HEALTHWAYS, INC (Form: 10-Q, Received: 08/08/2014 16:18:40)

Second, our programs are designed to eliminate or reduce lifestyle risks by:

	·	promoting personal change and improvement in the lifestyle behaviors that lead to poor health or chronic conditions; and
	·	providing personal interactions with highly trained healthcare professionals and educational materials to create and sustain healthier behaviors for those individuals at risk or in the early stages of chronic conditions.

Our programs for reducing or eliminating lifestyle risks are designed to motivate people to make positive lifestyle changes and accomplish individual goals, such as increasing physical activity for seniors through the Healthways SilverSneakers® fitness solution, overcoming nicotine addiction through the QuitNet® on-line smoking cessation community, or generating sustainable weight loss through our Innergy® solution.

Third, our programs are designed to help people optimize care for persistent or chronic conditions by:

	·	incorporating the latest, evidence-based clinical guidelines into interventions to optimize patient health outcomes;
	·	developing care support plans and motivating members to set attainable goals for themselves;
	·	providing local market resources to address acute episodic interventions;
	·	coordinating members' care as an extension of their healthcare providers;
	·	providing software technology solutions and management consulting in support of well-being improvement services; and
	·	providing high-risk care management for members at risk for hospitalization due to complex conditions.

Specific examples of interventions aimed at optimizing care include our Care Transitions hospital readmissions avoidance program, the Dr. Dean Ornish Program for Reversing Heart Disease™, and our disease management programs.

We recognize that each individual in a given population plays a variety of roles in his or her pursuit of improved well-being, often simultaneously. By providing the full spectrum of services to meet each individual's needs, we believe our interventions can be delivered at scale and in a manner that reflects those unique needs over time. We believe that real and sustainable behavior change generates measurable, long-term cost savings and improved individual and business performance for our customers.

In North America, our customers include health plans, both commercial and Medicare Advantage, large self-insured employers, including state and municipal government entities, and providers of healthcare, including integrated healthcare systems, hospitals, and physician groups, in all 50 states and the District of Columbia. We also provide services to commercial healthcare businesses and/or government entities in Brazil, Australia, and France. All of our interventions were developed with over 30 years of experience based in science and ongoing innovation. Our technology-driven infrastructure is compatible with, and integrated into, our customer and other vendor systems. We operate domestic and international well-being improvement call centers staffed with a wide range of licensed health professionals. Our fitness center network encompasses approximately 15,000 U.S. locations. We also maintain an extensive network of over 88,000 complementary, alternative and physical medicine practitioners, which offers convenient access to the significant number of individuals who seek health services outside of the traditional healthcare system.

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which are based upon current knowledge, assumptions, beliefs, estimates and expectations, involve a number of risks and uncertainties, and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical statements of fact and those regarding the intent, belief, or expectations of the Company, including, without limitation, all statements regarding the Company's future earnings and results of operations, and can be identified by the use of words like "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," or "continue" and similar expressions. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary from those in the forward-looking statements as a result of various factors, including, but not limited to:

	·	the effectiveness of management's strategies and decisions;
	·	our ability to sign and implement new contracts for our solutions;

	·	our ability to accurately forecast the costs required to successfully implement new contracts;
	·	our ability to renew and/or maintain contracts with our customers under existing terms or restructure these contracts on terms that would not have a material negative impact on our results of operations;
	·	our ability to effectively compete against other entities, whose financial, research, staff, and marketing resources may exceed our resources;
	·	our ability to accurately forecast our revenues, margins, earnings and net income, as well as any potential charges that we may incur as a result of changes in our business;
	·	our ability to accurately forecast performance and the timing of revenue recognition under the terms of our customer contracts ahead of data collection and reconciliation;
	·	the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, "PPACA") on our operations and/or the demand for our services;
	·	our ability to anticipate change and respond to emerging trends in the domestic and international markets for healthcare and the impact of the same on demand for our services;
	·	the risks associated with deriving a significant concentration of our revenues from a limited number of customers;
	·	the risks associated with foreign currency exchange rate fluctuations and our ability to hedge against such fluctuations;
	·	our ability to achieve and reach mutual agreement with customers with respect to the contractually required performance metrics, cost savings and clinical outcomes improvements, or to achieve such metrics, savings and improvements within the timeframes contemplated by us;

	·	our ability to achieve estimated annualized revenue in backlog in the manner and within the timeframe we expect, which is based on certain estimates regarding the implementation of our services;
	·	our ability and/or the ability of our customers to enroll participants and to accurately forecast their level of enrollment and participation in our programs in a manner and within the timeframe anticipated by us;
	·	the ability of our customers to provide timely and accurate data that is essential to the operation and measurement of our performance under the terms of our contracts;
	·	our ability to favorably resolve contract billing and interpretation issues with our customers;
	·	our ability to service our debt, make principal and interest payments as those payments become due, and remain in compliance with our debt covenants;
	·	the risks associated with changes in macroeconomic conditions, which may reduce the demand and/or the timing of purchases for our services from customers or potential customers, reduce the number of covered lives of our existing customers, or restrict our ability to obtain additional financing;
	·	counterparty risk associated with the Cash Convertible Notes Hedges, interest rate swap agreements, and foreign currency exchange contracts;

	·	the risks associated with valuation of the Cash Convertible Notes Hedges and the Cash Conversion Derivative, which may result in volatility to our consolidated statements of comprehensive income (loss) if these transactions do not completely offset one another;
	·	our ability to integrate new or acquired businesses, services (including outsourced services), or technologies into our business and to accurately forecast the related costs;
	·	our ability to anticipate and respond to strategic changes, opportunities, and emerging trends in our industry and/or business and to accurately forecast the related impact on our revenues and earnings;
	·	the impact of any impairment of our goodwill or other intangible assets;
	·	our ability to develop new products and deliver and report outcomes on those products;
	·	our ability to implement our integrated data and technology solutions platform within the required timeframe and expected cost estimates and to develop and enhance this platform and/or other technologies to meet evolving customer and market needs;
	·	our ability to obtain adequate financing to provide the capital that may be necessary to support our operations and to support or guarantee our performance under new contracts;
	·	unusual and unforeseen patterns of healthcare utilization by individuals with diseases or conditions for which we provide services;
	·	the ability of our customers to maintain the number of covered lives enrolled in the plans during the terms of our agreements;

	·		the risks associated with data privacy or security breaches, computer hacking, network penetration and other illegal intrusions of our information systems or those of third-party vendors or other service providers, which may result in unauthorized access by third parties to customer, employee or our information or patient health information and lead to enforcement actions, fines and other litigation against us;
	·		the impact of any new or proposed legislation, regulations and interpretations relating to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and any legislative or regulatory changes with respect to Medicare Advantage;
	·		the impact of future state, federal, and international legislation and regulations applicable to our business, including PPACA, on our ability to deliver our services and on the financial health of our customers and their willingness to purchase our services;
	·		current geopolitical turmoil, the continuing threat of domestic or international terrorism, and the potential emergence of a health pandemic;
	·		the impact of legal proceedings involving us and/or our subsidiaries; and

	·		other risks detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in this Report, including those set forth in Part II, Item 1A. "Risk Factors."

We undertake no obligation to update or revise any such forward-looking statements.

Customer Contracts

Our fees are generally billed on a per member per month ("PMPM") basis or upon member participation. For PMPM fees, we generally determine our contract fees by multiplying the contractually negotiated PMPM rate by the number of members covered by our services during the month. We typically set PMPM rates during contract negotiations with customers based on the value we expect our programs to create and a sharing of that value between the customer and the Company. In addition, some of our services, such as the Healthways SilverSneakers fitness solution, include fees that are based upon member participation.

Our contracts with health plans and integrated healthcare systems generally range from three to five years with several comprehensive strategic agreements extending up to ten years in length. Contracts with self-insured employers typically have two to four-year terms. Some of our contracts allow the customer to terminate early.

Some of our contracts place a portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical outcomes improvements ("performance-based"). Approximately 2% of revenues recorded during the six months ended June 30, 2014 were performance-based and 1% of revenues were subject to final reconciliation as of June 30, 2014.

