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Molina Healthcare Reports Third Quarter 2014 Results

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Molina Healthcare, Inc. (NYSE:MOH) :

  • Net income per diluted share, continuing operations, of $0.33, doubles 2013 results of $0.16.
  • Adjusted net income per diluted share, continuing operations1, of $0.83 increases 17% over 2013 results of $0.71.
  • Membership surpasses 2.4 million.
  • Total quarterly revenue reaches $2.5 billion.
  • General and administrative expense ratio improves to a five-year low of 7.2%.

Molina Healthcare, Inc. (NYSE:MOH) today reported its financial results for the third quarter of 2014.

“Molina Healthcare continues to grow and diversify,” said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. “Premium revenue grew $150 million, or almost 7%, in this quarter alone. We continued to expand the operations of our Medicare Medicaid dual eligible plans in California, Illinois and Ohio, and our general and administrative expense ratio was the lowest it has been in over five years.”

Overview of Financial Results, Continuing Operations

Increased premium revenue and a lower general and administrative expense ratio in the third quarter of 2014 offset an increase in the medical care ratio, allowing net income per diluted share, continuing operations, to double in the third quarter of 2014 when compared to the third quarter of 2013.

Strong enrollment growth across all of the Company’s products (Medicaid, Medicare special needs plans and dual eligible Medicare-Medicaid Plans) generated almost $2 billion, or 40%, more premium revenue for the nine months ended September 30, 2014, when compared with the same period in 2013.

Despite an increase in medical care costs as a percentage of premium revenue (the medical care ratio), higher per-member per-month (PMPM) premiums produced an increase of 8.5%, or $52.5 million, in medical margin for the nine months ended September 30, 2014, when compared with the same period in 2013.

The medical care ratio increased substantially in 2014 as a result of three developments:

  • Much of the Company’s revenue growth has come from participation in Medicaid programs covering long-term services and supports (LTSS). As the Company has previously discussed, percentage profit margins for LTSS benefits are generally lower than percentage profit margins for acute medical benefits. The addition of members eligible for LTSS benefits at the Florida and New Mexico health plans, as well as members who have joined the Company’s California, Illinois, and Ohio health plans through participation in Medicare-Medicaid Plan implementations, added 1.2% to the Company’s consolidated medical care ratio in the third quarter of 2014 and 0.8% for the nine months ended September 30, 2014.
  • Increases to the Company’s base premiums in recent years have not kept pace with medical cost trends.
  • Lack of coordination in the design of profit caps and medical cost floors in some of the Company’s contracts is resulting in counterproductive outcomes. In some instances, givebacks due to profitable performance in one product cannot be offset against losses in other products.

For example, at the Washington health plan, a minimum medical loss ratio requirement for the Medicaid expansion program reduced income before taxes by approximately $17 million for the third quarter of 2014, and $23 million for the nine months ended September 30, 2014. Simultaneously, the Washington health plan incurred a medical care ratio in excess of 100% for its aged, blind or disabled members. However, the Company is unable to offset profits from its Medicaid expansion contract against its other contracts. The Washington health plan is therefore left in a position where it must return profits under its Medicaid expansion contract to the state; while it receives no relief from losses incurred under another contract.

In a similar manner, at the New Mexico health plan, a contract provision limiting profits on retroactively added members reduced income before taxes by approximately $6 million for the nine months ended September 30, 2014. At the same time, the New Mexico health plan’s LTSS program operated at a medical care ratio in excess of 100%.

The Company reported substantial improvements in administrative cost efficiency in 2014. General and administrative expenses as a percentage of revenue declined to 7.2% for the third quarter of 2014, from 10.4% for the same period in 2013, and was 8.2% for the year-to-date period ended September 30, 2014, versus 9.8% in the same period of 2013. The Company’s quarterly general and administrative expense ratio has not been below 7.2% since the second quarter of 2009.

Affordable Care Act Health Insurer Fee Update

The Company previously reported that its results have been adversely affected by delays in reimbursement (including reimbursement for tax effects) of the Affordable Care Act’s Health Insurer Fee (ACA HIF) from California, Michigan, New Mexico, Texas and Utah.

