Edgar Filing: eHealth, Inc.

Document

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, 2017

☐ 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	☐
Emerging growth 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 July 31, 2017 was 18,535,327 shares.

Table of Contents

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, 2016 and June 30, 2017	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2017	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2017	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 6.	Exhibits	69
	Signatures	70
	Exhibit Index	71

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EHEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share information)



	December 31, 2016			June 30, 2017
Assets	(Note 1)
Current assets:
Cash and cash equivalents	$	61,781		$	66,080
Accounts receivable	9,213			18,614
Prepaid expenses and other current assets	5,148			4,699
Total current assets	76,142			89,393
Property and equipment, net	5,608			5,220
Other assets	4,473			4,863
Intangible assets, net	8,580			8,060
Goodwill	14,096			14,096
Total assets	$	108,899		$	121,632
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,112		$	2,344
Accrued compensation and benefits	10,920			10,121
Accrued marketing expenses	7,158			4,609
Deferred revenue	959			392
Other current liabilities	3,775			4,605
Total current liabilities	27,924			22,071
Non-current liabilities	3,374			1,430
Stockholders’ equity:
Common stock	29			30
Additional paid-in capital	272,778			277,132
Treasury stock, at cost	(199,998		)	(199,998		)
Retained earnings	4,616			20,777
Accumulated other comprehensive income	176			190
Total stockholders’ equity	77,601			98,131
Total liabilities and stockholders’ equity	$	108,899		$	121,632

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

EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts, unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
Revenue
Commission	$	34,649		$	25,802		$	104,036		$	101,984
Other	2,628			2,155			7,085			4,912
Total revenue	37,277			27,957			111,121			106,896
Operating costs and expenses:
Cost of revenue	533			204			2,717			1,833
Marketing and advertising	12,936			14,240			33,818			29,295
Customer care and enrollment	10,611			12,012			21,011			24,121
Technology and content	8,289			7,932			16,796			16,004
General and administrative	10,615			10,534			18,543			20,526
Restructuring benefit	(158		)	—			(158		)	—
Amortization of intangible assets	260			260			520			520
Total operating costs and expenses	43,086			45,182			93,247			92,299
Income (loss) from operations	(5,809		)	(17,225		)	17,874			14,597
Other income (expense), net	(21		)	90			(32		)	116
Income (loss) before provision (benefit) for income taxes	(5,830		)	(17,135		)	17,842			14,713
Provision (benefit) for income taxes	(5,354		)	125			284			(1,448		)
Net income (loss)	$	(476	)	$	(17,260	)	$	17,558		$	16,161
Net income (loss) per share:
Basic	$	(0.03	)	$	(0.93	)	$	0.96		$	0.88
Diluted	$	(0.03	)	$	(0.93	)	$	0.96		$	0.86
Weighted-average number of shares used in per share amounts:
Basic	18,258			18,481			18,206			18,424
Diluted	18,258			18,481			18,296			18,750
Comprehensive income (loss):
Net income (loss)	$	(476	)	$	(17,260	)	$	17,558		$	16,161
Foreign currency translation adjustment, net of taxes	4			6			(7		)	14
Comprehensive income (loss)	$	(472	)	$	(17,254	)	$	17,551		$	16,175

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

EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	Six Months Ended June 30,
	2016			2017
Operating activities
Net income	$	17,558		$	16,161
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,934			1,513
Amortization of internally developed software	435			651
Amortization of book-of-business consideration	1,603			1,160
Amortization of intangible assets	520			520
Stock-based compensation expense	4,009			4,702
Other non-cash items	(53		)	(51		)
Changes in operating assets and liabilities:
Accounts receivable	(4,284		)	(9,401		)
Prepaid expenses and other assets	(568		)	(88		)
Accounts payable	(630		)	(2,798		)
Accrued compensation and benefits	(5,887		)	(799		)
Accrued marketing expenses	(9,022		)	(2,549		)
Deferred revenue	115			(567		)
Other liabilities	1,526			(995		)
Net cash provided by operating activities	7,256			7,459
Investing activities
Purchases of property and equipment and other assets	(2,318		)	(2,769		)
Net cash used in investing activities	(2,318		)	(2,769		)
Financing activities
Proceeds from exercise of common stock options	60			48
Cash used to net-share settle equity awards	(944		)	(395		)
Principal payments in connection with capital leases	(43		)	(62		)
Net cash used in financing activities	(927		)	(409		)
Effect of exchange rate changes on cash and cash equivalents	(7		)	18
Net increase in cash and cash equivalents	4,004			4,299
Cash and cash equivalents at beginning of period	62,710			61,781
Cash and cash equivalents at end of period	$	66,714		$	66,080

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

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 a leading private health insurance exchange 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 Medicare-related, individual and family, 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. 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 sheets as of December 31, 2016 and June 30, 2017, the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2016 and 2017 and the condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2017, respectively, are unaudited. The condensed consolidated balance sheet data as of December 31, 2016 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on March 16, 2017. 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, 2016, and include all adjustments necessary for the fair presentation of eHealth’s financial position as of June 30, 2017, our results of operations for the three and six months ended June 30, 2016 and 2017 and our cash flows for the six months ended June 30, 2016 and 2017. All adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2017.

Principles of Consolidation—The condensed consolidated financial statements include the accounts of eHealth, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

Seasonality—A greater number of our Medicare-related health insurance 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. Additionally, substantially all of the Medicare Advantage and Medicare Part D prescription drug policies we have sold renew on January 1 of each year, resulting in our recognizing substantially all renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in our first quarter. Our Medicare plan-related commission revenue is highest in our first quarter and is higher in our fourth quarter compared to our second and third quarters.

The majority of our individual and family health insurance plans are sold in the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not 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 life events, such as losing employer-sponsored health insurance or moving to another state.

Operating Segments—We report segment information based on how our chief executive officer, who is our chief operating decision maker ("CODM"), regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit (loss). During the fourth quarter of 2016, we implemented a new operating structure to focus on our growth opportunities and objectives, while operating the business more efficiently. The new business structure is comprised of two operating segments, Medicare and Individual, Family and Small Business.

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Medicare segment consists primarily of commissions earned from our sale of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans, and to a lesser extent, ancillary products sold to our Medicare-eligible customers, including but not limited to, dental and vision insurance, as well as our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us and our delivery and sale to third parties of Medicare-related health insurance leads generated by our ecommerce platforms and our marketing activities.

The Individual, Family and Small Business segment consists primarily of commissions earned from our sale of individual and family and small business health insurance plans and ancillary products sold to our non-Medicare-eligible customers, including but not limited to, dental, vision, life, short term disability and long term disability insurance. To a lesser extent, the Individual, Family and Small Business segment consists of amounts earned from our online sponsorship program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website, our licensing to third parties the use of our health insurance ecommerce technology and our delivery and sale to third parties of individual and family health insurance leads generated by our ecommerce platforms and our marketing activities.

Marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect marketing and advertising, customer care and enrollment and technology and content operating expenses are allocated to each segment based on usage. Other indirect general and administrative operating expenses are managed in a corporate shared services environment and, since they are not the responsibility of segment operating management, are not allocated to the two operating segments and are presented as a reconciling item to our consolidated financial results.

Segment profit (loss) is calculated as total revenue for the applicable segment less direct and allocated marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses, excluding stock-based compensation, depreciation and amortization expense and amortization of intangible assets.

Reclassifications

For presentation purposes, certain prior period amounts have been reclassified to conform to the reporting in the current period financial statements. Specifically, for the three and six months ended June 30, 2016, we reclassified $0.2 million and $0.4 million, respectively, of operating expenses related to our licensing department which was previously reported as general and administrative expense, to customer care and enrollment expense. This reclassification did not affect previously reported net income (loss), cash flows or stockholders' equity.

Recent Accounting Pronouncements

Compensation — Stock Compensation (Topic 718) - In May 2017, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09 Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. We are currently considering our timing of adoption and evaluating the impact of this updated standard, but do not expect the adoption of ASU 2017-09 will have a material impact on our condensed consolidated financial statements.

Goodwill Impairment (Topic 350) — In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. Upon adoption, the standard will impact how we assess goodwill for impairment. We are currently considering our timing of adoption and do not expect ASU 2017-04 will have a material impact on our consolidated financial statements.

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Statement of Cash Flows (ASC Topic 230) — In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. ASU 2016-18 will be effective for us beginning on January 1, 2018 and will be applied on a retrospective basis. Early adoption is permitted. We are currently considering the timing of our adoption and do not expect ASU 2016-18 will have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented on the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently considering the timing of adoption and do not expect the adoption of ASU 2016-15 will have material impact on our consolidated financial statements.