Technology

Our solutions require sophisticated analytical, data management, Internet, and computer-telephony capabilities based on state-of-the-art technology. These solutions help us deliver our services to large populations within our customer base at scale. Our predictive modeling capabilities, including insights gained from well-being assessments such as the Gallup-Healthways Well-Being 5™ diagnostic tool, allow us to identify and stratify those participants who are most at risk for an adverse health event. We incorporate behavior-change science with consumer-friendly interactions to facilitate consumer preferences for engagement and convenience supporting improvement across all five elements of well-being: physical, financial, social, purpose and community. We use sophisticated data analytical and reporting solutions to validate the impact of our programs on clinical and financial outcomes. Our application offerings support integrating the primary care physician into the team of well-being experts working on behalf of participants.

We have recently completed a strategic transformation from a business that solely provided disease management services almost exclusively to health plans to a business that now provides a much broader array of population health and well-being services to a broader set of end customer markets - a process that has been underway for approximately seven years. While our transformation-related infrastructure and technology investments are complete, we continue to invest in technology, as evidenced by our long-term applications and technology services outsourcing agreement with HP Enterprise Services, LLC, and are continually refining our proprietary clinical, data management, and reporting systems to continue to meet the information management requirements of our services. The behavior change techniques and predictive modeling incorporated in our technology identify an individual's readiness to change and provide personalized support through appropriate interactions using a range of methods desired by an individual, including venue-based face-to-face; print; phone; mobile and remote devices with unique applications; on-line, including social networks; and any combination thereof to motivate and sustain healthy behaviors.

Business Strategy

The World Health Organization defines health as "…not only the absence of infirmity and disease, but also a state of physical, mental, and social well-being."

Our business strategy reflects our fundamental belief that people with higher well-being result in reduced overall health-related costs, improved workforce engagement and improved productivity, which yields better performance for individuals, families, health plans, governments, employers, integrated healthcare systems, and communities. We believe well-being consists of five essential elements: physical, financial, social, community, and purpose. Our solutions are designed to improve well-being across the five elements by helping to (1) keep healthy people healthy, (2) eliminate or reduce lifestyle risks and (3) optimize care for persistent or chronic conditions.

We believe it is critical to impact an entire population's well-being and underlying health status in a long-term, cost-effective way. Through our exclusive, 25-year relationship with Gallup that began in 2008, we have created a definitive measure and empiric database of changes in the well-being of the U.S. population based on over two million completed surveys to date, known as the Gallup-Healthways Well-Being Index® ("WBI"), that supports our understanding of the causes and effects of well-being for a population. In 2012, we created a global joint venture with Gallup that has developed the next generation of Gallup-Healthways individual well-being assessment tools, known as the Gallup-Healthways Well-Being 5, to provide employers, health providers, insurers and other interested parties with a validated capability to assess, measure and report on changes in the well-being of their employees, patients, members and customers.

To enhance well-being within their respective populations, our current and prospective customers, who typically bear risk for the higher cost and lower productivity associated with lower well-being, require solutions that focus on the underlying drivers of healthcare demand; address worsening health status; reverse or slow unsustainable cost trends; foster healthy behaviors; mitigate health risk factors; and manage chronic conditions. Our strategy is to deliver programs that engage individuals and help them enhance their well-being and underlying health status regardless of their starting point. Published, peer-reviewed studies prove that we can achieve well-being improvements in a population that generate significant cost savings and increases in productivity by providing effective programs that support the individual throughout his or her well-being journey.

As previously mentioned, we have completed a strategic transformation from a business that solely provided disease management services to a business that now provides a much broader array of population health and well-being services—a process that has been underway for approximately seven years. Our strategy includes the ongoing refinement of our value proposition through our total population management capabilities. We continue to enhance our well-being improvement solutions to extend our reach and effectiveness and to meet increasing demand for individualized, integrated solutions. The flexibility of our programs allows customers to provide a range of services they deem appropriate for their organizations. Customers may select from certain single program options up to a total-population approach, in which all members of a customer's population are eligible to receive our services. Our strategy also includes the ongoing enhancement and deployment of our proprietary technology platform known as Embrace®. This platform, which is essential to our total population management solution, enables us to integrate data from the healthcare organizations and other entities interacting with an individual. Embrace provides for the delivery of our integrated solutions and ongoing communications between the individual and his or her medical and health experts, using a range of methods, including venue-based face-to-face interactions; print; phone; mobile and remote devices with unique applications; on-line, including social networks; and any combination thereof to motivate and sustain healthy behaviors.

Today we have a number of customer markets for our well-being improvement solutions, including health plans, self-insured employers, integrated health systems / hospitals /physician groups, and international entities.

Health Plans

A number of contracts signed since 2011 have expanded both the level of integration and breadth of services provided to major regional commercial health plans, in some cases as they develop and implement a number of patient-centered medical home models. Our services extend beyond chronic care and wellness programs to include a full range of care management functions, as well as a variety of health promotion, prevention and quality improvement solutions. Examples include our collaboration with Blue Zones, LLC in delivering a scaled well-being improvement solution to support our customers' initiatives to improve the well-being of their populations; our wholly-owned subsidiary MeYou Health, LLC in bringing to market well-being improvement tools in the social media space through Internet and personal device delivery methods; and our exclusive partnership with Dr. Ornish that is creating access to the Dr. Dean Ornish Program for Reversing Heart Disease for a growing number of health plans and health systems.

We also provide a variety of services to most of the major Medicare Advantage health plans. We expect this market to grow due to the continuing trend of enrollment growth in Medicare Advantage as the size of the Medicare-eligible population increases. Our Silver Sneakers program is the largest single program within our current services. In addition, some of our Medicare Advantage health plan customers are adding additional services including web-based and mobile applications for personal support and social networking as more of the senior population becomes interested in these modalities of interaction.

Self-Insured Employers

Self-insured employers, including state and municipal government entities as employers, continue to demand services that focus across the entire population of employees and their dependent family members. Our well-being improvement solution, in addition to improving individuals' health and reducing direct healthcare costs, targets a much larger improvement in employer performance and profitability by reducing the impact of productivity lost for health-related reasons. With the success of our work aimed at total population management, we expect to enhance our competitive advantage in responding to employers' needs for a healthier, higher-performing, and less costly workforce.

Integrated Health Systems / Hospitals / Physician Groups

Significant changes in healthcare payment structures from fee for service to outcomes–based payments have expanded our opportunities to provide services to integrated healthcare systems, hospitals, and physicians. In 2011, we acquired Navvis & Company, a well-established provider of strategic counsel and change management services, enabling its healthcare system clients to become future-ready clinical enterprises within healthcare's rapidly emerging value-based reimbursement system. Our strategy includes providing integrated healthcare systems, hospitals, and physician enterprises with both consultative strategic planning services and a range of capabilities that enable and support the delivery of Physician-Directed Population Health solutions. We expect to continue to grow the number and size of our health systems relationships through the ongoing deployment of services including, for example, consulting, the American Hospital Association-endorsed acute to post-acute Care Transitions Solution ^TM and the Dr. Dean Ornish Program for Reversing Heart Disease, in addition to the aggregation of risk lives within health systems for our total population management services.

International Entities

Our international strategy is to pursue opportunities in countries with a relatively developed healthcare infrastructure, including the existence of one or more payors with a large volume of at risk lives. This approach allows us to partner either directly with government payors or with the private insurers and service providers that operate in those countries.

We plan to increase our competitive advantage in delivering our services by leveraging the scope of our well-being improvement capabilities, including our medical information content, behavior change processes and techniques, strategic relationships, health provider networks, and fitness center relationships. We also plan to continue to scale the delivery of our solutions employing a blend of our scalable, state-of-the-art well-being improvement call centers and proprietary technologies, modalities, and techniques. While our core population health infrastructure and technology investments are complete and our highly scalable platform is in place, we may add new capabilities and technologies through internal development, strategic alliances with other entities, and/or selective acquisitions or investments.

Critical Accounting Policies

We describe our accounting policies in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. We prepare the consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

We believe the following accounting policies are the most critical in understanding the estimates and judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Revenue Recognition

Our fees are generally billed on a PMPM basis or upon member participation. For PMPM fees, we generally determine our contract fees by multiplying the contractually negotiated PMPM rate by the number of members covered by our services during the month. We typically set PMPM rates during contract negotiations with customers based on the value we expect our programs to create and a sharing of that value between the customer and the Company. In addition, some of our services, such as the Healthways SilverSneakers fitness solution, include fees that are based upon member participation.

