acquired broker of record status on a number of Medicare health insurance plans. The amount of book-of-business consideration we amortize to cost of revenue each quarter is proportional to the amount of commission revenue we recognize on the underlying policies each quarter.

Six Months Ended June 30, 2013 and 2014—Cost of revenue decreased $0.6 million, or 17%, in the six months ended June 30, 2014, compared to the six months ended June 30, 2013, due to a decrease in amortization expense associated with consideration we paid in connection with several book-of-business transactions in which we acquired broker of record status on a number of Medicare health insurance plans. The amount of book-of-business consideration we amortize to cost of revenue each quarter is proportional to the amount of commission revenue we recognize on the underlying policies each quarter.

Marketing and Advertising

The following table presents our marketing and advertising expenses for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2013			2014			$			%		2013			2014			$		%

Marketing and advertising	$	13,761		$	9,609		$	(4,152	)	(30	)%	$	28,596		$	32,718		$	4,122	14	%
Percentage of total revenue	35		%	23		%						34		%	35		%

Three Months Ended June 30, 2013 and 2014—Marketing and advertising expenses decreased $4.2 million, or 30%, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily due to a decrease in variable advertising costs of $4.1 million. Fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website decreased $3.2 million and online advertising costs decreased $1.4 million, primarily due to the decrease in submitted individual and family health insurance applications outside of open enrollment periods. This was partially offset by an increase of $0.4 million in direct marketing expenses.

Six Months Ended June 30, 2013 and 2014—Marketing and advertising expenses increased $4.1 million, or 14%, in the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily due to an increase of variable advertising costs of $3.4 million. Fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website increased $1.1 million and direct marketing expenses increased $1.7 million, and online advertising costs increased $0.6 million, primarily due to the increase in submitted individual and family health insurance applications during the open enrollment periods in the first quarter of 2014. Additionally, compensation, benefits, stock-based compensation and other personnel costs increased $0.4 million as a result of an increase in marketing and advertising personnel.

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Customer Care and Enrollment

The following table presents our customer care and enrollment expenses for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2013			2014			$		%		2013			2014			$		%
Customer care and enrollment	$	7,812		$	8,984		$	1,172	15	%	$	14,978		$	18,697		$	3,719	25	%
Percentage of total revenue	20		%	21		%					18		%	20		%

Three Months Ended June 30, 2013 and 2014—Customer care and enrollment expenses increased $1.2 million, or 15%, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, due primarily to additional compensation, benefits, stock-based compensation, licensing and other personnel costs for customer care center personnel.

Six Months Ended June 30, 2013 and 2014—Customer care and enrollment expenses increased $3.7 million, or 25%, in the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to additional compensation, benefits, stock-based compensation, licensing and other personnel costs for customer care center personnel.

Technology and Content

The following table presents our technology and content expenses for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2013			2014			$		%		2013			2014			$		%
Technology and content	$	7,727		$	9,550		$	1,823	24	%	$	14,468		$	20,017		$	5,549	38	%
Percentage of total revenue	19		%	22		%					17		%	21		%

Three Months Ended June 30, 2013 and 2014—Technology and content expenses increased $1.8 million, or 24%, in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily due to an increase of $1.2 million in compensation, benefits, stock-based compensation and other personnel costs as a result of an increase in technology and content personnel. Additionally, technology and content expenses increased $0.6 million due to increases in depreciation and facilities expense.

Six Months Ended June 30, 2013 and 2014—Technology and content expenses increased $5.5 million, or 38%, in the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily due to an increase of $3.9 million in compensation, benefits, stock-based compensation and other personnel costs as a result of an increase in technology and content personnel. Additionally, technology and content expenses increased due to an increase of $0.9 million in depreciation expense and facilities expense and an increase of $0.7 million in spending to support website operation and infrastructure maintenance costs and information technology.

General and Administrative

The following table presents our general and administrative expenses for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2013			2014			$			%		2013			2014			$		%
General and administrative	$	7,132		$	6,857		$	(275	)	(4	)%	$	14,651		$	15,151		$	500	3	%
Percentage of total revenue	18		%	16		%						18		%	16		%

Three Months Ended June 30, 2013 and 2014—General and administrative expenses were relatively flat in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

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Six Months Ended June 30, 2013 and 2014—General and administrative expenses were relatively flat in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Amortization of Intangible Assets

The following table presents our amortization of intangible assets for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2013			2014			$		%		2013			2014			$		%
Amortization of intangible assets	$	353		$	354		$	1	—	%	$	707		$	708		$	1	—	%
Percentage of total revenue	1		%	1		%					1		%	1		%

Three Months Ended June 30, 2013 and 2014—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber remained flat in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Six Months Ended June 30, 2013 and 2014—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber remained flat in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Other Expense, Net

The following table presents our other expense, net, for the three and six months ended June 30, 2013 and 2014 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2013			2014			$			%		2013			2014			$			%
Other expense, net	$	(21	)	$	(29	)	$	(8	)	38	%	$	(46	)	$	(68	)	$	(22	)	48	%
Percentage of total revenue	—		%	—		%						—		%	—		%

Three Months Ended June 30, 2013 and 2014—Administrative bank fees, foreign exchange losses, management fees and interest expense on our capital lease obligations more than offset interest earned on our invested cash and foreign exchange gains in the three months ended June 30, 2014.

Six Months Ended June 30, 2013 and 2014—Administrative bank fees, foreign exchange losses, management fees and interest expense on our capital lease obligations more than offset interest earned on our invested cash and foreign exchange gains in the six months ended June 30, 2014.

Provision for Income Taxes

The following table presents our provision for income taxes for the three and six months ended June 30, 2013 and 2014 and the dollar changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2013			2014			$		%		2013			2014			$			%
Provision for income taxes	$	864		$	3,296		$	2,432	281	%	$	2,419		$	1,700		$	(719	)	(30	)%
Percentage of total revenue	2		%	8		%					3		%	2		%

Three Months Ended June 30, 2013 and 2014—In the three months ended June 30, 2013 and 2014, we recorded a provision for income taxes representing effective tax rates of 43.0% and 52.2%, respectively. Our effective tax rate for the three months ended June 30, 2013 was higher than statutory federal and state tax rates due primarily to non-deductible lobbying

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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 for the three months ended June 30, 2014 was higher than statutory federal and state tax rates due primarily to non-deductible lobbying expenses.

Six Months Ended June 30, 2013 and 2014—In the six months ended June 30, 2013 and 2014, we recorded a provision for income taxes representing effective tax rates of 40.8% and 53.6%, respectively. Our effective tax rate for the six months ended June 30, 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 ext