Leases (ASC Topic 842) — In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). ASU 2016-02 requires lessees to put leases on their balance sheets but recognize expenses on their income statements; for lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We are currently considering our timing of adoption and are in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

Change in Revenue Recognition Standard (ASC Topic 606) — In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), requiring 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 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. ASU 2014-09 may be adopted retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We will adopt this new accounting standard on January 1, 2018, and using the full retrospective method to restate each prior reporting period presented.

Because the new standard will impact our business processes, systems and controls, we developed a project plan that includes analyzing the standard’s impact on our contract portfolio, comparing our historical policies and practices to the requirements of the new standard and identifying differences from applying the requirements of the new standard to our contracts. We are developing internal controls to ensure we adequately evaluate our portfolio of contracts under the five-step model to ensure proper assessment of our operating results under the new standard. We do not expect a significant change in our control environment due to the adoption of the new standard; however, we will continue to assess until the date of adoption. We are also reporting on the progress of the implementation to the Audit Committee and the Board of Directors on a regular basis during the project’s duration.

We anticipate the adoption of the new standard will have a material impact to our opening balance sheet as of January 1, 2016 due to the cumulative effect of adopting the new standard. In addition, our adoption of the new standard will have a material impact on our consolidated balance sheets and consolidated statements of comprehensive income for the years ended December 31, 2016 and 2017; however, we do not anticipate any impact to our consolidated statements of cash flows during those periods. Under the new standard, we expect to recognize Medicare-related, individual and family and ancillary health insurance plan commission revenue at the time the policy is sold equal to the estimated commissions to be earned by us over the initial and estimated renewal periods as opposed to our current treatment of recognizing revenue over the life of the policy. ASU 2014-09 will require us to make significant estimates, including, but not limited to, the estimated consideration to be paid to us over the estimated life of policies sold for which we are the broker of record.

In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. ASU 2016-10 provides guidance in identifying performance obligations and determining the appropriate accounting for licensing arrangements. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). We are currently in the process of evaluating the impact of the adoption of ASU 2016-10 on our consolidated financial statements.

Note 2 - Balance Sheet Accounts

Cash and Cash Equivalents—As of December 31, 2016 and June 30, 2017, 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, 2016 and June 30, 2017, 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, 2016 and 2017.

As of December 31, 2016 and June 30, 2017, our cash and cash equivalent balances were invested as follows (in thousands):



	December 31, 2016		June 30, 2017
Cash	$	4,066	$	3,597
Money market funds	57,715		62,483
Total cash and cash equivalents	$	61,781	$	66,080

We used observable prices in active markets in determining the classification of our money market funds as Level 1 as of December 31, 2016 and June 30, 2017

Accounts Receivable—As of December 31, 2016 and June 30, 2017, our accounts receivable consisted of the following (in thousands):



	December 31, 2016		June 30, 2017
Commissions receivable	$	7,265	$	18,052
Accounts receivable – other revenue	1,948		562
Total accounts receivable	$	9,213	$	18,614

Note 3 - Fair Value Measurements

We define fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques we use to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We classify the inputs used to measure fair value into the following hierarchy:



Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or
		Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
		Inputs other than quoted prices that are observable for the asset or liability
Level 3		Unobservable inputs for the asset or liability

Our cash equivalents were invested in money market funds and were classified as Level 1. We endeavor to utilize the best available information in measuring fair value. We used observable prices in active markets in determining the classification of our money market funds as Level 1.

The following table is a summary our financial assets measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands).



	December 31, 2016						June 30, 2017
	Carrying Value		Level 1		Total		Carrying Value		Level 1		Total
Assets
Money market funds	$	57,715	$	57,715	$	57,715	$	62,483	$	62,483	$	62,483

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4 - Stockholder's Equity

2014 Equity Incentive Plans—The following table summarizes activity under our 2014 Equity Incentive Plan (the “2014 Plan”) for the six months ended June 30, 2017 (in thousands):



	Shares Available for Grant ¹
Shares available for grant December 31, 2016 ¹	2,267
Restricted stock units granted ²	(482	)
Options granted³	(141	)
Restricted stock units cancelled ⁴	285
Options cancelled	5
Shares available for grant June 30, 2017 ¹	1,934


(1)	Shares available for grant do not include treasury stock shares that could be granted if we determined to do so.


(2)	Includes grants of restricted stock units with service, performance-based or market-based vesting criteria.


(3)	Includes grants of stock options with service, performance-based or market-based vesting criteria.


(4)	Includes cancelled restricted stock units with service, performance-based or market-based vesting criteria.

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



	Number of Stock Options ¹		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Life (years)	Aggregate Intrinsic Value ²
Balance outstanding at December 31, 2016	975		$	18.14	3.5	$	31
Granted	141		$	11.86
Exercised	(34	)	$	14.93
Cancelled	(208	)	$	18.67
Balance outstanding at June 30, 2017	874		$	17.71	4.1	$	3,731
Vested and expected to vest at June 30, 2017	827		$	17.36	2.5	$	3,455
Exercisable at June 30, 2017	433		$	21.27	2.5	$	1,108


(1)	Includes certain stock options with service, performance-based or market-based vesting criteria.


(2)	The aggregate intrinsic value is calculated as the difference between eHealth’s closing stock price as of December 31, 2016 and June 30, 2017 and the exercise price of in-the-money options as of those dates.

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes restricted stock unit activity under the Stock Plans (in thousands, except weighted-average grant date fair value and weighted-average remaining contractual life data):



	Number of Restricted Stock Units ¹		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Service Period	Aggregate Intrinsic Value ²
Unvested as of December 31, 2016	1,523		$	12.83	2.8	$	13,901
Granted	482		$	10.97
Vested	(205	)	$	16.18
Cancelled	(285	)	$	12.26
Unvested as of June 30, 2017	1,515		$	11.74	2.1	$	28,492


(1)	Includes certain restricted stock units with service, performance-based or market-based vesting criteria.


(2)	The aggregate intrinsic value is calculated as eHealth’s closing stock price as of December 31, 2016 and June 30, 2017 multiplied by the number of restricted stock units outstanding as of December 31, 2016 and June 30, 2017, respectively.

Stock Repurchase Programs —We had no stock repurchase activity during the six months ended June 30, 2017. In addition to 10,663,888 shares repurchased under our past repurchase programs as of June 30, 2017, we have in treasury 532,812 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, 2016 and June 30, 2017, we had a total of 11,135,590 shares and 11,196,700 shares, respectively, held in treasury.

Stock-Based Compensation Expense —The following table summarizes stock-based compensation expense recorded during the three and six months ended June 30, 2016 and 2017 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017
Common stock options	$	308	$	714	$	634	$	901
Restricted stock units	1,869		1,855		3,375		3,801
Total stock-based compensation expense	$	2,177	$	2,569	$	4,009	$	4,702

The following table summarizes stock-based compensation expense by operating function for the three and six months ended June 30, 2016 and 2017 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017
Marketing and advertising	$	417	$	220	$	972	$	435
Customer care and enrollment	147		124		270		136
Technology and content	473		274		908		668
General and administrative	1,140		1,951		1,859		3,463
Total stock-based compensation expense	$	2,177	$	2,569	$	4,009	$	4,702

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5 - Income Taxes

The following table summarizes our provision (benefit) for income taxes and our effective tax rates for the three and six months ended June 30, 2016 and 2017 (in thousands, except effective tax rate):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
Income (loss) before provision (benefit) for income taxes	$	(5,830	)	$	(17,135	)	$	17,842		$	14,713
Provision (benefit) for income taxes	(5,354		)	125			284			(1,448		)
Effective tax rate	92		%	(1		)%	2		%	(10		)%

In the three and six months ended June 30, 2017, we recorded a provision for income taxes of $0.1 million and a benefit for income taxes of $1.4 million, respectively. The benefit for income taxes in the six months ended June 30, 2017 primarily related to a $1.9 million decrease in our liability for unrecognized tax benefits recorded in the first quarter of 2017, partially offset by Federal and state minimum taxes and foreign taxes. Our effective tax rate in the six months ended June 30, 2017 was lower than the federal statutory rate primarily due to the recording of a valuation allowance against our federal and state deferred tax assets, offset by the reversal of previously recorded unrecognized tax benefits related to federal and state tax credits.

In the three and six months ended June 30, 2016, we recorded a benefit for income taxes of $5.4 million and a provision for income taxes of $0.3 million, respectively. We recorded a benefit for income taxes in the three months ended June 30, 2016 in order for the year-to-date tax provision to be in line with the estimated annual effective tax rate. The provision for income taxes in the six months ended June 30, 2016 primarily consisted of foreign income taxes and certain discrete items.