Our performance-based contracts place a portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical outcomes improvements. Approximately 2% of revenues recorded during the six months ended June 30, 2014 were performance-based and 1% of revenues were subject to final reconciliation as of June 30, 2014.

We recognize revenue as follows: (1) we recognize the fixed portion of PMPM fees and fees for service as revenue during the period in which we perform our services; and (2) we recognize performance-based revenue based on the most recent assessment of our performance, which represents the amount that the customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date.

We generally bill our customers each month for the entire amount of the fees contractually due for the prior month's enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should we not meet performance targets. Fees for service are typically billed in the month after the services are provided. Deferred revenues arise from contracts that permit upfront billing and collection of fees covering the entire contractual service period, generally 12 months. A limited number of our contracts provide for certain performance-based fees that we cannot bill until we reconcile them with the customer.

We generally assess our level of performance for our contracts based on medical claims and other data that the customer is contractually required to supply, interim assessments of achievement against performance targets, or metrics available from our operating platforms. A minimum of four to nine months' data is typically required for us to measure performance. In assessing our performance, we may include estimates such as medical claims incurred but not reported. In addition, we may also provide contractual allowances for billing adjustments (such as data reconciliation differences) as appropriate.

If data is insufficient or incomplete to measure performance, or interim performance measures indicate that we are not meeting performance targets, we do not recognize performance-based fees subject to refund as revenues but instead record them in a current liability account entitled "contract billings in excess of earned revenue." Only in the event we do not meet performance levels by the end of the measurement period, typically one year, are we contractually obligated to refund some or all of the performance-based fees. We would only reverse revenues that we had already recognized if performance to date in the measurement period, previously above targeted levels, subsequently dropped below targeted levels. Historically, any such adjustments have been immaterial to our financial condition and results of operations.

During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data. As of June 30, 2014, cumulative performance-based revenues that have not yet been settled with our customers but that have been recognized in the current and prior years totaled approximately $24.0 million, all of which were based on actual data. Data reconciliation differences, for which we provide contractual allowances until we reach agreement with respect to identified issues, can arise between the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.

Performance-related adjustments (including any amounts recorded as revenue that were ultimately refunded), changes in estimates, or data reconciliation differences may cause us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior fiscal year. During the six months ended June 30, 2014, we recognized a net increase in revenue of $2.7 million related to services provided prior to 2014.

Impairment of Intangible Assets and Goodwill

We review goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. We may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we conclude during the qualitative assessment that this is the case or if we elect not to perform a qualitative assessment, we perform a quantitative review as described below.

During a quantitative review of goodwill, we estimate the fair value of each reporting unit using a combination of a discounted cash flow model and a market-based approach, and we reconcile the aggregate fair value of our reporting units to our consolidated market capitalization. Estimating fair value requires significant judgments, including management's estimate of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital, as well as relevant comparable company earnings multiples for the market-based approach. Changes in these estimates and assumptions could materially affect the estimate of fair value and potential goodwill impairment for each reporting unit.

If we determine that the carrying value of goodwill is impaired based upon an impairment review, we calculate any impairment using a fair-value-based goodwill impairment test as required by U.S. GAAP. The fair value of a reporting unit is the price that would be received upon a sale of the unit as a whole in an orderly transaction between market participants at the measurement date.

Except for a trade name that has an indefinite life and is not subject to amortization, we amortize identifiable intangible assets, such as acquired technologies and customer contracts, over their estimated useful lives using the straight-line method. We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset's fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.

We review intangible assets not subject to amortization, which consist of a trade name, on an annual basis or more frequently whenever events or circumstances indicate that the assets might be impaired. We estimate the fair value of the trade name using a present value technique, which requires management's estimate of future revenues attributable to this trade name, estimation of the long-term growth rate for these revenues, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the estimate of fair value for the trade name.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Accounting for income taxes requires significant judgment in determining income tax provisions, including determination of deferred tax assets, deferred tax liabilities, and any valuation allowances that might be required against deferred tax assets, and in evaluating tax positions.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. U.S. GAAP also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial position, results of operations, and cash flows.

Share-Based Compensation

We measure and recognize compensation expense for all share-based payment awards over the required vesting period based on estimated fair values at the date of grant. Determining the fair value of stock options at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

Results of Operations

The following table shows the components of the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013 expressed as a percentage of revenues.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services (exclusive of depreciation
and amortization included below)	81.1	%	82.3	%	82.4	%	83.9	%
Selling, general and administrative expenses	9.4	%	8.8	%	9.3	%	8.4	%
Depreciation and amortization	7.5	%	8.0	%	7.5	%	8.1	%
Legal settlement charges	—		—		2.6	%	—
Operating income (loss) ⁽¹⁾	2.0	%	0.9	%	(1.9	)%	(0.4	)%

Interest expense	2.5	%	1.9	%	2.5	%	2.0	%

Loss before income taxes	(0.5	)%	(1.0	)%	(4.4	)%	(2.4	)%
Income tax benefit	(0.2	)%	(0.3	)%	(1.6	)%	(0.8	)%

Net loss ⁽¹⁾	(0.3	)%	(0.7	)%	(2.8	)%	(1.5	)%

⁽¹⁾ Figures may not add due to rounding.

Revenues

Revenues increased $18.3 million, or 11.3%, and $30.0 million, or 9.1%, respectively, for the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to the following:

•		the commencement of contracts with new customers and growth with existing customers; and
•		an increase in participation in our fitness solutions, as well as in the number of members eligible to participate in such solutions.

These increases were somewhat offset by terminations with certain customers.

Cost of Services

Cost of services (excluding depreciation and amortization) as a percentage of revenues decreased to 81.1% and 82.4%, respectively, for the three and six months ended June 30, 2014, compared to 82.3% and 83.9%, respectively, for the three and six months ended June 30, 2013, primarily due to the following:

•		economies of scale resulting from certain types of costs that remain relatively fixed or do not increase at the same rate as revenues; and
•		a decrease in employees' healthcare benefit costs related to a decrease in cost of claims.

These decreases were partially offset by a lower level of recoupment of fees related to certain supplier agreements for the three and six months ended June 30, 2014 compared to the same periods in 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues increased to 9.4% for the three months ended June 30, 2014 compared to 8.8% for the three months ended June 30, 2013 primarily due to expenses incurred in 2014 in connection with proxy contest defense costs.

Selling, general and administrative expenses as a percentage of revenues increased to 9.3% for the six months ended June 30, 2014 compared to 8.4% for the six months ended June 30, 2013 primarily due to expenses incurred in 2014 in connection with proxy contest defense costs in addition to an insurance reimbursement received during the six months ended June 30, 2013 for certain previously incurred legal expenses.

Depreciation and Amortization

Depreciation and amortization expense increased $0.5 million and $0.3 million, or 4.0% and 1.2%, respectively, for the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to increased depreciation expense related to our Embrace platform, partially offset by decreased amortization expense due to certain intangible assets becoming fully amortized during 2013.

Legal Settlement Charges

On April 17, 2014, we entered into an agreement with BCBSMN to resolve a contractual dispute. As a result of this settlement, we incurred charges of approximately $9.4 million during the six months ended June 30, 2014.

Interest Expense

Interest expense increased $1.4 million and $2.4 million, respectively, for the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to amortization of the debt discount related to the Cash Convertible Notes.

Income Tax Expense

For the three months ended June 30, 2014, we had an effective tax benefit rate of 36.5% compared to 33.3% for the three months ended June 30, 2013. The increase in the effective rate of benefit was primarily due to the smaller base of pretax loss for the 2014 period in relation to certain items for which we currently are not able to recognize a tax benefit.

Our effective tax benefit rate remained relatively consistent at 35.6% for the six months ended June 30, 2014 compared to approximately 34.4% for the six months ended June 30, 2013.

Liquidity and Capital Resources

Operating activities for the six months ended June 30, 2014 provided cash of $19.3 million compared to $38.9 million for the six months ended June 30, 2013, primarily due to the following:

•		an increase in days sales outstanding in accounts receivable from 46 days at June 30, 2013 to 55 days at June 30, 2014; and
•		the timing of several significant vendor payments.