During the third quarter, Michigan and Utah committed to reimbursement of the ACA HIF, but not to the reimbursement of the related tax effects. However, both states have informally indicated that it is their desire to reimburse the Company for those tax effects. As a result of these developments, the Company was able to recognize an additional $11 million in ACA HIF revenue (but not amounts related to tax effects) from Michigan and Utah during the third quarter of 2014.

Nevertheless, ACA HIF not reimbursed by California, New Mexico and Texas, as well as tax effects not yet reimbursed by Michigan and Utah, reduced income before taxes by approximately $6 million, or $0.07 per diluted share, for the third quarter of 2014, and $37 million, or $0.49 per diluted share, for the nine months ended September 30, 2014 (per-share amounts for both periods are on a GAAP and adjusted basis). While the Company remains guardedly optimistic that it will eventually secure reimbursement from all of its state partners, it no longer expects that all reimbursement will be secured prior to the close of 2014. Accordingly, the Company does not expect to recognize the full amount of revenue associated with reimbursement of its ACA HIF payment during 2014.

The following table summarizes the status of ACA HIF Medicaid revenue recognition for the nine months ended September 30, 2014:

ACA HIF Medicaid Revenue
Recognized Required Reimbursement through
Sept. 30, 2014
Not

Recognized

(In millions)
Quarter 1 $ 16.6 $ 32.7 $ 16.1
Quarter 2 17.2 32.7 15.5
Quarter 3 27.0 32.7 5.7
Nine months ended September 30, 2014 $ 60.8 $ 98.1 $ 37.3

The Company has secured agreements allowing the recognition of approximately $20 million of ACA HIF revenue in the fourth quarter of 2014. The Company has not yet secured agreements from the states of California, New Mexico, Texas, Michigan (tax effect not secured), and Utah (tax effect not secured). The total amount of ACA HIF revenue for which agreements have not been secured is approximately $50 million for the full year of 2014.

Texas Health Plan Quality Revenue Update

The Company’s non-recognition of a portion of the Texas health plan’s quality revenue reduced income before taxes by approximately $4 million, or $0.05 per diluted share, for the third quarter of 2014, and $18 million, or $0.23 per diluted share, for the nine months ended September 30, 2014 (per-share amounts for both periods are on a GAAP and adjusted basis). Unless it receives clarification of the standards and full transparency on the calculations by which quality revenue is to be assessed by the state, the Company is unable to independently assess its performance against those standards. As such, the Company is doubtful that it will be able to recognize the full amount of its Texas quality revenue in 2014.

The following table summarizes the status of Texas quality revenue recognition for the nine months ended September 30, 2014:

Texas Quality Revenue
Recognized Available Not Recognized
(In millions)
Quarter 1 $ 2.6 $ 8.6 $ 6.0
Quarter 2 1.1 8.6 7.5
Quarter 3 4.6 8.8 4.2
Nine months ended September 30, 2014 $ 8.3 $ 26.0 $ 17.7

Washington Health Plan Settlement Update

As previously disclosed, the Company recorded a net decrease to premium revenue and income before taxes of approximately $11 million, or $0.14 per diluted share, in the third quarter of 2014 as a result of the settlements of three unrelated issues with the Washington Health Care Authority that related to periods prior to 2014.

Income Tax Update

During the third quarter of 2014, the Internal Revenue Service (IRS) issued final regulations related to compensation deduction limitations applicable to certain health insurance issuers. Pursuant to these final regulations the Company recognized a tax benefit during the third quarter of 2014 of approximately $7 million, or $0.15 per diluted share, for periods prior to the third quarter of 2014.

Full Year 2014 Update

The Company has previously disclosed issues relating to its inability to fully recognize ACA HIF revenue and Texas quality revenue in 2014. These issues, along with medical care costs that are trending higher than the Company anticipated compared with its full year estimate, and the impact of certain contractual provisions that limit the Company’s ability to retain profits, will adversely impact 2014 earnings. Accordingly, the Company now expects that its net income per diluted share, continuing operations, and adjusted net income per diluted share, continuing operations, may fall short of the low end of the ranges for those respective metrics as included in the Company’s previously issued 2014 guidance.