We recorded a valuation allowance against the U.S. deferred tax assets in an earlier year and continue to maintain that full valuation allowance as of June 30, 2017 as we believe it is not more likely than not that the net deferred tax assets will be fully realized.

The examination of our 2009 and 2010 California income tax returns by the California Franchise Tax Board was completed in the first quarter of 2017. We assessed the impact on our unrecognized tax benefits for all open years and recorded any necessary adjustments in the first quarter of 2017.

Note 6 - Net Income (Loss) Per Share

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

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016		2017
Basic:
Numerator:
Net income (loss)	$	(476	)	$	(17,260	)	$	17,558	$	16,161
Denominator:
Weighted-average number of common stock shares outstanding	18,258			18,481			18,206		18,424
Net income (loss) per share—basic:	$	(0.03	)	$	(0.93	)	$	0.96	$	0.88
Diluted:
Numerator:
Net income (loss)	$	(476	)	$	(17,260	)	$	17,558	$	16,161
Denominator:
Net weighted average number of common stock shares outstanding	18,258			18,481			18,206		18,424
Dilutive effect of potential common stock	—			—			90		326
Total common stock shares used in per share calculation	18,258			18,481			18,296		18,750
Net income (loss) per share—diluted:	$	(0.03	)	$	(0.93	)	$	0.96	$	0.86

For each of the three and six months ended June 30, 2016 and 2017, we had securities outstanding that could potentially dilute net income (loss) per share, but the shares from the assumed exercise of these securities were excluded in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive for the periods presented. The number of outstanding weighted average anti-dilutive shares that were excluded from the computation of diluted net income (loss) per share consisted of the following (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2017	2016	2017
Common stock options	1,281	293	1,255	44
Restricted stock units	869	432	235	313
Total	2,150	725	1,490	357

Note 7 - Legal Proceedings

On January 26, 2017, a purported class action lawsuit was filed against us in the Superior Court of the State of California, County of Santa Clara. The complaint alleges that we negligently failed to take necessary precautions required to protect from unauthorized disclosure personally identifiable information contained on 2016 Form W-2s for current and former employees. The complaint purports to allege causes of action against us for negligence, violation of Section 17200 et seq. of the California Business & Professions Code, declaratory relief and breach of implied contract. The complaint seeks actual damages, punitive damages, statutory damages, costs, including experts’ fees and attorneys’ fees, pre-judgment and post-judgment interest as prescribed by law and equitable, injunctive and declaratory relief as appropriate. In April 2017, an additional purported class action lawsuit was filed against us in the Superior Court of the State of California, County of Santa Clara, relating to the same circumstances. The second complaint purports to allege causes of action against us for negligence, violation of California Customer Records Act (California Civil Code Section 1798.80 et seq.), violation of the California Confidentiality of Medical Information Act (California Civil Code Section 56 et seq.), invasion of privacy by public disclosure of private facts, breach of confidentiality and violation of the California Unfair Competition Law (California Business & Professions Code Section 17200 et seq.). The second complaint seeks actual damages, statutory damages, restitution, disgorgement, equitable, injunctive and declaratory relief, costs, including experts’ fees and attorneys’ fees and costs of

EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

prosecuting the action, and pre-judgment and post-judgment interest as prescribed by law. In July 2017, we entered into a binding settlement term sheet (the “Agreement”) where we and the plaintiffs in each of the above-described cases agreed to enter into a settlement pursuant to which we would receive a release of all claims that were or could have been alleged related to the unauthorized disclosure at issue in each of the cases. In exchange for the release, we agreed to (i) pay subject to an aggregate cap of $250,000 up to $2,500 to each impacted individual for reasonable, documented out-of-pocket losses or expenses related to the data security incident; (ii) offer to individuals who signed up for identity theft protection that we offered at the time of the incident a one-year extension of the identity theft protection; (iii) offer to individuals who did not sign up for identity theft protection that we offered at the time of the incident three-years of identity theft protection; and (iv) not to oppose a request by class counsel for attorneys’ fees, costs and class representative enhancements of up to $245,000 in the aggregate. The Agreement obligates us to enter into a joint stipulation for settlement of class action to be agreed to by the parties reflecting the terms above. The terms of the settlement are subject to a hearing and court approval. As of June 30, 2017, we recorded an accrual for estimated potential damages in our consolidated financial statements.

In the ordinary course of our business, we have received and may continue to receive inquiries from state regulators relating to various matters. We have become, and may in the future become, involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations in any of the states, we could be subject to various fines and penalties, including revocation of our license to sell insurance in those states, and our business and financial results would be harmed. Revocation of any of our licenses or penalties in one jurisdiction could cause our license to be revoked or for us to face penalties in other jurisdictions. In addition, without a health insurance license in a jurisdiction, carriers would not pay us commissions for the products we sold in that jurisdiction, and we would not be able to sell new health insurance products in that jurisdiction. We would also be harmed to the extent that related publicity damages our reputation as a trusted source of objective information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome. At December 31, 2016 and June 30, 2017, we had no material liabilities for outstanding claims included in our Condensed Consolidated Balance Sheets.

Note 8 - Operating Segments, Geographic Information and Significant Customers

Operating Segments

The following table presents summary results of our operating segments for the three and six months ended June 30, 2016 and 2017 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017
Revenue
Medicare	$	9,679		$	11,014		$	53,146		$	68,988
Individual, Family and Small Business	27,598			16,943			57,975			37,908
Total revenue	$	37,277		$	27,957		$	111,121		$	106,896

Segment profit (loss)
Medicare segment profit (loss)	$	(14,131	)	$	(15,107	)	$	3,760		$	15,588
Individual, Family and Small Business segment profit	20,526			8,404			36,081			19,483
Total segment profit (loss)	6,395			(6,703		)	39,841			35,071
Corporate	(8,996		)	(6,942		)	(15,662		)	(13,739		)
Stock-based compensation expense	(2,177		)	(2,569		)	(4,009		)	(4,702		)
Depreciation and amortization	(929		)	(751		)	(1,934		)	(1,513		)
Restructuring benefit	158			—			158			—
Amortization of intangible assets	(260		)	(260		)	(520		)	(520		)
Other income (expense), net	(21		)	90			(32		)	116
Income (loss) before provision (benefit) for income taxes	$	(5,830	)	$	(17,135	)	$	17,842		$	14,713

There are no internal revenue transactions between our operating segments. Our CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.

Geographic Information

Our long-lived assets consisted primarily of property and equipment, internally-developed software, 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 as of December 31, 2016 and June 30, 2017 were as follows (in thousands):



	December 31, 2016		June 30, 2017
United States	$	32,162	$	31,575
China	391		665
Total	$	32,553	$	32,240

Significant Customers

Substantially all revenue for the three and six months ended June 30, 2016 and 2017 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the three and six months ended June 30, 2016 and 2017 are presented in the table below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017
Humana	16	%	16	%	27	%	23	%
UnitedHealthcare ¹	13	%	15	%	11	%	17	%
Anthem ²	9	%	10	%	8	%	7	%


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


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

As of December 31, 2016, three customers represented 23%, 20% and 11%, respectively, or a combined total of 54% of our $9.2 million outstanding accounts receivable balance. As of June 30, 2017, two customers represented 49%, and 15%, respectively, or a combined total of 64%, of our $18.6 million outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at December 31, 2016 and June 30, 2017. We believe the potential for collection issues with any of our customers was minimal as of June 30, 2017. Accordingly, our estimate for uncollectible amounts at June 30, 2017 was not material.