Investing activities during the six months ended June 30, 2014 used $24.8 million in cash which primarily consisted of capital expenditures associated with our Embrace platform.

Financing activities during the six months ended June 30, 2014 provided $4.9 million in cash primarily due to proceeds from the revolving credit facility partially offset by net payments under the Fifth Amended Credit Agreement.

Credit Facility

On June 8, 2012, we entered into the Fifth Amended Credit Agreement. The Fifth Amended Credit Agreement provides us with a $200.0 million revolving credit facility that expires on June 8, 2017 and includes a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters of credit. The Fifth Amended Credit Agreement also provides a $200.0 million term loan facility that matures on June 8, 2017, $105.0 million of which remained outstanding at June 30, 2014, and an uncommitted incremental accordion facility of $200.0 million.

Borrowings under the Fifth Amended Credit Agreement generally bear interest at variable rates based on a margin or spread in excess of either (1) the one-month, two-month, three-month or six-month rate (or with the approval of affected lenders, nine-month or twelve-month rate) for Eurodollar deposits ( "LIBOR") or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the "Base Rate"), as selected by the Company. The LIBOR margin varies between 1.75% and 3.00%, and the Base Rate margin varies between 0.75% and 2.00%, depending on our leverage ratio. The Fifth Amended Credit Agreement also provides for an annual fee ranging between 0.30% and 0.50% of the unused commitments under the revolving credit facility. Extensions of credit under the Fifth Amended Credit Agreement are secured by guarantees from all of the Company's active domestic subsidiaries and by security interests in substantially all of the Company's and such subsidiaries' assets.

On July 1, 2013, we entered into an amendment to the Fifth Amended Credit Agreement, which provided for, among other things, the amendment of certain negative covenants to permit the issuance of and payments related to the Cash Convertible Notes, Cash Convertible Notes Hedges and Warrants described below as well as increases in the maximum required levels of total funded debt to EBITDA beginning with the quarter ended June 30, 2013.

On April 15, 2014, in connection with the agreement to resolve our former contractual dispute with BCBSMN, we entered into an additional amendment to the Fifth Amended Credit Agreement that provides for an add-back to our consolidated EBITDA, which is used for purposes of calculating financial covenants under the Fifth Amended Credit Agreement, for the $9.4 million charge incurred as a result of the settlement of our dispute with BCBSMN. As of June 30, 2014, availability under the revolving credit facility totaled $41.3 million as calculated under the most restrictive covenant.

We are required to repay outstanding revolving loans under the revolving credit facility in full on June 8, 2017. We are required to repay term loans in quarterly principal installments aggregating (1) 1.250% of the original aggregate principal amount of the term loans during each of the eight quarters beginning with the quarter ended September 30, 2012, (2) 1.875% of the original aggregate principal amount of the term loans during each of the next four quarters beginning with the quarter ending September 30, 2014, and (3) 2.500% of the original aggregate principal amount of the term loans during each of the remaining quarters prior to maturity on June 8, 2017, at which time the entire unpaid principal balance of the term loans is due and payable.

The Fifth Amended Credit Agreement contains financial covenants that require us to maintain, as defined, specified ratios or levels at June 30, 2014 of (1) a maximum total funded debt to EBITDA of 4.50 and (2) a minimum total fixed charge coverage of 1.50. As of June 30, 2014, our total funded debt to EBITDA ratio was 3.89, and our total fixed charge coverage ratio was 2.04, each as defined in the Fifth Amended Credit Agreement. We were in compliance with all of the financial covenant requirements of the Fifth Amended Credit Agreement as of June 30, 2014.

The Fifth Amended Credit Agreement contains various other affirmative and negative covenants that are typical for financings of this type. Among other things, the Fifth Amended Credit Agreement limits repurchases of our common stock and the amount of dividends that we can pay to holders of our common stock. A breach of any of these covenants could result in a default under the Fifth Amended Credit Agreement, in which all amounts outstanding under the Fifth Amended Credit Agreement may become immediately due and payable, and all commitments under the Fifth Amended Credit Agreement to extend further credit may be terminated. In addition, a payment default, including an acceleration following an event of default, under the Fifth Amended Credit Agreement or under our indenture for the Cash Convertible Notes, could each trigger an event of default under the other debt instrument, which could result in the principal of and the accrued and unpaid interest on such debt becoming due and payable.

In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we maintain interest rate swap agreements that effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to fixed obligations, thus reducing the impact of interest rate changes on future interest expense. Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest with interest rates ranging from 0.690% to 1.480% plus a spread (see Note 6 to the consolidated financial statements). We maintain interest rate swap agreements with current notional amounts of $145.0 million and termination dates ranging from November 2015 to December 2016. Of this amount, $95.0 million was effective at June 30, 2014, and $50.0 million will become effective in December 2015, as older interest rate swap agreements expire. We have designated these interest rate swap agreements as qualifying cash flow hedges. We currently meet the hedge accounting criteria under U.S. GAAP in accounting for these interest rate swap agreements.

Cash Convertible Senior Notes

On July 16, 2013, we issued $150.0 million aggregate principal amount of the Cash Convertible Notes due 2018, which bear interest at a rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2014. The Cash Convertible Notes will mature on July 1, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date. The Cash Convertible Notes are convertible into cash based on the conversion rate set forth below and are not convertible into our common stock or any other securities under any circumstances. The initial cash conversion rate is approximately 51.38 shares of our common stock per $1,000 principal amount of Cash Convertible Notes (equivalent to an initial conversion price of approximately $19.46 per share of common stock). The Cash Convertible Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Cash Convertible Notes.

In connection with the issuance of the Cash Convertible Notes, we entered into the Cash Convertible Notes Hedges, which are cash-settled and are intended to reduce our exposure to potential cash payments that we would be required to make if holders elect to convert the Cash Convertible Notes at a time when our stock price exceeds the conversion price. The Cash Convertible Notes Hedges, which are recorded and carried at fair value as a derivative asset, are intended to offset the gain (or loss) associated with changes to the valuation of the Cash Conversion Derivative. We also entered into separate privately negotiated Warrants initially relating, in the aggregate, to a notional number of shares of our common stock underlying the Cash Convertible Notes Hedges. The Warrants could have a dilutive effect to the extent that the market price per share of our common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the Warrants. The initial strike price of the Warrants is approximately $25.95 per share, which effectively increases the conversion price of the Cash Convertible Notes to a 60% premium to our stock price on July 1, 2013.

The net proceeds from the sale of the Cash Convertible Notes were approximately $145.3 million, after deducting the initial purchasers' discounts and commissions and the placement expenses. We used $21.6 million of the net proceeds from the sale of the Cash Convertible Notes to pay the cost of the Cash Convertible Notes Hedges (after such cost was partially offset by the proceeds to the Company from the sale of the Warrants), and we used the remainder of the net proceeds from the sale of the Cash Convertible Notes to reduce the outstanding indebtedness under the Fifth Amended Credit Agreement.

Aside from the initial premium paid, we will not be required to make any cash payments under the Cash Convertible Notes Hedges and could be entitled to receive an amount of cash from the option counterparties generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Cash Convertible Note Hedges during the relevant valuation period. The strike price under the Cash Convertible Notes Hedges is initially equal to the conversion price of the Cash Convertible Notes. Additionally, if the market price per share of our common stock exceeds the strike price of the Warrants on any warrant exercise date we will be obligated to issue to the option counterparties a number of shares based on the amount by which the then-current market price per share of our common stock exceeds the then-effective strike price of each Warrant. We will not receive any additional proceeds if the Warrants are exercised.

CareFirst Convertible Note

On October 1, 2013, we entered into an Investment Agreement with CareFirst, which is in addition to the Commercial Agreements. Pursuant to the Investment Agreement, we issued the CareFirst Convertible Note in the aggregate original principal amount of $20 million to CareFirst for a purchase price of $20 million. The CareFirst Convertible Note bears interest at a rate of 4.75% per year, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each calendar year, beginning on December 31, 2013. The CareFirst Convertible Note may be prepaid only under limited circumstances and upon the terms and conditions specified therein. If the CareFirst Convertible Note has not been fully converted or redeemed in accordance with its terms, it will mature on October 1, 2019. The CareFirst Convertible Note is subordinate in right of payment to the prior payment in full of (a) all indebtedness of the Company under the Fifth Amended Credit Agreement, and (b) any other senior debt of the Company, which currently includes only the Cash Convertible Notes.