Conference Call

The Company’s management will host a conference call and webcast to discuss its third quarter results at 5:00 p.m. Eastern time on Thursday, October 30, 2014. The number to call for the interactive teleconference is (212) 271-4651. A telephonic replay of the conference call will be available from 7:00 p.m. Eastern time on Thursday, October 30, 2014, through 6:00 p.m. on Friday, October 31, 2014, by dialing (800) 633-8284 and entering confirmation number 21733502. A live broadcast of Molina Healthcare’s conference call will be available on the Company’s website, www.molinahealthcare.com. A 30-day online replay will be available approximately an hour following the conclusion of the live broadcast.

About Molina Healthcare

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Through our locally operated health plans in 11 states across the nation, Molina currently serves approximately 2.4 million members. Dr. C. David Molina founded our company in 1980 as a provider organization serving low-income families in Southern California. Today, we continue his mission of providing high quality and cost-effective health care to those who need it most. For more information about Molina Healthcare, please visit our website at www.molinahealthcare.com.

Notes:

1. Adjusted net income per diluted share, continuing operations, is a non-GAAP financial measure used by management as a supplemental metric in evaluating its financial performance, its financing and business decisions, and in forecasting and planning for future periods. This measure is not determined in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be viewed as a substitute for the most directly comparable GAAP measure, which is diluted net income per share, continuing operations. See below for reconciliations of the Company’s non-GAAP measures to the most directly comparable GAAP measures.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains “forward-looking statements” regarding the Company’s plans, expectations, and anticipated future events. Actual results could differ materially due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the following:

  • uncertainties associated with the implementation of the Affordable Care Act, including the full grossed up reimbursement by states of the non-deductible health insurer fee, the expansion of Medicaid eligibility in the states that participate to previously uninsured populations unfamiliar with managed care, the implementation of state insurance marketplaces, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures, including the dual eligibles demonstration programs in California, Illinois, Michigan, Ohio, and South Carolina;
  • newly FDA-approved specialty drugs such as Sovaldi, Olysio, Harvoni, and other specialty drugs that are exorbitantly priced but not factored into the calculation of our capitated rates;
  • significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;
  • management of our medical costs, including seasonal flu patterns and rates of utilization that are consistent with our expectations, and our ability to reduce over time the high medical costs commonly associated with new patient populations;
  • the accurate estimation of incurred but not paid medical costs across our health plans;
  • retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates or retroactive premium rate increases;
  • efforts by states to recoup previously paid amounts;
  • the success of our efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, including the success of the proposal of Molina Medicaid Solutions in New Jersey;
  • the continuation and renewal of the government contracts of both our health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed, including the extension of the Louisiana contract of Molina Medicaid Solutions through 2015;
  • complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
  • government audits and reviews, and any fine, enrollment freeze, or monitoring program that may result therefrom;
  • changes with respect to our provider contracts and the loss of providers;
  • federal or state medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;
  • the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures, including 2014 at-risk premium rules in the state of Texas;
  • approval by state regulators of dividends and distributions by our health plan subsidiaries;
  • changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
  • high dollar claims related to catastrophic illness;
  • the favorable or unfavorable resolution of litigation, arbitration, or administrative proceedings, including pending qui tam actions in Florida and California, and the litigation commenced against us by the state of Louisiana alleging that Molina Medicaid Solutions and its predecessors used an incorrect reimbursement formula for the payment of pharmaceutical claims;
  • the relatively small number of states in which we operate health plans;
  • our management of a portion of College Health Enterprises’ hospital in Long Beach, California;
  • the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;
  • the failure of a state in which we operate to renew its federal Medicaid waiver;
  • cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
  • changes generally affecting the managed care or Medicaid management information systems industries;
  • increases in government surcharges, taxes, and assessments;
  • public alarm associated with the Ebola virus, or any actual widespread epidemic;
  • changes in general economic conditions, including unemployment rates;
  • increasing consolidation in the Medicaid industry;

and numerous other risk factors, including those discussed in the Company’s periodic reports and filings with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of the Company’s website or on the SEC’s website at www.sec.gov. Given these risks and uncertainties, we can give no assurances that the Company’s forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by the Company’s forward-looking statements will in fact occur, and we caution investors not to place undue reliance on these statements. All forward-looking statements in this release represent the Company’s judgment as of October 30, 2014, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in the Company’s expectations.