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 and membership; our expectations relating to revenue, sources of revenue, cost of revenue, the collectability of our accounts receivable, operating expenses and profitability; our expectations regarding our strategy and investments and impact to our operating results; our expectations regarding the impact of healthcare reform on our business; our ability to enroll and plans relating to the enrollment of individuals and families into qualified health plans through government health insurance exchanges; our expectations regarding commission rates, payment rates, conversion rates, membership retention rates and membership acquisition costs; our expectations relating to the seasonality of our business; our expectations relating to marketing and advertising expense and our business development and cross-selling efforts; the timing of our receipt of commission payments; our critical accounting policies and related estimates; our adoption of new revenue recognition standard and the expected financial impact; our belief that cash generated from operations and our current cash and cash equivalents will be sufficient to fund operations for the next twelve months; future capital requirements; expected competition from government-run health insurance exchanges and other sources; the timing and source of our Medicare-related revenue; political, legislative, regulatory and legal challenges; the merits or potential impact of any lawsuits filed against us; 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; our ability to retain existing members and enroll a large number of new members during the annual healthcare reform open enrollment period and Medicare annual enrollment period; the impact of annual enrollment period for the purchase of individual and family health insurance and its timing on our recognition of revenue; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy eligible individuals through government-run health insurance exchanges; our ability to comply with CMS guidance and impact on conversion rates as a result of the federal exchange changes to enrollment; competition, including competition from government-run health insurance exchanges; seasonality of our business and the fluctuation of our operating results; our ability to retain existing members and limit member turnover; changes in consumer behaviors and their selection of individual and family health insurance products, including the selection of products for which we receive lower commissions; product offerings among carriers and the resulting impact on our commission revenue; carriers exiting the market of selling individual and family health insurance and the resulting impact on our supply and commission revenue; our ability to execute on our growth strategy in the Medicare and small business health insurance markets; the impact of increased health insurance costs on demand; our ability to timely receive and accurately predict the amount of commission payments from health insurance carriers; medical loss ratio requirements; delays in our receipt of items required to recognize Medicare revenue; changes in member conversion rates; our ability to accurately estimate membership; our relationships with health insurance carriers; customer concentration and consolidation of the health insurance industry; our success in marketing and selling health insurance plans and our unit cost of acquisition; our ability to hire, train and retain licensed health insurance agents and other employees; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; costs of acquiring new members; scalability of the Medicare business; lack of membership growth and retention rates; consumers satisfaction of our service; our ability to attract and to convert online visitors into paying members; 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 investments in our business, including membership growth initiatives; dependence on acceptance of the Internet as a marketplace for the purchase and sale of health insurance; reliance on marketing partners; our direct marketing efforts; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; dependence on our operations in China; 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 2017, 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 a leading private health insurance exchange for individuals, families and small businesses. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. As a result, we simplify and streamline the complex and traditionally paper-intensive health insurance sales and purchasing process.

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

Sources of Revenue

Commission Revenues

We generate revenue primarily from commissions we receive from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms. Commission revenue represented 92% and 95% of our total revenue in the three and six months ended June 30, 2017, respectively. Commission revenue represented 93% and 94% of our total revenue in the three and six months ended June 30, 2016, respectively.

We typically enter into contractual agency relationships with health insurance carriers that are non-exclusive and terminable on short notice by either party for any reason. In addition, health insurance carriers often have the ability to terminate or amend our agreements unilaterally on short notice, including provisions in our agreements relating to our commission rates. The amendment or termination of an agreement we have with a health insurance carrier may adversely impact the commissions we are paid on health insurance plans that we have already sold through the carrier. See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2016 for details regarding our recognition of commission revenue.

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

We have historically sold a significant portion of the Medicare plans that we sell during the year in the fourth quarter during the Medicare annual enrollment period, when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. During 2016, 49% of our Medicare plan-related applications were submitted during the fourth quarter. As a result, we generate a significant portion of our commission revenues related to new Medicare plan-related enrollments in the fourth quarter. During the first quarter, we recognize substantially all of our Medicare Advantage and Medicare Part D prescription drug plan renewal commission revenue as substantially all Medicare Advantage and Medicare Part D policies renew on January 1 of each year.

In addition to Medicare plans, we also actively market individual and family, small business and ancillary health insurance plans through our ecommerce platforms (www.eHealth.com and www.eHealthInsurance.com), and generate revenue from commissions we receive from health insurance carriers whose plans are purchased through us, as well as commission override payments we receive for achieving sales volume thresholds or other objectives. We market a variety of ancillary

products, including but not limited to short-term health insurance, dental, vision, life, short term disability and long term disability insurance. These ancillary products are offered to our members on a standalone basis and with other products.

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

Health care reform established annual open enrollment periods for the purchase of individual and family health insurance. The initial open enrollment period under health care reform began in October 2013 and ended in March 2014 for coverage effective in 2014. Subsequent open enrollment periods for individual and family health insurance have begun in November and ended on January 31 in the following year. CMS announced that the upcoming open enrollment period for coverage effective in 2018 will begin on November 1, 2017 and end on December 15, 2017. Individuals and families generally are not able to purchase individual and family health insurance outside of the annual enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying life events, such as losing employer-sponsored health insurance or moving to another state. In addition, CMS tightened the requirements for individuals to qualify for a special enrollment period starting in 2016. We have not enrolled a significant number of individuals in individual and family health insurance outside of the open enrollment period.

The implementation of open enrollment periods changed the seasonality of our individual and family health insurance business and individual and family health insurance submitted applications. Given that the upcoming open enrollment period will take place solely during the fourth quarter of 2017, the seasonality of our individual and family business will change again. To the extent we experience higher application volume in the fourth quarter of 2017 as a result of this change, we may incur higher membership acquisition costs in the fourth quarter of 2017 without recognizing the corresponding revenue, which would negatively impact our financial results for the fourth quarter of 2017 and fiscal year 2017. Open enrollment periods present challenges to our ability to enroll a significant number of individuals and families into health insurance over a limited period of time and significantly reduce our ability to obtain new health insurance members outside of the open enrollment period.

A substantial number of individuals and families are eligible for subsidies under health care reform. Health care reform’s establishment of government-run health insurance exchanges through which individuals and families must purchase qualified health plans to receive government subsidies has increased our competition as individual and families may purchase qualified health plans directly from government exchanges. While they are not required to do so, government-run exchanges are permitted to allow agents and brokers to enroll individuals and families into qualified health plans through government-run exchanges. We have entered into an agreement with, and enrolled individuals and families into qualified health plans through, the Federally Facilitated Marketplace, or FFM, run by CMS. The FFM operated some part of the health insurance exchange in 39 states during the last health care reform open enrollment period.

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

In February 2016 after the end of the open enrollment period, CMS directed us and other web-based entities to make changes to the process we developed for enrolling individuals into qualified health plans through the FFM. As a result of the changes that we made to our online process in response to CMS requirements, which require that we use a different and more cumbersome pathway through which individuals are enrolled in qualified health plans, we experienced a substantial reduction in the rate at which individuals and families starting the application process for qualified health plans and subsidies became members. The reduced conversion rates for the process that CMS has directed us to use for enrolling individuals in qualified health plans persisted throughout the open enrollment period that began on November 1, 2016 and ended January 31,

2017. These reduced conversion rates resulted in higher marketing and advertising costs per submitted application and reduced the cost-effectiveness of our direct and online marketing programs. As a result, we reduced our individual and family health insurance marketing expenditures both outside of the open enrollment period in 2016 as well as during the open enrollment period ended on January 31, 2017. These circumstances resulted in our enrolling a significantly lower number of individuals and families into individual and family health insurance plans, which positively impacted our 2016 financial results due to the reduction in marketing and advertising expenses, but is significantly contributing to the reduction in our individual and family health insurance membership and commission revenue in 2017 compared to 2016. Due to the reduced conversion rates continuing outside of the open enrollment period in 2017, we have continued to maintain reduced individual and family health insurance marketing expenditures so far in 2017.

In May 2017, CMS issued new guidance that provides for an alternative qualified health plan enrollment process through the FFM and would allow us and other web-based entities to enroll customers into qualified health plans and apply for advanced payment of premium tax credits through the FFM without leaving our website. The new process is an effort on the part of CMS to remedy certain of the aspects of the existing process that make enrolling in qualified health plans online through the FFM difficult and cumbersome and could positively impact the reduced conversion rates that we have experienced with the existing process. CMS has indicated that it expects to allow entities who meet the applicable requirements to enroll individuals using the new process during the upcoming open enrollment period. In order to be able to utilize the new process, we must ensure that the user experience meets several regulatory requirements. We must also ensure that the application questions and the order they are asked on our website duplicate the questions and order on the FFM. We are required to enter into an agreement with CMS relating to our ability to use the process and meet numerous privacy and security requirements. In addition, we must engage a third-party auditor to verify that we are meeting applicable requirements, including the privacy and security requirements. We are in the process of working to comply with the privacy and security requirements, developing a user experience that complies with the CMS guidance and engaging a third-party auditor. We have a limited amount of time to come into compliance with the requirements, and may not be able to do so in time for the upcoming open enrollment period. If we are not able to enroll individuals and families into qualified health plans using the new process, our ability to sell qualified health plans will be harmed, which could result in a reduction of our individual and family health insurance membership and revenue.

