Summary of Selected Metrics

Our insurance carrier partners bill and collect insurance premiums paid by our members. Carrier partners do not report to us the number of members that we have as of a given date. The majority of our non-Medicare members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our non-Medicare members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date. We estimate the number of continuing members on all policies as of a specific date as follows:•Historically, to calculate the estimated number of members active on individual and family plan health insurance policies, we have taken the sum of (i) the number of IFP members for whom we have received or applied a commission payment for the month that is six months prior to the date of estimation after reducing that number using historical experience (for which the experience for the period from July 1 to December 31, 2013 was used for the calculation of membership as of December 31, 2014) for assumed member cancellations over the six-month period and (ii) the number of approved members over the six-month period prior to the date of estimation after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate. Historically, the percentage of our members who did not accept their approved policy remained at a relatively constant rate.   However, we observed an increase in the number of members who ultimately did not accept their approved policies, compared to our historical experience, beginning with policies that were submitted in the quarter ended March 31, 2014. This lower acceptance rate was used to estimate the assumed number of members who did not accept their approved policy for the six months ended December 31, 2014. As a result, for the purpose of estimating the number of members active on individual and family plan insurance policies as of December 31, 2014, we have assumed and applied a higher percentage of members who do not accept their approved policy as compared to the assumption used in prior years.•For ancillary insurance policies (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 the month that is one to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the one to three-month period); and (ii) the number of approved members over the one to three-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate).  The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers.•For Medicare-related insurance policies, we take the number of members for whom we have received or applied a commission payment prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations, including rapid disenrollment).•For small business health insurance policies, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us.During the portion of the second open enrollment period for individual and family health insurance plans that ran from November 15, 2014 through December 31, 2014, we were only able to sell individual and family health insurance plans with a 2015 effective date, did not receive commission payment on these plans until 2015 and therefore included none of the members on these plans in our estimated number of members active on individual and family health insurance plans at December 31, 2014. This difference from the prior year, when we were able to sell a substantial number of individual and family health insurance plans with a 2013 effective date during the portion of the initial open enrollment period for individual and family health insurance plans that ran from October 1, 2013 through December 31, 2013, received commission payment on a significant portion of these plans during the fourth quarter of 2013 and therefore included the members on these plans in our estimated number of members active on individual and family health insurance plans at December 31, 2013. Additionally, our carrier partners often do not communicate policy cancellation information to us. We often are made aware of policy cancellations at the time of annual renewal and update our membership statistics accordingly in the period they are reported.  A member who purchases and is active on multiple standalone insurance policies will be counted as a member more than once.  For example, a member who is active on both an individual and family health insurance policy and a standalone dental policy will be counted as two continuing members.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 membership in the membership estimate for the period we receive such updated information, if applicable. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. In addition, and as a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions such as health care reform implementation on our membership retention. Health care reform and other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.

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| Notes: | | |
| (1) |  | Net cash provided by operating activities for the period from the consolidated statements of cash flows. |
| (2) |  | IFP applications submitted on eHealth’s website during the period. Applications are counted as submitted when the applicant completes the application, provides a method for payment and clicks the submit button on our website and submits the application to us. The applicant generally has additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information and providing an electronic signature. In addition, an applicant may submit more than one application. We include applications for IFP plans for which we receive commissions as well as other forms of payment. We define our “IFP” offerings as major medical individual and family health insurance plans, which does not include small business, short-term, stand-alone dental, life, student or Medicare-related health insurance plans. |
| (3) |  | New IFP members reported to eHealth as approved during the period. Some members that are approved by a carrier do not accept the approval and therefore do not become paying members. |
| (4) |  | New members for all products reported to eHealth as approved during the period. Some members that are approved by a carrier do not accept the approval and therefore do not become paying members. |
| (5) |  | Commission revenue (from all sources) recognized during the period from the consolidated statements of comprehensive income. |
| (6) |  | Calculated as commission revenue recognized during the period (see note (5) above) divided by average estimated membership for the period (calculated as beginning and ending estimated membership for all plans for the period, divided by two). |
| (7) |  | Estimated number of members active on IFP insurance policies as of the date indicated. |
| (8) |  | Estimated number of members active on Medicare-related insurance policies as of the date indicated. |
| (9) |  | Estimated number of members active on insurance policies other than IFP and Medicare-related policies as of the date indicated. |
| (10) |  | Estimated number of members active on all insurance policies, including Medicare-related policies, as of the date indicated. |
| (11) |  | Percentage of IFP submitted applications from applicants who came directly to the eHealth website through algorithmic search engine results or otherwise. See note (2) above for further information as to what constitutes a submitted application. |
| (12) |  | Percentage of IFP submitted applications from applicants sourced through eHealth’s network of marketing partners. See note (2) above for further information as to what constitutes a submitted application. |
| (13) |  | Percentage of IFP submitted applications from applicants sourced through paid search and other online advertising activities. See note (2) above for further information as to what constitutes a submitted application. |