The CareFirst Convertible Note is convertible into shares of our common stock at the conversion rate determined by dividing (a) the sum of the portion of the principal to be converted and accrued and unpaid interest with respect to such principal by (b) the conversion price equal to $22.41 per share of our common stock. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications and similar events.

CareFirst has an opportunity to earn CareFirst Warrants based on achievement of the Revenue Thresholds for Quarterly Revenue. If the Quarterly Revenue is greater than or equal to the applicable Revenue Threshold for any quarter ending on or prior to September 30, 2017, then we will issue to CareFirst a certain number of warrants exercisable for the number of CareFirst Warrant Shares determined in accordance with the terms of the Investment Agreement unless (i) CareFirst elects to receive a cash payment in accordance with the terms of the Investment Agreement or (ii) there is a change of control. The aggregate number of CareFirst Warrant Shares in any single 12-month period beginning on October 1, 2013 cannot exceed 400,000, and the aggregate number of CareFirst Warrant Shares issuable pursuant to the Investment Agreement cannot exceed 1,600,000. The CareFirst Warrants issued prior to June 30, 2014 totaling 73,761 have a dilutive effect on net income per share, and the "treasury stock" method is used in calculating the dilutive effect on earnings per share.

We believe that cash flows from operating activities, our available cash, and our anticipated available credit under the Fifth Amended Credit Agreement will continue to enable us to meet our contractual obligations and fund our current operations for the foreseeable future. We cannot assure you that we would always be able to secure additional financing if needed and, if such funds were available, whether the terms or conditions would be acceptable to us.

If contract development accelerates or acquisition opportunities arise, we may need to issue additional debt or equity securities to provide the funding for these increased growth opportunities. We may also issue debt or equity securities in connection with future acquisitions or strategic alliances. We cannot assure you that we would be able to issue additional debt or equity securities on terms that would be acceptable to us.

Recently Issued Accounting Standards

In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which requires an entity to present in the financial statements an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset resulting from a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, when the above situation is not available at the reporting date or the tax law of the applicable jurisdiction does not require the entity to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013. We adopted this standard for the interim period beginning January 1, 2014. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position, cash flows, or notes to the consolidated financial statements.

In May 2014, the FASB issued guidance codified in FASB Accounting Standards Codification ("ASC") Topic 606, " Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC Topic 605, " Revenue Recognition." The provisions of ASC Topic 606 provide for a single comprehensive principles-based standard for the recognition of revenue across all industries and expanded disclosure about the nature, amount, timing and uncertainty of revenue , as well as certain additional quantitative and qualitative disclosures. The standard is effective for annual periods beginning after December 15, 2016, including interim periods within those years. We are currently evaluating the impact of adopting ASC Topic 606.

Exhibit 10.6

HEALTHWAYS, INC.

2014 STOCK INCENTIVE PLAN

PERFORMANCE SHARE UNIT AWARD AGREEMENT
(EXECUTIVE OFFICERS AND OTHER SENIOR OFFICERS)

This PERFORMANCE SHARE UNIT AWARD AGREEMENT (the " Agreement "), dated GRANT DATE , is by and between Healthways, Inc., a Delaware corporation (the " Company "), and PARTICIPANT NAME (the " Grantee "), under the Company's 2014 Stock Incentive Plan (the " Plan "). Terms not otherwise defined herein shall have the meanings given to them in the Plan.

Section 1. Performance Share Unit Award; Management Objectives . The Grantee is hereby granted NUMBER OF SHARES performance share units, with the specific number of Performance Share Units earned to be determined in accordance with Exhibit A hereto (the " Performance Share Units "). Each Performance Share Unit represents the right to receive one share of the Company's Common Stock, $.001 par value (the " Stock "), subject to the terms and conditions of this Agreement and the Plan. Except as otherwise provided in Section 3 or Section 5.2 , before the Performance Share Units will be earned and settled, the Committee must certify the level of achievement of the Management Objectives described in Exhibit A hereto which the Committee shall do as soon as practicable after END OF PERFORMANCE PERIOD (the " End of the Performance Period "). Any Performance Share Units that are not earned as a result of the level of achievement of the Management Objectives at of the End of the Performance Period shall be immediately forfeited as of the End of the Performance Period.

Section 2. Vesting of the Award . Except as otherwise provided in Section 3 and Section 5.2 below, 100% of the Performance Share Units determined by the Committee to be earned pursuant to Section 1 hereof will vest on VESTING DATE (the " Vesting Date "), as long as the Grantee is serving as an employee of the Company on the Vesting Date. The Company shall issue one share of the Stock to the Grantee in settlement of each earned and vested Performance Share Unit (in the aggregate, the " Distributed Shares ") at the time the Performance Share Unit vests pursuant to this Agreement. The Distributed Shares shall be represented by a certificate or by a book-entry.

Section 3. Forfeiture on Termination of Employment .

3.1. Termination by the Company for Cause . If the Grantee's employment with the Company is involuntarily terminated for Cause, then all Performance Share Units that have not vested prior to the date of termination of Grantee's employment will be forfeited and the Grantee shall have no further rights with respect to such Performance Share Units.

3.2. Termination by Reason of Retirement . If the Grantee's employment by the Company terminates by reason of Retirement (as defined in the Plan), before or after the End of the Performance Period, the Performance Share Units granted hereunder shall not be forfeited but shall be settled in Stock issued to the Grantee on the same schedule as provided in Section 2 (or otherwise) as if the Grantee had continued employment through the Vesting Date (or such other vesting event pursuant to Section 3.4 or Section 5.2 ) and based on actual performance of the Company as determined in accordance with Section 1 and Exhibit A hereto.

3.3. Termination by the Company without Cause or by the Grantee for Good Reason . If Grantee's employment with the Company (a) is involuntarily terminated by the Company for any reason other than termination for Cause, or (b) is terminated by the Grantee for Good Reason, then the Performance Share Units that were earned (or may be earned) as of the End of the Performance Period but that have not yet vested prior to the date of a termination of Grantee's employment described in this Section 3.3 shall not be forfeited but shall be settled in Stock issued to the Grantee on the same schedule as provided in Section 2 (or otherwise) as if the Grantee had continued employment through the Vesting Date (or such other vesting event pursuant to Section 3.4 or Section 5.2 ) and based on actual performance of the Company as determined in accordance with Section 1 and Exhibit A hereto. For purposes of this Section 3.3 , the term " Good Reason " shall mean (i) a material reduction in the Grantee's base salary (unless such reduction is part of an across the board reduction affecting all Company executives with a comparable title), or (ii) a requirement by the Company to relocate the Grantee to a location that is greater than 25 miles from the location of the office in which the Grantee performs his or her duties at the time of such relocation.

3.4. Termination by Death or Disability . If the Grantee's employment by the Company terminates by reason of death or Disability (as defined in the Plan), and such event occurs on a date that is after the End of the Performance Period, then a number of Performance Share Units earned hereunder (as determined by the actual performance of the Company in accordance with Section 1 and Exhibit A ) shall become vested on such date. If the Grantee's employment by the Company terminates by reason of death or Disability (as defined in the Plan), and such event occurs on a date that is prior to the End of the Performance Period, all Performance Share Units granted hereunder shall be forfeited.

3.5 Other Termination . Subject to Section 5.2 , if the Grantee's employment with the Company terminates for any reason other than as described in Sections 3.1 through 3.4 above, then all Performance Share Units that have not vested prior to the date of termination of Grantee's employment will be forfeited and the Grantee shall have no further rights with respect to such Performance Share Units.

Section 4. Voting Rights and Dividends . Prior to the Vesting Date, the Grantee shall be credited with cash dividend equivalents with respect to the Performance Share Units at the time of any payment of dividends to stockholders on shares of Common Stock in accordance with the terms set forth in the Plan, and such dividend equivalents shall be paid (in cash, without interest) to the Grantee when the Performance Share Units to which they relate are settled in accordance with this Agreement. The Grantee shall not have any voting rights with respect to the Stock underlying the Performance Share Units prior to the vesting of the Performance Share Units and the issuance of the Stock as set forth in Section 2 . A holder of Distributed Shares shall have full dividend and voting rights as a holder of Stock.