Health insurance carriers have the ability to enter into or withdraw from health insurance markets and unilaterally change their relationship with us in various ways, including by altering the geographic areas in which they permit us to sell their products and changing the commission rates they pay us. As a result of higher medical utilization rates than carriers projected under healthcare reform and for other reasons related to healthcare reform, several health insurance carriers for which we have sold individual and family health insurance, including large national carriers, have exited the individual and family health insurance market altogether or in a large number of states. Additionally, some carriers have decided to only sell individual and family health insurance through government exchanges, such as the FFM. In addition, health insurance carriers who have not exited the individual and family health insurance market are generally charging significantly greater premiums to consumers. These circumstances have resulted in our offering a significantly reduced number of individual and family health insurance plans on our website, including several states and zip codes where we have no individual and family health insurance plans to offer. They also have resulted in consumers having to pay significantly higher premiums to purchase and maintain their individual and family health insurance. In addition, a significant number of our individual and family health insurance members previously purchased their individual and family health insurance from carriers who have exited or may be exiting the individual and family health insurance market. As a result of carriers exiting the market, higher premiums and for other reasons, we have observed lower retention rates and a reduction in our individual and family health insurance membership. If additional health insurance carriers determine not to sell individual and family health insurance in certain states or altogether, or premiums for individual and family health insurance continue to increase, the impact on our individual and family membership and commission revenue will likely be more pronounced. We believe decreased retention rates, higher premiums and a reduction in the demand for individual and family health insurance plans that we sell will contribute to significantly reduced individual and family insurance membership and commission revenue for us in 2017 compared to 2016.

In light of the circumstances in the individual and family health insurance market, we have, among other things, determined to place a greater focus on offering short-term health insurance products, which are often the only option available to consumers outside of the open enrollment period. In addition, we plan to launch eHealth-branded insurance and ancillary product bundles that include a short-term health insurance plan and ancillary products that our market research indicates are of value to consumers in this market. We plan for the bundles to be a cost-efficient alternative to major medical individual and family plans. We anticipate that the bundles, which can be sold throughout the year, will be an attractive solution to our customers and also generate higher commission revenue per member compared to an individual and family plan or a short-term insurance product.

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

In light of the impact of the Affordable Care Act and health care reform on the individual and family health insurance market, President Trump and Congress have attempted to pass legislation to change it several times. The bills have included provisions eliminating the mandate to maintain health insurance and changing the basis on which premium tax credits are calculated, among other things. In addition, the executive branch of the government has at various times expressed a desire to defund various aspects of the Affordable Care Act, including cost sharing reduction payments from the government to health insurance carriers. Trump administration statements and the various actions by Congress attempting to change the Affordable Care Act have created uncertainty on behalf of carriers and consumers that negatively impacts the individual and family health insurance market. It is unclear what, if any, changes will be made to the Affordable Care Act or its funding or implementation. If changes are not made that bring carriers back into the market with lower-cost individual and family health insurance plans, our individual and family membership and business will continue to be harmed. Our individual and family membership and business will also be harmed if changes to the Affordable Care Act or its funding or implementation are harmful to the demand for the individual and family health insurance products that we sell.

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


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


•	the number of members on submitted applications;


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


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


•	our membership retention.

Submitted Applications. Historically, we have experienced a significant increase in the number of Medicare-related submitted applications during the Medicare annual enrollment period, which occurs during the fourth quarter of each year. During 2016, we also experienced an increase in the number of Medicare-related applications submitted during the first, second and third quarters compared to the fourth quarter. During 2016, 49% of our Medicare plan-related applications were submitted during the fourth quarter, compared to 56% in 2015. In the first and second quarters of 2017, submitted applications for Medicare Advantage products declined 6% and 7% compared to the first and second quarters of 2016, respectively. Submitted applications for all Medicare products, which also include Medicare Supplement and Medical Part D prescription drug plans, grew 1% in the first quarter of 2017 compared to the first quarter of 2016, but declined 5% in the second quarter of 2017 compared to the second quarter of 2016. These growth rates represent a deceleration compared to strong growth rates we experienced in our Medicare business in the first half of 2016 compared to the first half of 2015. The deceleration we experienced during the second half of 2016 and the first half of 2017 was driven in large part by the lingering impact of changes we made to our sales and marketing processes in response to compliance requirements issued by CMS, which impacted the effectiveness of our call center agents in converting leads into submitted applications. The deceleration was also due to a change in our strategy and our focus on more cost-effective sources of demand generation. We experienced an improvement in the second quarter of 2017 as a result of this strategy, which resulted in improved conversion of leads to applications and lower cost of acquisition compared to the first quarter of 2017, and anticipate that we will see continued improvement in application volumes and cost of acquisition in the second half of this year as a result of this shift.

The number of individual and family health insurance applications submitted through us has historically been highest during the Affordable Care Act open enrollment period, which has begun in the fourth quarter and run into the first quarter of the following year. The second and third quarters are outside of the Affordable Care Act open enrollment period and the number of individual and family health insurance submitted applications submitted during these periods has historically decreased compared to the first and fourth quarters. In connection with the most recently completed open enrollment period that began on November 1, 2016 and ended on January 31, 2017, the number of individual and family health insurance submitted applications

during the fourth quarter of 2016 and first quarter of 2017 again increased significantly compared to the second and third quarters of 2016. However, as a result of our offering a reduced number of individual and family health insurance plans on our website, as well as increasing premiums on individual and family health insurance plans, the number of individual and family health insurance submitted applications during the first quarter of 2017 declined 70% compared to the first quarter of 2016 and the number of individual and family health insurance submitted applications during the second quarter of 2017 declined 45% compared to the second quarter of 2016. CMS announced that the upcoming open enrollment period for coverage effective in 2018 will take place solely during the fourth quarter of 2017. To the extent we experience higher application volume in the fourth quarter of 2017 as a result of this change, we may incur higher membership acquisition costs in the fourth quarter of 2017 without recognizing the corresponding revenue, which would negatively impact our financial results for the fourth quarter of 2017 and fiscal year 2017.

Members per Submitted Application. For Medicare-related health insurance, there is only one individual on a submitted application. However, for individual and family and certain ancillary health insurance plans, there may be more than one member per submitted application. Similar to prior years, we experienced a decline in the average number of members on individual and family health insurance applications submitted through us during the first quarter of 2017 compared to the second through fourth quarters of 2016 and the second quarter of 2017. However, in both the first and second quarters of 2017, we experienced an increase in the average number of members on individual and family health insurance applications submitted through us compared to the first and second quarters of 2016, respectively.

Approval Rates and Initial Payment Rates. The approval rates for Medicare Advantage and Medicare Part D prescription drug plans we sold in the first half of 2017 were consistent with the approval rates in the first half of 2016, while the approval rates for Medicare Supplement plans we sold in the first half of 2017 improved compared to approval rates in the first half of 2016. The initial payment rates on Medicare Advantage plans we sold during the first quarter of 2017 improved compared to initial payment rates on Medicare Advantage health insurance we sold during the first quarter of 2016, while the initial payment rates on Medicare Part D prescription drug and Medicare Supplement plans we sold during the first quarter of 2017 were consistent with the initial payment rates on Medicare Part D prescription drug and Medicare Supplement plans we sold during the first quarter of 2016. We currently do not have sufficient data to assess the initial payment rates on Medicare-related health insurance we sold during the second quarter of 2017. As a result of the health care reform prohibition on using pre-existing health conditions as a reason to deny health insurance applications, we have experienced higher approval rates on individual and family plan applications submitted during the open enrollment periods compared to periods before health care reform implementation. Individual and family health insurance approval rates have historically been lower outside of the open enrollment period than for applications submitted during the open enrollment period. The approval rates for individual and family health insurance in the first half of 2017 are consistent with the approval rates in the first half of 2016. However, the initial payment rates on individual and family health insurance we sold during the first quarter of 2017 has declined compared to initial payment rates on individual and family health insurance we sold during the first quarter of 2016. We currently do not have sufficient data to assess the initial payment rates on individual and family health insurance we sold during the second quarter of 2017.

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

In the first plan year of a Medicare Advantage and Medicare Part D prescription drug plan, after the health insurance carrier approves the application but during the effective year of the plan, we are paid a fixed annual commission that is prorated for the number of months remaining in the calendar year. Additionally, if the plan is the first Medicare Advantage or Medicare Part D prescription drug plan issued to the member, we may receive a higher commission rate that covers a full twelve-month period, regardless of the month the plan was effective. Beginning with and subsequent to the second plan year, we typically receive fixed, monthly or annual commissions. During 2016, for certain categories of enrollments that occur outside of the annual enrollment period, CMS allowed carriers to either prorate the commission payment for the number of months remaining in the calendar year or pay the broker a full year of commissions up-front. During 2016, a number of carriers for which we sell Medicare products changed from paying us a full-year of commissions up-front to pro-rating their payments based on the number of months remaining in the calendar year, which negatively impacted our Medicare commission revenue in 2016 compared to the same period in 2015. During the first quarter of 2017, we experienced an increase in Medicare commission revenue, primarily attributable to increased renewal commissions per member for our Medicare Advantage plans. We earn commission revenue for Medicare Advantage and Medicare Part D prescription drug plans for which we are the broker of record, typically until either the policy is cancelled or we otherwise do not remain the agent on the policy. Commission payments we receive for Medicare Supplement policies sold by us are typically a percentage of the premium on the policy and

paid to us until the policy is cancelled or we otherwise do not remain the agent on the policy. See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for details regarding our recognition of Medicare plan commission revenue.