MOLINA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

September 30,

Nine Months Ended

September 30,

2014 2013 2014 2013
(Amounts in thousands, except net income per share)
Revenue:
Premium revenue $ 2,316,759 $ 1,584,656 $ 6,424,238 $ 4,583,818
Service revenue 52,557 51,100 156,419 150,528
Premium tax revenue 81,240 43,723 203,053 127,606
Health insurer fee revenue (1) 29,427 67,785
Investment income 2,041 1,740 5,615 4,884
Other revenue 2,327 5,860 8,523 16,476
Total revenue 2,484,351 1,687,079 6,865,633 4,883,312
Operating expenses:
Medical care costs 2,097,836 1,383,213 5,753,793 3,965,834
Cost of service revenue 40,067 40,113 117,831 119,188
General and administrative expenses 178,879 176,233 560,205 478,990
Premium tax expenses 81,240 43,723 203,053 127,606
Health insurer fee expenses (1) 22,308 66,443
Depreciation and amortization 24,242 18,871 67,835 52,449
Total operating expenses 2,444,572 1,662,153 6,769,160 4,744,067
Operating income 39,779 24,926 96,473 139,245
Other expenses, net:
Interest expense 14,419 13,532 42,234 38,236
Other expense (income), net 863 (24 ) 810 3,347
Total other expenses, net 15,282 13,508 43,044 41,583
Income from continuing operations before income tax expense 24,497 11,418 53,429 97,662
Income tax expense 8,427 3,865 24,784 43,791
Income from continuing operations 16,070 7,553 28,645 53,871
Income (loss) from discontinued operations,

net of tax

52 16 (214 ) 8,184
Net income $ 16,122 $ 7,569 $ 28,431 $ 62,055
Diluted net income (loss) per share:
Continuing operations $ 0.33 $ 0.16 $ 0.60 $ 1.15
Discontinued operations (0.01 ) 0.18
Diluted net income per share $ 0.33 $ 0.16 $ 0.59 $ 1.33
Diluted weighted average shares outstanding 48,644 47,062 48,088 46,767
Operating Statistics, Continuing Operations:
Medical care ratio (2) 90.6 % 87.3 % 89.6 % 86.5 %
Service revenue ratio (3) 76.2 % 78.5 % 75.3 % 79.2 %
General and administrative expense ratio (4) 7.2 % 10.4 % 8.2 % 9.8 %
Premium tax ratio (2) 3.4 % 2.7 % 3.1 % 2.7 %
Effective tax rate 34.4 % 33.9 % 46.4 % 44.8 %

(1) Health insurer fee expenses represent insurer fees levied by the federal government under the Affordable Care Act, which are not tax deductible. Associated revenues represent state and federal reimbursement of such fees (including the related income tax effect) for Medicaid and Medicare insurers.

(2) Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue. Medical care costs include costs incurred for providing long term services and supports (LTSS).

(3) Service revenue ratio represents cost of service revenue as a percentage of service revenue.

(4) Computed as a percentage of total revenue.

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)
September 30,
2014
December 31,
2013
(Amounts in thousands,

except per-share data)