Section 5. Restrictions on Transfer; Change in Control .

5.1. General Restrictions . The Performance Share Units shall not be transferable by the Grantee (or his or her personal representative or estate) other than by will or by the laws of descent and distribution. The terms of this Agreement shall be binding on the executors, administrators, heirs and successors of the Grantee.

5.2. Change in Control .

(a) If in connection with a Change in Control, the acquiring corporation (or other successor to the Company in the Change in Control) does not assume the Performance Share Units, then the Performance Share Units shall vest and be settled in Stock issued to the Grantee immediately prior to the Change in Control. If the Change in Control occurs prior to the End of the Performance Period, then 100% of the number of Performance Share Units granted to the Grantee pursuant to Section 1 hereof (for the avoidance of doubt, not including the TSR Shares as such term is defined on Exhibit A ) shall vest pursuant to this Section 5.2(a) ; if the Change in Control occurs after the End of the Performance Period, then the number of Performance Share Units that were earned as of the End of the Performance Period shall vest pursuant to this Section 5.2(a) .

(b) If in connection with a Change in Control, the acquiring corporation (or other successor to the Company in the Change in Control) assumes the Performance Share Units, and if Grantee's employment with the Company (or its successor company) (i) is involuntarily terminated within 12 months following a Change in Control for any reason other than termination for Cause, (ii) is terminated by the Grantee for Good Reason within 12 months following a Change in Control, or (iii) has previously terminated on account of Retirement or pursuant to Section 3.3 as of the date of a Change in Control, then a number of Performance Share Units earned hereunder as determined based on the actual performance of the Company (determined in accordance with Section 1 and Exhibit A hereof) shall become vested and payable on the date of such termination (or in the case of (iii) above, on the date of the Change in Control); provided , however , that if such vesting or payment event occurs prior to the End of the Performance Period, then 100% of the number of Performance Share Units described in Section 1 (for the avoidance of doubt, not including the TSR Shares as such term is defined on Exhibit A ) shall become vested or payable as of the date of such event. For purposes of this Section 5.2(b ), the term " Good Reason " shall mean (x) a material reduction in the Grantee's base salary or incentive compensation, (y) a requirement by the Company (or its successor company) to relocate the Grantee to a location that is greater than 25 miles from the location of the office in which the Grantee performs his or her duties at the time of such relocation, or (z) a failure by the successor person or entity, or the Board, either to honor the Grantee's employment agreement with the Company existing at the time a Change in Control occurs or to present Grantee with an employment agreement containing provisions substantially similar to such employment agreement or otherwise satisfactory to Grantee and which is executed by Grantee.

Section 6. Restrictive Agreement . As a condition to the receipt of any Distributed Shares, the Grantee (or his or her legal representative or estate or any third party transferee), if the Company so requests, will execute an agreement in form satisfactory to the Company in which the Grantee or such other recipient of the shares represents that he or she is purchasing the shares for investment purposes, and not with a view to resale or distribution.

Section 7. Performance Share Units Award Subject to Recoupment Policy . The award of Performance Share Units is subject to the Healthways, Inc. Compensation Recoupment Policy (the " Policy "). The award of Performance Share Units, or any amount traceable to the award of Performance Share Units, shall be subject to the recoupment obligations described in the Policy.

Section 8. Adjustment . In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in corporate structure affecting the Stock, the number of Performance Share Units subject to this Agreement, as well as the performance criteria set forth on Exhibit A , shall be equitably and proportionately adjusted by the Committee in accordance with the Plan and the intent of this Agreement without duplication of Section 4 .

Section 9. Tax Withholding . The Company shall have the right to require the Grantee to remit to the Company an amount necessary to satisfy any federal, state and local withholding tax requirements attributable to the vesting and payment of the Performance Share Units prior to the delivery of the Distributed Shares, or may withhold from the Distributed Shares an amount of Stock having a Fair Market Value equal to such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.

Section 10. Plan . This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern. By signing this Agreement, the Grantee confirms that he or she has received a copy of the Plan.

Section 11. Confidentiality, Non-Solicitation and Non-Compete. It is in the interest of all colleagues to protect and preserve the assets of the Company. In this regard, in consideration for granting the Performance Share Units and as conditions of Grantee's ability to receive the Distributed Shares, Grantee acknowledges and agrees that:

(a) Confidentiality . In the course of Grantee's employment, Grantee will have access to trade secrets and other confidential information of the Company and its clients. Accordingly, Grantee agrees that, without the prior written consent of the Company, Grantee will not, other than in the normal conduct of the Company's business affairs, divulge, furnish, publish or use for personal benefit or for the direct or indirect benefit of any other person or business entity, whether or not for monetary gain, any trade secrets or confidential or proprietary information of the Company or its clients, including, without limitation, any information relating to any business methods, marketing and business plans, financial data, systems, customers, suppliers, policies, procedures, techniques or research developed for the benefit of the Company or its clients. Proprietary information includes, but is not limited to, information developed by the Grantee for the Company while employed by the Company. The obligations of the Grantee under this paragraph will continue after the Grantee has left the employment of the Company. Grantee agrees that upon leaving the employment of the Company, Grantee will return to the Company all property and confidential information in the Grantee's possession and agrees not to copy or otherwise record in any way such information.

(b) Non-Solicitation . While employed by the Company and for a period of two years thereafter, Grantee shall not, upon Grantee's own behalf or on behalf of any other person or entity, directly or indirectly,

- hire or solicit to leave the employ of the Company any person employed by or under contract as an independent contractor to the Company; or

- contact, solicit, entice away, or divert any healthcare and/or well-being support services, coaching or management business from any person or entity who is a client or with whom the Company was engaged in discussions as a potential client within one year prior to the date of termination of Grantee.

(c) Non-Compete . While employed by the Company and continuing during the period while any amounts are being paid to Grantee by the Company and for a period of 18 months thereafter, Grantee will not own or be employed by or assist anyone else in the conduct of any business (i) which is in competition with any business conducted by the Company or (ii) which Grantee knows the Company was actively evaluating for possible entry, in either case in the United States or in any other jurisdiction in which the Company is engaged in business or has been engaged in business during Grantee's employment by the Company, or in such jurisdictions where Grantee knows the Company is actively pursuing business opportunities at the time of Grantee's termination of employment with the Company; provided that ownership of five percent (5%) or less of the voting stock or other ownership interests of any business entity that is listed on a national securities exchange shall not constitute a violation hereof.

In the event Grantee breaches any provisions of this Section 11 , the Performance Share Units shall immediately expire, and the Company shall be entitled to seek other appropriate remedies it may have available in connection with such breach.

Section 12. Miscellaneous .

12.1. Entire Agreement . This Agreement and the Plan contain the entire understanding and agreement between the Company and the Grantee concerning the Performance Share Units granted hereby, and supersede any prior or contemporaneous negotiations and understandings. The Company and the Grantee have made no promises, agreements, conditions, or understandings relating to the Performance Share Units, either orally or in writing, that are not included in this Agreement or the Plan.

12.2. Employment . By establishing the Plan, granting awards under the Plan, and entering into this Agreement, the Company does not give the Grantee any right to continue to be employed by the Company or to be entitled to any remuneration or benefits not set forth in this Agreement or the Plan.

12.3. Captions . The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience. They do not define, limit, construe, or describe the scope or intent of the provisions of this Agreement.

12.4. Counterparts . This Agreement may be executed in counterparts, each of which when signed by the Company and the Grantee will be deemed an original and all of which together will be deemed the same Agreement.

12.5. Notice . All notices required to be given under this Agreement shall be deemed to be received if delivered or mailed as provided for herein, to the parties at the following addresses, or to such other address as either party may provide in writing from time to time.

To the Company:	Healthways, Inc.
	701 Cool Springs Blvd
	Franklin, Tennessee 37067

To the Grantee:	PARTICIPANT NAME
(Grantee name and address)	Address on File
	at Healthways

12.6. Amendment . Subject to the restrictions contained in the Plan, the Committee may amend the terms of this Agreement, prospectively or retroactively, but, subject to Section 8 above, no such amendment shall impair the rights of the Grantee hereunder without the Grantee's consent.