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

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

Retention Rates. Our commission revenue is also influenced by our member retention rates. Retention rates are typically lower in the first policy year. Our Medicare Advantage membership retention rates declined during the first half of 2017 compared to the first half of 2016, while our Medicare Supplement and Medicare Part D prescription drug plan membership retention rates remained consistent during the first half of 2017 compared to the first half of 2016. Our individual and family plan membership retention rates were negatively impacted by health care reform throughout 2016 and the first half of 2017. We observed lower retention rates during the first quarter of 2017. Retention rates we observed during the second quarter of 2017 were consistent with retention rates we observed during the second quarter of 2016. The number of new individual and family health insurance members added during the second through fourth quarters of 2016 and the first half of 2017 was not enough to offset the loss of existing members, resulting in a decline in our estimated individual and family health insurance membership during those periods. We believe the decline in retention rates related to premium inflation in the individual and family plan market and carriers exiting the individual and family health insurance market altogether or in certain jurisdictions.

Other Revenue

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

Online Sponsorship and Advertising. We generate revenue from our online sponsorship and advertising program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website and allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us. In return, we are typically paid a flat fee or, with respect to individual and family health insurance plans, a monthly fee and a performance-based fee based on metrics such as submitted health insurance applications. Health insurance carriers commit to sponsorship and advertising on a quarterly basis, if at all, and generally determine prior to the quarter whether to purchase sponsorship and advertising from us and how much they are willing to spend. During the first half of 2017, online sponsorship and advertising revenue declined compared to the first half of 2016, primarily due to a decline in individual and family health insurance submitted applications, as well as a reduction in the amount we received for Medicare-related advertising. We expect this trend will continue in the second half of 2017.

Technology Licensing. We generate revenue from licensing the use of our health insurance ecommerce technology. Our technology platform enables health insurance carriers to market and distribute health insurance plans online. Health

insurance carriers that license our technology typically pay us implementation fees and performance-based fees that are based on metrics such as submitted health insurance applications. During the first half of 2017, technology licensing revenue declined compared to the first half of 2016, primarily due to the decline in individual and family health insurance submitted applications. We expect this trend will continue in the second half of 2017.

Lead Referrals. We generate revenue from referral fees paid to us based on Medicare-related and individual and family health insurance leads generated by our ecommerce platforms that are delivered and sold to third parties. During first half of 2017, lead revenue declined compared to first half of 2016, primarily due to a decrease in the number of excess leads we were unable to service as a health insurance agent. We expect this trend will continue in the second half of 2017.

See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for details regarding our recognition of online sponsorship and advertising revenue, technology licensing revenue and lead referral revenue.

Change in Revenue Recognition Standard (ASC Topic 606)

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606), requiring 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 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. ASU 2014-09 may be adopted retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We will adopt this new accounting standard on January 1, 2018 using the full retrospective method to restate each prior reporting period presented.

Because the new standard will impact our business processes, systems and controls, we developed a project plan that includes analyzing the standard’s impact on our contract portfolio, comparing our historical policies and practices to the requirements of the new standard and identifying differences from applying the requirements of the new standard to our contracts. We are developing internal controls to ensure we adequately evaluate our portfolio of contracts under the five-step model promulgated by FASB to ensure proper assessment of our operating results under the new standard. We do not expect a significant change in our control environment due to the adoption of the new standard; however, we will continue to assess until the date of adoption. We are also reporting on the progress of the implementation to the Audit Committee and the Board of Directors on a regular basis during the project’s duration.

Member Acquisition

Marketing initiatives are an important component of our strategy to increase revenue. Our marketing initiatives are focused on three primary member acquisition channels: direct, marketing partners and online advertising and are primarily designed to encourage consumers to complete an application for health insurance. For the three and six months ended June 30, 2016 and 2017, applications submitted through us for Medicare-related, individual and family, small business and ancillary health insurance from our three member acquisition channels as a percentage of all health insurance applications submitted through us during the same periods were as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2017	2016	2017
Source of total submitted applications (as a percentage of total submitted applications for the year):
Direct	63%	59%	53%	55%
Marketing partners	31%	35%	33%	36%
Online advertising	6%	6%	14%	9%
Total	100%	100%	100%	100%

Direct. Our direct member acquisition channel consists of consumers who access our website addresses, (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com) either directly, through algorithmic natural search listings on Internet search engines and directories, or other forms of marketing, such as retargeting campaigns, television advertising, direct mail and email marketing. Expenses related to our direct channel increased significantly during the first half of 2017 compared to the first half of 2016 primarily due to an increase in both direct response television advertising and direct mail marketing relating to our Medicare business.

Marketing Partners. Our marketing partner member acquisition channel consists of consumers who access our websites through a network of affiliate partners and financial services and other companies. We compensate a significant number of our marketing partners by paying a fee each time a consumer referral from a partner results in a submitted health insurance application, regardless of whether the consumer’s application is approved by the health insurance carrier. Some of our marketing partners have tiered arrangements in which the amount of the fee increases as the volume of submitted applications we receive from the marketing partner increases over a particular period. We recognize these expenditures in the period when a marketing partner’s referral results in the submission of a health insurance application. Growth in our marketing partner channel depends upon our expanding marketing programs with our existing marketing partners and adding new marketing partners. While we have relationships with a large number of marketing partners, we depend upon referrals from a limited number of marketing partners for a significant portion of the submitted applications we receive from our marketing partner customer acquisition channel. Moreover, a significant portion of our referrals for the purchase of Medicare plans comes from a single marketing partner. Expenses related to our marketing partner channel decreased during the first half of 2017 compared to the first half of 2016 primarily due to shift from certain higher cost marketing partners to lower cost advertising within our direct channel.

Online Advertising. Our online advertising member acquisition channel consists of consumers who access our websites through paid keyword search advertising from search engines such as Google, Bing and Yahoo!, as well as various Internet marketing programs such as display advertising. We incur expenses associated with search advertising in the period in which the consumer clicks on the advertisement. Costs related to our online channel decreased significantly during the first half of 2017 compared to the first half of 2016 primarily due to a decline in the amount we were willing to spend to acquire members through this channel.

Operating Costs and Expenses

Cost of Revenue

Cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying policies. These transfers include

primarily Medicare plan members. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.

Additionally, 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.

Marketing and Advertising

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

Since a significant portion of our marketing and advertising expenses consists of expenses incurred as a result of payments owed to our marketing partners in connection with health insurance applications submitted on our ecommerce platforms and other forms of marketing, such as direct mail, email marketing, television, radio and retargeting campaigns, those expenses are influenced by seasonal submitted application patterns. As a result of the annual open enrollment periods for both Medicare-related and individual and family health insurance, marketing and advertising expenses have increased during the fourth quarter of each year. Additionally, since the health care reform open enrollment periods for individual and family health insurance has continued into the following year, marketing and advertising expenses have increased during the first quarter of each year compared to the second and third quarters, but to a lesser extent than the fourth quarter. During the second and third quarters, marketing and advertising expenses decrease, consistent with the decrease in submitted applications compared to periods during the open enrollment periods. We expect these seasonal trends to continue in 2017. However, since the upcoming open enrollment period for coverage effective in 2018 will begin on November 1, 2017 and end on December 15, 2017, we do not expect to see the same increase in marketing and advertising expenses related to individual and family health insurance during the first quarter of 2018.

In February 2015 CMS issued guidance indicating that third party websites and marketing material must be filed with CMS. Health insurance carriers have interpreted this guidance to mean that websites and marketing material of our marketing partners must go through the process of CMS filing and review and approval by health insurance carriers. Our marketing partners may not consent to having their websites or other marketing material filed with CMS. In addition, we have a number of marketing partners who refer leads to us for Medicare-related health insurance products. Given the resources and review required of us and health insurance carriers prior to CMS filing, it is unlikely that we will be able to have all of our marketing partner websites and material filed with CMS. Even for our marketing partner websites and marketing material that are filed with CMS, they may not make it through the review process in time for the Medicare annual enrollment period. Moreover, under CMS guidance, websites and marketing material must be refiled with CMS if changed, which makes it difficult to adapt and optimize our own websites and marketing material as well as our marketing partner websites and marketing material in a short amount of time.