Results of Operations

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


Revenue

2014 compared to 2013—Commission revenue increased $5.2 million, or 3%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to a $8.1 million increase in Medicare-related commission revenue, partially offset by a $2.8 million decrease in non-Medicare plan commission revenue, consisting primarily of individual and family health insurance commission revenue.  The increase in Medicare related commission revenue is due to increased Medicare estimated membership for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease in non-Medicare plan related commission revenue is primarily due to decreased individual and family plan estimated membership for the year ended December 31, 2014 compared to the year ended December 31, 2013.Other revenue decreased $4.7 million, or 18%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to a $5.4 million decrease in online sponsorship and advertising revenue, partially offset by a $0.5 million increase in technology licensing revenue.We expect commission revenue to decline in absolute dollars in 2015 compared to 2014, primarily as a result of a decrease in non-Medicare plan related commission revenue, partially offset by a continued increase in Medicare plan related commission revenue.  We expect other revenue to decline in absolute dollars in 2015 compared to 2014, primarily due to a continued decrease in online sponsorship and advertising revenue.2013 compared to 2012—Commission revenue increased $22.7 million, or 17%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due to a $13.8 million increase in non-Medicare plan related commission revenue, consisting primarily of individual and family health insurance commission revenue and ancillary product commission revenue, and an $8.9 million increase in Medicare plan related commission revenue. The increase in revenue of both Medicare plan related and non-Medicare plan related commission revenue is due to increased membership for the year ended December 31, 2013 compared to the year ended December 31, 2012.Other revenue increased $1.0 million, or 4%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to a $1.7 million increase in online sponsorship and advertising revenue and a $0.5 million increase in technology licensing revenue, partially offset by a $1.2 million decrease in revenue related to our Medicare lead referral revenue.  The increase in online sponsorship and advertising revenue was primarily related to individual and family health insurance plan carriers. The decrease in lead referral revenue was the result of our strategic decision to reduce the number of Medicare leads sold to third parties and to instead act as a health insurance agent to those leads.


Cost of Revenue

2014 compared to 2013—Cost of revenue decreased $1.0 million, or 18%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to a decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.  2013 compared to 2012—Cost of revenue increased $0.7 million, or 14%, in the year ended December 31, 2013 compared to the year ended December 31, 2012,  due primarily to an increase in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.


Marketing and Advertising

2014 compared to 2013—Marketing and advertising expenses decreased $1.9 million, or 3%, in the year ended December 31, 2014 compared to the year ended December 31, 2013,  primarily due to a decrease of $4.1 million in fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website and a decrease of $1.8 million in compensation, benefits, stock-based compensation and other personnel costs, partially offset by an increase of $2.5 million in online advertising costs and an increase of $0.4 million in other direct marketing costs. We expect our marketing and advertising expenses to increase in absolute dollars in 2015 compared to 2014 due primarily to increased variable advertising costs associated with the second open enrollment period for individual and family health insurance plans, which ended on February 15, 2015, and the upcoming open enrollment periods for individual and family health insurance and Medicare-related health insurance, which are scheduled to commence on November 1, 2015 and October 15, 2015, respectively, partially offset by a decrease in compensation and benefits due to the reduction in force announced in March 2015.2013 compared to 2012—Marketing and advertising expenses increased $13.9 million, or 24%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily due to an increase of $6.6 million in fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website, an increase of $2.7 million in online advertising costs, and an increase of $1.8 million in direct marketing costs. Also contributing to the increase was an increase of $2.0 million in compensation, benefits, stock-based compensation and other personnel costs associated with an increase in employee headcount.


Customer Care and Enrollment

2014 compared to 2013—Customer care and enrollment expenses increased $7.6 million, or 22%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to additional customer care center personnel hired in connection with the open enrollment periods for individual and family health insurance and Medicare-related health insurance. As a result, compensation, benefits, stock-based compensation, licensing and other personnel costs increased $7.2 million.We expect customer care and enrollment expenses to significantly decrease in absolute dollars in 2015 compared to 2014 as a result of a decrease in compensation and benefits due to the reduction in force announced in March 2015, partially offset by the cost of seasonal customer care center staffing necessary to handle the volume of applications during the upcoming open enrollment periods for individual and family health insurance and Medicare-related health insurance, which are scheduled to commence on November 1, 2015 and October 15, 2015, respectively.2013 compared to 2012—Customer care and enrollment expenses increased $4.8 million, or 16%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to additional customer care center personnel hired to service the increased enrollment in individual and family health insurance plans and Medicare-related health insurance plans. As a result, compensation, benefits, stock-based compensation, licensing and other personnel costs increased $4.2 million.