12.7. Governing Law . This Agreement shall be governed and construed exclusively in accordance with the law of the State of Delaware applicable to agreements to be performed in the State of Delaware to the extent it may apply.

12.8. Validity; Severability . If, for any reason, any provision hereof shall be determined to be invalid or unenforceable, the validity and effect of the other provisions hereof shall not be affected thereby. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. If any court determines that any provision of this Agreement is unenforceable but has the power to reduce the scope or duration of such provision, as the case may be, such provision, in its reduced form, shall then be enforceable.

12.9. Interpretation; Resolution of Disputes; Section 409A .

(a) It is expressly understood that the Committee is authorized to administer, construe and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon the Grantee. Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Board. Any determination made hereunder shall be final, binding and conclusive on the Grantee and the Company for all purposes.

(b) Notwithstanding anything herein to the contrary, to the maximum extent permitted by applicable law, the settlement of the Performance Share Units (including any dividend equivalent rights) to be made to the Grantee pursuant to this Agreement is intended to qualify as a "short-term deferral" pursuant to Section 1.409A-1(b)(4) of the U.S. Treasury Regulations and this Agreement shall be interpreted consistently therewith. However, under certain circumstances, settlement of the Performance Share Units or any dividend equivalent rights may not so qualify, and in that case, the Committee shall administer the grant and settlement of such Performance Share Units and any dividend equivalent rights in strict compliance with Section 409A of the Code. Further, notwithstanding anything herein to the contrary, if at the time of a Participant's termination of employment with the Company, the Participant is a "specified employee" as defined in Section 409A of the Code, and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of service is necessary in order to prevent the imposition of any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Participant) to the minimum extent necessary to satisfy Section 409A of the Code until the date that is six months and one day following the Participant's termination of employment with the Company (or the earliest date as is permitted under Section 409A of the Code), if such payment or benefit is payable upon a termination of employment. Each payment of Performance Share Units (and related dividend equivalent rights) constitutes a "separate payment" for purposes of Section 409A of the Code.

12.10. Successors in Interest . This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Grantee's legal representative and permitted assignees. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee's heirs, executors, administrators, successors and assignees.

[remainder of page intentionally left blank; signature page follows]

IN WITNESS WHEREOF, the parties have caused the Performance Share Unit Award Agreement to be duly executed as of the day and year first written above.

HEALTHWAYS, INC.

By: /s/ Ben R. Leedle, Jr.

Name: Ben R. Leedle, Jr.

Title: Chief Executive Officer

GRANTEE: PARTICIPANT NAME

Online Grant Acceptance Satisfies

Signature Requirement

Delaware		62-1117144
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

			Page
Part I	Financial Information
	Item 1.	Financial Statements	4
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	35
Part II	Other Information
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 3.	Defaults Upon Senior Securities	37
	Item 4.	Mine Safety Disclosures	37
	Item 5.	Other Information	37
	Item 6.	Exhibits	37

	June 30, 2014			December 31, 2013
Current assets:
Cash and cash equivalents	$	2,427		$	2,584
Accounts receivable, net		108,715			89,484
Prepaid expenses		9,873			9,228
Other current assets		7,694			6,857
Income taxes receivable		5,465			1,402
Deferred tax asset		8,562			9,667
Total current assets		142,736			119,222

Property and equipment:
Leasehold improvements		38,143			37,463
Computer equipment and related software		305,482			290,392
Furniture and office equipment		23,230			22,881
Capital projects in process		35,618			25,228
		402,473			375,964
Less accumulated depreciation		(238,949	)		(217,766	)
		163,524			158,198

Other assets		63,886			53,629
Intangible assets, net		74,029			79,162
Goodwill, net		338,800			338,800

Total assets	$	782,975		$	749,011

	June 30, 2014			December 31, 2013
Current liabilities:
Accounts payable	$	42,206		$	33,125
Accrued salaries and benefits		17,325			20,157
Accrued liabilities		47,767			32,065
Deferred revenue		11,888			4,496
Contract billings in excess of earned revenue		18,612			17,411
Current portion of long-term debt		18,533			14,340
Current portion of long-term liabilities		784			2,822
Total current liabilities		157,115			124,416

Long-term debt		234,224			237,582
Long-term deferred tax liability		28,971			33,320
Other long-term liabilities		64,775			51,003

Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding		—			—
Common stock $.001 par value, 120,000,000 shares authorized, 35,334,275 and 35,107,303 shares outstanding, respectively		35			35
Additional paid-in capital		288,146			283,244
Retained earnings		37,887			48,000
Treasury stock, at cost, 2,254,953 shares in treasury		(28,182	)		(28,182	)
Accumulated other comprehensive income (loss)		4			(407	)
Total stockholders' equity		297,890			302,690

Total liabilities and stockholders' equity	$	782,975		$	749,011

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	180,613		$	162,270		$	357,391		$	327,435
Cost of services (exclusive of depreciation and amortization of $9,604, $8,886, $18,976, and $17,712, respectively, included below)		146,476			133,468			294,624			274,726
Selling, general and administrative expenses		16,899			14,279			33,331			27,377
Depreciation and amortization		13,536			13,015			26,872			26,548
Legal settlement charges		—			—			9,363			—

Operating income (loss)		3,702			1,508			(6,799	)		(1,216	)
Interest expense		4,516			3,158			8,899			6,479

Loss before income taxes		(814	)		(1,650	)		(15,698	)		(7,695	)
Income tax benefit		(297	)		(549	)		(5,585	)		(2,644	)

Net loss	$	(517	)	$	(1,101	)	$	(10,113	)	$	(5,051	)

Loss per share:
Basic	$	(0.01	)	$	(0.03	)	$	(0.29	)	$	(0.15	)

Diluted ⁽¹⁾	$	(0.01	)	$	(0.03	)	$	(0.29	)	$	(0.15	)

Comprehensive loss	$	(449	)	$	(1,136	)	$	(9,702	)	$	(4,888	)

Weighted average common shares and equivalents:
Basic		35,285			34,188			35,219			34,089
Diluted ⁽¹⁾		35,285			34,188			35,219			34,089

	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total

Balance, December 31, 2013	$	—	$	35	$	283,244		$	48,000		$	(28,182	)	$	(407	)	$	302,690

Comprehensive income (loss)		—		—		—			(10,113	)		—			411			(9,702	)

Exercise of stock options		—		—		1,265			—			—			—			1,265

Tax effect of stock options and restricted stock units		—		—		(570	)		—			—			—			(570	)

Share-based employee compensation expense		—		—		3,558			—			—			—			3,558

Issuance of CareFirst warrants		—		—		649			—			—			—			649

Balance, June 30, 2014	$	—	$	35	$	288,146		$	37,887		$	(28,182	)	$	4		$	297,890

	Shares (000s)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)		Aggregate Value ($000s)
Stock Options
Outstanding at January 1, 2014		4,325		$	15.09
Granted		98			16.60
Exercised		(106	)		12.39
Forfeited		(59	)		13.00
Expired		(28	)		33.49
Outstanding at June 30, 2014		4,230			15.09		6.04		$	20,135
Exercisable at June 30, 2014		2,441		$	17.72		4.62		$	9,335

	Restricted Stock and Restricted Stock Units					Performance Share Units
Nonvested Shares	Shares (000s)			Weighted- Average Grant Date Fair Value		Shares (000s)		Weighted- Average Grant Date Fair Value
Nonvested at January 1, 2014		841		$	10.44		—	$	—
Granted		264			16.71		303		14.74
Vested		(160	)		10.92		—		—
Forfeited		(21	)		11.16		—		—
Nonvested at June 30, 2014		924		$	12.14		303	$	14.74

(In $000s)	For the Three Months Ended							For the Six Months Ended
Derivatives in Cash Flow Hedging Relationships	June 30, 2014			June 30, 2013				June 30, 2014		June 30, 2013
Loss (gain) related to effective portion of derivatives recognized in accumulated OCI, gross of tax effect		$	216		$	(754	)	$	281	$	(696	)
Loss related to effective portion of derivatives reclassified from accumulated OCI to interest expense, gross of tax effect		$	130		$	551		$	256	$	1,180