Due to an increase in the cost of acquiring a new Medicare Advantage member over the past twelve months, we have increased our focus on the profitability of new Medicare Advantage members. Accordingly, as we de-emphasized less profitable member acquisition channels, we have experienced a slowdown in our Medicare Advantage submitted application growth in the first half of 2017. We also have more aggressively pursued the Medicare Supplement segment of the market. We expect submitted application volumes for Medicare plans will increase during the third quarter of 2017 compared the third quarter of 2016, resulting in an increase in our Medicare-related marketing and advertising costs during the third quarter of 2017 compared to the third quarter of 2016. We also expect submitted application volumes for Medicare plans will increase during the fourth quarter of 2017 compared to the fourth quarter of 2016. However, despite the expected increase in application volumes for Medicare plans during the fourth quarter of 2017, we expect the cost of acquiring new Medicare members will decrease during the fourth quarter of 2017, resulting in a decrease in Medicare-related marketing and advertising costs during the fourth quarter of 2017 compared to the fourth quarter of 2016.

Because the total volume of submitted applications that we receive from our marketing partners is largely outside of our control, particularly during any short-term period, and because of our tiered marketing partner arrangements, we could incur expenses in excess of, or below, the amounts we had planned in periods of rapid change in the volume of submitted applications from marketing partner referrals. Similar to our marketing partner channel, expenses in our online advertising channel will increase or decrease in relation to any increase or decrease in consumers referred to our website as a result of search engine advertising. Increases in submitted applications resulting from marketing partner referrals or visitors to our

website from our online advertising channel has in the past and could in the future result in marketing and advertising expenses significantly higher than our expectations. This has in the past and could in the future negatively impact our profitability during such periods because the revenue (if any) derived from submitted applications that are approved by health insurance carriers is not recognized until future periods.

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

Customer Care and Enrollment

Customer care and enrollment expenses primarily consist of compensation and benefits costs for personnel engaged in assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the enrollment process. Similar to the prior year, in preparation for the Medicare annual enrollment period during 2017, and to a lesser extent the open enrollment period for individual and family health insurance plans during 2017, we began ramping up our customer care center staff during our second and third quarters to handle the anticipated increased volume of health insurance transactions. Following the last two annual enrollment periods, we retained substantially all of our Medicare sales and enrollment personnel to handle the anticipated increased volume of Medicare-related applications outside of the open enrollment period.

Technology and Content

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

General and Administrative

General and administrative expenses include compensation and benefits costs for staff working in our executive, division president, finance, investor relations, government affairs, legal, human resources, internal audit, facilities and internal information technology departments. These expenses also include fees paid for outside professional services, including audit, tax, legal, government affairs and information technology fees.

Summary of Selected Metrics

The following table shows certain selected quarterly metrics for the three and six months ended June 30, 2016 and 2017:



Key Metrics:	Three Months Ended June 30,				Six Months Ended June 30,
	2016	2017	Percent Change		2016	2017	Percent Change
Submitted applications:
Medicare submitted applications (1)	32,700	31,200	(5	)%	63,600	62,500	(2	)%
IFP submitted applications (2)	9,800	5,400	(45	)%	84,100	27,400	(67	)%
Other submitted applications (3)	60,600	53,400	(12	)%	158,000	116,800	(26	)%
Total submitted applications (4)	103,100	90,000	(13	)%	305,700	206,700	(32	)%

Medicare Advantage submitted applications (5)	24,900	23,100	(7	)%	48,000	44,900	(6	)%



	As of June 30,
	2016	2017	Percent Change
Estimated membership:
Medicare products (6)	239,000	300,400	26%
IFP products (7)	481,300	244,900	(49)%
Other products (8)	380,000	340,500	(10)%
Total estimated membership (9)	1,100,300	885,800	(19)%



Notes:
(1)		Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D prescription drug and Medicare Supplement plans. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application.
(2)		Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. Applications are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. We define our IFP offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans (primarily consisting of short-term, dental, life, vision, and accident insurance plans).
(3)		Applications for health insurance plans other than Medicare and IFP submitted on our website during the period. Applications for ancillary plans are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. Applications for small business plans are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application.
(4)		Applications for all health insurance plans submitted on our website or through our customer care center during the period. See notes (1), (2) and (3) above for more information as to what constitutes a submitted application.
(5)		Medicare Advantage plan health insurance applications submitted on our website or through our customer care center during the period. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. Medicare Advantage submitted applications are included in Medicare submitted applications - See Note1 above for more detail.
(6)		Estimated number of members active on Medicare-related health insurance as of the date indicated. See the note below for additional information regarding our calculation of estimated Medicare membership.
(7)		Estimated number of members active on IFP health insurance plans as of the date indicated. See the note below for additional information regarding our calculation of IFP estimated membership.
(8)		Estimated number of members active on insurance plans other than Medicare-related health insurance and IFP health insurance plans as of the date indicated. See the note below for additional information regarding our calculation of other estimated membership.
(9)		Estimated number of members active on all insurance plans as of the date indicated. See the note below for additional information regarding our calculation of total estimated membership.

Note:

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


•	For Medicare-related health insurance plans, we take the number of members for whom we have received or applied a commission payment during the month of estimation.

•

For IFP health insurance plans, we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that is up to six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the period being estimated; and (ii) the number of approved members over that period (after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation.

•

For ancillary health insurance plans (such as short-term, dental, vision, accident and student), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers. For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported.

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

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

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 six months ended June 30, 2017, 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, 2016, for a complete discussion of our critical accounting policies and estimates.

Results of Operations

The following table sets forth our operating results and related percentage of total revenues for the three and six months ended June 30, 2016 and 2017 (dollars in thousands):



	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2016					2017					2016					2017
Revenue
Commission	$	34,649		93	%	$	25,802		92	%	$	104,036		94	%	$	101,984		95	%
Other	2,628			7		2,155			8		7,085			6		4,912			5
Total revenue	37,277			100		27,957			100		111,121			100		106,896			100
Operating costs and expenses:
Cost of revenue	533			1		204			1		2,717			2		1,833			2
Marketing and advertising	12,936			35		14,240			51		33,818			30		29,295			27
Customer care and enrollment	10,611			28		12,012			43		21,011			19		24,121			23
Technology and content	8,289			22		7,932			28		16,796			15		16,004			15
General and administrative	10,615			28		10,534			38		18,543			17		20,526			19
Restructuring benefit	(158		)	—		—			—		(158		)	—		—			—
Amortization of intangible assets	260			1		260			1		520			—		520			—
Total operating costs and expenses	43,086			115		45,182			162		93,247			83		92,299			86
Income (loss) from operations	(5,809		)	(16	)	(17,225		)	(62	)	17,874			16		14,597			14
Other income (expense), net	(21		)	—		90			—		(32		)	—		116			—
Income (loss) before provision (benefit) for income taxes	(5,830		)	(16	)	(17,135		)	(61	)	17,842			16		14,713			14
Provision (benefit) for income taxes	(5,354		)	(14	)	125			—		284			—		(1,448		)	(1	)
Net income (loss)	$	(476	)	(1	)%	$	(17,260	)	(62	)%	$	17,558		16	%	$	16,161		15	%

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,
	2016		2017		2016		2017
Marketing and advertising	$	417	$	220	$	972	$	435
Customer care and enrollment	147		124		270		136
Technology and content	473		274		908		668
General and administrative	1,140		1,951		1,859		3,463
Total stock-based compensation expense	$	2,177	$	2,569	$	4,009	$	4,702

Three and Six Months Ended June 30, 2016 and 2017

Revenue

The following table presents our commission, other revenue and total revenue for the three and six months ended June 30, 2016 and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2016			2017			Amount			Percent		2016			2017			Amount			Percent
Commission	$	34,649		$	25,802		$	(8,847	)	(26	)%	$	104,036		$	101,984		$	(2,052	)	(2	)%
Percentage of total revenue	93		%	92		%						94		%	95		%
Other	$	2,628		$	2,155		$	(473	)	(18	)%	$	7,085		$	4,912		$	(2,173	)	(31	)%
Percentage of total revenue	7		%	8		%						6		%	5		%
Total revenue	$	37,277		$	27,957		$	(9,320	)	(25	)%	$	111,121		$	106,896		$	(4,225	)	(4	)%

Three Months Ended June 30, 2017 and 2016—Commission revenue decreased $8.8 million, or 26%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, due to a $9.8 million decrease in Individual, Family and Small Business commission revenue, partially offset by a $0.9 million increase in Medicare commission revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a decrease in estimated individual and family health insurance membership in the first half of 2017 compared to estimated membership in the first half of 2016. The increase in Medicare commission revenue was primarily attributable to an increase in estimated Medicare membership in the first half of 2017 compared to estimated Medicare membership in the first half of 2016, in part due to growth in our sale of Medicare Supplement plans.