Technology and Content

2014 compared to 2013—Technology and content expenses increased $7.8 million, or 24%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to an increase of $6.9 million in compensation, benefits, stock-based compensation, and other personnel costs, as a result of an increase in technology and content personnel. The remainder of the increase is due to increased spending to support website operations and increases in data center infrastructure maintenance costs and depreciation expense. We expect technology and content expenses to decrease in absolute dollars in 2015 compared in 2014 as a result of a decrease in compensation and benefits due to the reduction in force announced in March 2015. 2013 compared to 2012—Technology and content expenses increased $11.2 million, or 52%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to an increase of $8.9 million in compensation, benefits, stock-based compensation, and other personnel costs, as a result of an increase in technology and content personnel. Additionally, data center infrastructure maintenance costs and depreciation expense increased $0.7 million and $0.5 million, respectively. The remainder of the increase is due to increased spending to support website operations.


General and Administrative

2014 compared to 2013—General and administrative expenses decreased $1.7 million, or 6%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to the non-achievement of performance bonuses for fiscal 2014 and the reversal of stock-based compensation expense associated with performance-based restricted stock units granted to executives within the general and administrative group as a result of related financial metrics not being achieved for the year ended December 31, 2014.We expect our general and administrative expenses to increase in absolute dollars in 2015 compared to 2014 as a result of the accrual of annual performance bonuses for fiscal 2015 and anticipated increases in both legal fees and stock-based compensation expense, partially offset by a decrease in compensation and benefits due to the reduction in force announced in March 2015.2013 compared to 2012—General and administrative expenses increased $3.1 million, or 12%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to an increase of $3.0 million in compensation, benefits, stock-based compensation and other personnel costs as a result of an increase in general and administrative personnel as we add infrastructure to support company growth.


Amortization of Intangible Assets

2014 compared to 2013—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber increased for the year ended December 31, 2014 compared to the year ended December 31, 2013 due to a $0.1 impairment charge recorded during the fourth quarter of 2014 related to certain acquired intangible assets that will not be utilized in future periods.We expect a slight decrease in the amortization of intangible assets in 2015 compared to 2014.2013 compared to 2012—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber decreased for the year ended December 31, 2013 compared to the year ended December 31, 2012 due to certain acquired intangible assets becoming fully amortized in May 2012.


Other Income (Expense), Net

Other income (expense), net, in 2012,  2013 and 2014 primarily consisted of interest income earned on our invested cash,  cash equivalents and marketable securities balances, offset by administrative bank fees, investment management fees and interest expense on capital lease obligations.  2014 compared to 2013 and 2013 compared to 2012—Other income (expense), remained relatively flat in 2014 compared to 2013 and net decreased in 2013 compared to 2012 due primarily to a decrease in investment interest income due to lower cash balances and declining average yields as well as higher bank fees. We expect other income (expense), net to be flat in 2015 compared to 2014.


Provision for Income Taxes

2014 compared to 2013—In 2014, we recorded a provision for income taxes of $9.3 million, representing an effective tax rate of (136.25%). Our effective tax rate changed from 52.7% in 2013 to (136.25%) in 2014 due primarily to valuation allowance adjustments in 2014.  We expect our provision for income taxes to decrease in 2015 compared to 2014.2013 compared to 2012—In 2013, we recorded a provision for income taxes of $1.9 million, representing an effective tax rate of 52.7%. Our effective tax rate in 2013 was higher than our effective tax rate in 2012 of 47.4%, due primarily to a decrease in pre-tax income, which resulted in non-deductible expenses having a more significant impact on the effective tax rate during 2013.


Liquidity and Capital Resources

(1)Cumulative balances at December 31, 2013 consist of shares repurchased in connection with our previous stock repurchase plans announced in 2013, 2012, 2011, 2010 and 2008.  (2)Cumulative balances at December 31, 2014 consist of shares repurchased in connection with our stock repurchase programs announced on March 31, 2014, as well as a previous stock repurchase plan announced in 2013, 2012, 2011, 2010 and 2008.  (3)Average price paid per share includes commissions.In addition to the shares repurchased under our repurchase programs as of December 31, 2014, we have in treasury 0.3 million shares that were surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2013 and 2014, we had a total of 9.5 million shares and 10.9 million shares, respectively, held in treasury. The following table presents a summary of our cash flows for the years ended December 31,  2012,  2013 and 2014 (in thousands):