(In $000s)	Three Months Ended June 30, 2014				Six Months Ended June 30, 2014				Statements of Comprehensive Income (Loss) Classification
Cash Convertible Notes Hedges:
Net unrealized gain		$	1,849			$	9,580		Selling, general and administrative expenses
Cash Conversion Derivative:
Net unrealized loss		$	(1,849	)		$	(9,580	)	Selling, general and administrative expenses

	June 30, 2014						December 31, 2013
(In $000s)	Foreign currency exchange contracts		Interest rate swap agreements		Cash Convertible Notes Hedges and Cash Conversion Derivative		Foreign currency exchange contracts		Interest rate swap agreements		Cash Convertible Notes Hedges and Cash Conversion Derivative
Assets:
Derivatives not designated as hedging instruments:
Other current assets	$	56	$	—	$	—	$	178	$	—	$	—
Other assets		—		—		37,346		—		—		27,766
Total assets	$	56	$	—	$	37,346	$	178	$	—	$	27,766
Liabilities:
Derivatives not designated as hedging instruments:
Accrued liabilities	$	227	$	—	$	—	$	67	$	—	$	—
Other long-term liabilities		—		—		37,346		—		—		27,766
Derivatives designated as hedging instruments:
Accrued liabilities		—		—		—		—		—		—
Other long-term liabilities		—		583		—		—		505		—
Total liabilities	$	227	$	583	$	37,346	$	67	$	505	$	27,766

(In $000s) June 30, 2014	Level 2		Level 3		Gross Fair Value		Netting ⁽¹⁾			Net Fair Value
Assets:
Foreign currency exchange contracts	$	56	$	—	$	56	$	(9	)	$	47
Cash Convertible Notes Hedges		—		37,346		37,346		—			37,346
Liabilities:
Foreign currency exchange contracts	$	227	$	—	$	227	$	(9	)	$	218
Interest rate swap agreements		583		—		583		—			583
Cash Conversion Derivative		—		37,346		37,346		—			37,346

(In $000s) December 31, 2013	Level 2		Level 3		Gross Fair Value		Netting ⁽¹⁾			Net Fair Value
Assets:
Foreign currency exchange contracts	$	178	$	—	$	178	$	(57	)	$	121
Cash Convertible Notes Hedges		—		27,766		27,766		—			27,766
Liabilities:
Foreign currency exchange contracts	$	67	$	—	$	67	$	(57	)	$	10
Interest rate swap agreements		505		—		505		—			505
Cash Conversion Derivative		—		27,766		27,766		—			27,766

(In $000s)	Balance at December 31, 2013			Purchases of Level 3 Instruments		Issuances of Level 3 Instruments		Gains/(Losses) Included in Earnings			Balance at June 30, 2014
Cash Convertible Notes Hedges	$	27,766		$	—	$	—	$	9,580		$	37,346
Cash Conversion Derivative		(27,766	)		—		—		(9,580	)		(37,346	)

(In 000s, except per share data)	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
Numerator:
Net loss - numerator for basic loss per share	$	(517	)	$	(1,101	)	$	(10,113	)	$	(5,051	)

Denominator:
Shares used for basic loss per share		35,285			34,188			35,219			34,089
Effect of dilutive securities outstanding:
Non-qualified stock options ⁽¹⁾		—			—			—			—
Restricted stock units ⁽¹⁾		—			—			—			—
Shares used for diluted loss per share ⁽¹⁾		35,285			34,188			35,219			34,089

Loss per share:
Basic	$	(0.01	)	$	(0.03	)	$	(0.29	)	$	(0.15	)
Diluted ⁽¹⁾	$	(0.01	)	$	(0.03	)	$	(0.29	)	$	(0.15	)

Dilutive securities outstanding not included in the computation of loss per share because their effect is antidilutive:
Non-qualified stock options		2,237			3,848			2,164			3,892
Restricted stock units		300			339			298			423
Performance stock units		1			—			7			—
Warrants related to Cash Convertible Notes		7,707			—			7,707			—
CareFirst Convertible Note		892			—			892			—
CareFirst Warrants		36			—			34			—

(In $000s)	Net Change in Fair Value of Interest Rate Swaps			Foreign Currency Translation Adjustments		Total
Accumulated OCI, net of tax, as of January 1, 2014	$	(513	)	$	106	$	(407	)
Other comprehensive income (loss) before reclassifications, net of tax		(150	)		407		257
Amounts reclassified from accumulated OCI, net of tax		154			—		154
Net increase in other comprehensive income (loss), net of tax		4			407		411
Accumulated OCI, net of tax, as of June 30, 2014	$	(509	)	$	513	$	4

	Six Months Ended June 30,								Statement of Comprehensive
(In $000s)	2014				2013				Loss Classification
Interest rate swaps		$	256			$	1,180		Interest expense
			(102	)			(467	)	Income tax benefit
		$	154			$	713		Net of tax

	·	fostering wellness and disease prevention through total population screening and well-being assessments;
	·	engaging people in our well-being improvement programs, such as fitness, weight management, stress management, and financial and lifestyle management; and
	·	providing access to our fitness, chiropractic, and complementary and alternative medicine networks.

3.1		Amended and Restated Bylaws [incorporated by reference to Exhibit 3.2 to Form 10-Q of the Company's fiscal quarter ended February 29, 2004, File No. 000-19364]

3.2		Amendment to Amended and Restated Bylaws [incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated November 15, 2007, File No. 000-19364]

3.3		Amendment No. 2 to Amended and Restated Bylaws [incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated September 3, 2008, File No. 000-19364]

3.4		Amendment No. 3 to Amended and Restated Bylaws

10.1		Fourth Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement dated April 14, 2014 between the Company and SunTrust Bank as Administrative Agent

10.2		Nomination and Standstill Agreement dated June 2, 2014 among the Company, North Tide Capital Master, LP, North Tide Capital, LLC and Conan J. Laughlin [incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 3, 2014, File No. 000-19364]

10.3		2014 Stock Incentive Plan [incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 dated June 25, 2014, Registration No. 333-197025]

10.4		Form of Non-Qualified Stock Option Award Agreement (for Executive Officers) under the Company's 2014 Stock Incentive Plan

10.5		Form of Restricted Stock Unit Award Agreement (for Executive Officers) under the Company's 2014 Stock Incentive Plan

10.6		Form of Performance Share Unit Award Agreement (for Executive Officers) under the Company's 2014 Stock Incentive Plan

10.7		Form of Performance Cash Award Agreement (for Executive Officers) under the Company's 2014 Stock Incentive Plan

10.8		Form of Non-Qualified Stock Option Award Agreement (for Directors) under the Company's 2014 Stock Incentive Plan

10.9		Form of Restricted Stock Unit Award Agreement (for Directors) under the Company's 2014 Stock Incentive Plan

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

			Healthways, Inc.
			(Registrant)

Date	August 8, 2014	By	/s/ Alfred Lumsdaine
			Alfred Lumsdaine
			Chief Financial Officer
			(Principal Financial Officer)

Percentage Vested		Date of Vesting
25% 50% 75% 100%		One Year from Grant Date Two Years from Grant Date Three Years from Grant Date Four Years from Grant Date

To the Company:		Healthways, Inc.
		701 Cool Springs Boulevard
		Franklin, Tennessee 37067


To the Colleague:		PARTICIPANT NAME
(Colleague name and address)		Address on File
		at Healthways

Vesting Date		Award Percentage of Restricted Stock Units
One Year from Grant Date Two Years from Grant Date Three Years from Grant Date Four Years from Grant Date		25% 25% 25% 25%

Percentage Vested		Date of Vesting
25%		One Year from Grant Date
25%		Two Years from Grant Date
25%		Three Years from Grant Date
25%		Four Years from Grant Date

To the Corporation:	Healthways, Inc.
	701 Cool Springs Blvd
	Franklin, Tennessee 37067

To the Director:	PARTICIPANT NAME
(Director name and address)	Address on File
	at Healthways

	/s/ Ben R. Leedle, Jr.
	Ben R. Leedle, Jr.
	Chief Executive Officer