Other revenue decreased $0.5 million, or 18%, in the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to a $0.2 million decrease in licensing fees, a $0.1 million decrease in online sponsorship and advertising revenue and a $0.1 million decrease in lead generation revenue, primarily resulting from the decrease in individual and family health insurance applications submitted during the three months ended June 30, 2017 compared to the three months ended June 30, 2016.

Six Months Ended June 30, 2017 and 2016—Commission revenue decreased $2.1 million, or 2%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, due to a $17.4 million decrease in Individual, Family and Small Business commission revenue partially offset by a $15.4 million increase in Medicare commission revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a decrease in estimated individual and family health insurance membership in the first half of 2017 compared to estimated individual and family membership in the first half of 2016. The increase in Medicare commission revenue was primarily attributable to the receipt of increased renewal commissions per member on Medicare Advantage plans during the first quarter of 2017, as well as an increase in estimated membership for Medicare products in the first half of 2017 compared to estimated membership in the first half 2016.

Other revenue decreased $2.2 million, or 31%, in the six months ended June 30, 2017, compared to six months ended June 30, 2016, due to a $0.8 million decrease in online sponsorship and advertising revenue, $0.7 million decrease in lead generation, and a $0.6 million decrease in licensing fees, primarily resulting from the decrease in individual and family health insurance applications submitted during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

We expect commission revenue to decrease in absolute dollars in 2017 compared to 2016, primarily as a result of a decrease in Individual, Family and Small Business commission revenue, partially offset by an increase in Medicare commission revenue. We also expect other revenue to decrease in absolute dollars in 2017 compared to 2016.

Cost of Revenue

The following table presents our cost of revenue for the three and six months ended June 30, 2016 and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2016			2017			Amount			Percent		2016			2017			Amount			Percent
Cost of revenue	$	533		$	204		$	(329	)	(62	)%	$	2,717		$	1,833		$	(884	)	(33	)%
Percentage of total revenue	1		%	1		%						2		%	2		%

Three Months Ended June 30, 2017 and 2016—Cost of revenue decreased $0.3 million, or 62%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, due primarily to fewer payments to marketing partners with whom we have revenue-sharing arrangements.

Six Months Ended June 30, 2017 and 2016—Cost of revenue decreased $0.9 million, or 33%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, due primarily to a $0.4 million decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of the several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies, as well as a $0.4 million decrease due to fewer payments to marketing partners with whom we have revenue sharing arrangements.

We expect cost of revenue to remain relatively consistent in 2017 compared to 2016.

Marketing and Advertising

The following table presents our marketing and advertising expenses for three and six months ended June 30, 2016 and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2016			2017			Amount		Percent		2016			2017			Amount			Percent
Marketing and advertising	$	12,936		$	14,240		$	1,304	10	%	$	33,818		$	29,295		$	(4,523	)	(13	)%
Percentage of total revenue	35		%	51		%					30		%	27		%

Three Months Ended June 30, 2017 and 2016—Marketing and advertising expenses increased $1.3 million, or 10%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to a $1.6 million increase in variable advertising costs partially offset by a $0.3 million decrease in stock-based compensation. The increase in variable advertising costs was primarily due to an increase in Medicare television advertising and direct mail expense, partially offset by a decrease in Medicare online advertising expense.

Six Months Ended June 30, 2017 and 2016—Marketing and advertising expenses decreased $4.5 million, or 13%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a $3.5 million decrease in variable advertising costs, a $0.6 million decrease in stock-based compensation a $0.3 million decrease in compensation, benefits and other personnel costs. The decrease in variable advertising costs was primarily due to lower individual and family application volumes during the most recently completed open enrollment period and a decrease in Medicare online advertising expense, partially offset by an increase in Medicare television advertising and direct mail expense and expense from our marketing partner channel.

We expect our marketing and advertising expenses to decrease in absolute dollars in 2017 compared to 2016 due primarily to a reduction in our cost of acquiring new members as we de-emphasize less profitable acquisition channels.

Customer Care and Enrollment

The following table presents our customer care and enrollment expenses for the three and six months ended June 30, 2016, and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2016			2017			Amount		Percent		2016			2017			Amount		Percent
Customer care and enrollment	$	10,611		$	12,012		$	1,401	13	%	$	21,011		$	24,121		$	3,110	15	%
Percentage of total revenue	28		%	43		%					19		%	23		%

Three Months Ended June 30, 2017 and 2016—Customer care and enrollment expenses increased $1.4 million, or 13%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to a $1.1 million increase in compensation, benefits and other personnel costs primarily relating to our small business and Medicare businesses and a $0.3 million increase in facilities and other operating costs.

Six Months Ended June 30, 2017 and 2016 —Customer care and enrollment expenses increased $3.1 million, or 15%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a $2.5 million increase in compensation, benefits and other personnel costs primarily relating to our small business and Medicare businesses and a $0.7 million increase in facilities and other operating costs.

We expect customer care and enrollment expenses to increase in absolute dollars in 2017 compared to 2016.

Technology and Content

The following table presents our technology and content expenses for the three and six months ended June 30, 2016 and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2016			2017			Amount			Percent		2016			2017			Amount			Percent
Technology and content	$	8,289		$	7,932		$	(357	)	(4	)%	$	16,796		$	16,004		$	(792	)	(5	)%
Percentage of total revenue	22		%	28		%						15		%	15		%

Three Months Ended June 30, 2017 and 2016 —Technology and content expenses decreased $0.4 million, or 4%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to a $0.3 million decrease in facilities and other operating costs.

Six Months Ended June 30, 2017 and 2016 —Technology and content expenses decreased $0.8 million, or 5%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a $0.6 million decrease in facilities and other operating costs and a $0.2 million decrease in stock-based compensation expense.

We expect technology and content expenses to increase in absolute dollars in 2017 compared to 2016 due to planned investment in technology related to both our small business and Medicare businesses.

General and Administrative

The following table presents our general and administrative expenses for the three and six months ended June 30, 2016 and 2017 and the dollar and percentage changes from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2016			2017			Amount			Percent		2016			2017			Amount		Percent
General and administrative	$	10,615		$	10,534		$	(81	)	(1	)%	$	18,543		$	20,526		$	1,983	11	%
Percentage of total revenue	28		%	38		%						17		%	19		%

Three Months Ended June 30, 2017 and 2016 — General and administrative expenses decreased $0.1 million, or 1%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to a $0.8 million decrease in legal fees, and a $0.4 million decrease in compensation and benefits and other personnel costs, partially offset by a $0.9 million increase in stock-based compensation expense and a $0.2 million increase in lobbying fees.

Six Months Ended June 30, 2017 and 2016 — General and administrative expenses increased $2.0 million, or 11%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a $1.7 million increase in stock-based compensation expense, a $0.5 million increase in lobbying fees and a $0.5 million increase in compensation, benefits and other personnel costs, partially offset by a $0.9 million decrease in legal fees.

We expect general and administrative expenses to increase in absolute dollars in 2017 compared to 2016 due to incremental operating expenses in 2017 related to the newly appointed presidents for both the Medicare and Individual, Family and Small Business segments and higher stock-based compensation expense.

Restructuring Benefits

The following table presents our restructuring benefit for the three and six months ended June 30, 2016 and 2017 and the dollar change from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2016			2017			Amount		Percent		2016			2017			Amount		Percent
Restructuring benefit	$	(158	)	$	—		$	158	(100	)%	$	(158	)	$	—		$	158	(100	)%
Percentage of total revenue	—		%	—		%					—		%	—		%

In the second quarter of 2016, we reversed $0.2 million related to facility exit costs as we reoccupied office

space we had previously vacated and were also released from a lease for other office space we had previously vacated.

Amortization of Intangible Assets

The following table presents our intangible asset amortization expense for the three and six months ended June 30, 2016 and 2017 and the dollar change from the prior year (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,				Change
	2016			2017			Amount		Percent		2016		2017		Amount		Percent
Amortization of intangible assets	$	260		$	260		$	—	—	%	$	520	$	520	$	—	—	%
Percentage of total revenue	1		%	1		%					—