ASSETS
Current assets:
Cash and cash equivalents $ 1,598,596 $ 935,895
Investments 842,683 703,052
Receivables 425,683 298,935
Income taxes refundable 7,679 32,742
Deferred income taxes 30,817 26,556
Prepaid expenses and other current assets 82,062 42,484
Total current assets 2,987,520 2,039,664
Property, equipment, and capitalized software, net 328,547 292,083
Deferred contract costs 51,179 45,675
Intangible assets, net 85,035 98,871
Goodwill 236,635 230,738
Restricted investments 93,119 63,093
Derivative asset 222,997 186,351
Other assets 51,108 46,462
$ 4,056,140 $ 3,002,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 1,123,846 $ 669,787
Accounts payable and accrued liabilities 609,444 319,965
Deferred revenue 190,856 122,216
Current maturities of long-term debt 11,927 182,008
Total current liabilities 1,936,073 1,293,976
Convertible senior notes 697,210 416,368
Lease financing obligations 160,412 159,394
Lease financing obligations – related party 39,258 27,092
Deferred income taxes 7,719 580
Derivative liability 222,877 186,239
Other long-term liabilities 28,300 26,351
Total liabilities 3,091,849 2,110,000
Stockholders’ equity:
Common stock, $0.001 par value; 150,000 shares authorized; outstanding: 48,279 shares at September 30, 2014 and 45,871 shares at December 31, 2013 48 46
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding
Additional paid-in capital 383,300 340,848
Accumulated other comprehensive loss (617 ) (1,086 )
Retained earnings 581,560 553,129
Total stockholders’ equity 964,291 892,937
$ 4,056,140 $ 3,002,937

MOLINA HEALTHCARE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS,

CONTINUING AND DISCONTINUED OPERATIONS

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014 2013 2014 2013
(Amounts in thousands)
Operating activities:
Net income $ 16,122 $ 7,569 $ 28,431 $ 62,055
Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization 33,810 24,128 99,464 68,035
Deferred income taxes (12,397 ) (16,287 ) (10,705 ) (38,442 )
Stock-based compensation 5,659 8,504 16,115 20,654
Amortization of convertible senior notes and lease financing obligations 6,740 6,440 20,195 16,128
Other, net 2,152 4,396 3,875 14,406
Changes in operating assets and liabilities:
Receivables 47,831 (80,191 ) (126,748 ) (144,285 )
Prepaid expenses and other assets 15,305 (4,696 ) (51,582 ) (27,552 )
Medical claims and benefits payable 199,664 167,219 454,059 138,176
Accounts payable and accrued liabilities 136,894 37,959 314,391 20,991
Deferred revenue 144,911 78,439 68,640 (17,410 )
Income taxes 9,047 (9,988 ) 25,063 (1,012 )
Net cash provided by operating activities 605,738 223,492 841,198 111,744
Investing activities:
Purchases of investments (248,020 ) (95,802 ) (616,324 ) (627,953 )
Sales and maturities of investments 147,188 78,380 473,836 227,800
Purchases of equipment (34,101 ) (29,197 ) (71,771 ) (64,426 )
Increase in restricted investments (8,679 ) (8,290 ) (24,301 ) (21,124 )
Net cash paid in business combinations (7,500 ) (57,684 ) (7,500 ) (57,684 )
Other, net (7,832 ) 2,989 (15,220 ) 1,971
Net cash used in investing activities (158,944 ) (109,604 ) (261,280 ) (541,416 )
Financing activities:
Proceeds from issuance of convertible senior notes, net of deferred financing costs 123,387 123,387 537,973
Proceeds from sale-leaseback transactions 158,694
Purchase of call option (149,331 )
Proceeds from issuance of warrants 75,074
Treasury stock purchases (50,000 )
Principal payments on term loan (47,471 )
Repayment of amounts borrowed under credit facility (40,000 )
Contingent consideration liabilities settled (50,349 )
Proceeds from employee stock plans 11 304 7,628 5,156
Other, net 1,053 (306 ) 2,117 363
Net cash provided by (used in) financing activities 124,451 (2 ) 82,783 490,458
Net increase in cash and cash equivalents 571,245 113,886 662,701 60,786
Cash and cash equivalents at beginning of period 1,027,351 742,670 935,895 795,770
Cash and cash equivalents at end of period $ 1,598,596 $ 856,556 $ 1,598,596 $ 856,556

MOLINA HEALTHCARE, INC.
UNAUDITED NON-GAAP FINANCIAL MEASURES

The Company uses two non-GAAP financial measures as supplemental metrics in evaluating its financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing the Company’s performance to the performance of other public companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not as substitutes for or superior to, GAAP measures. The first of these non-GAAP measures is earnings before interest, taxes, depreciation and amortization (EBITDA). The following table reconciles net income, which the Company believes to be the most comparable GAAP measure, to EBITDA.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014 2013 2014 2013
(Amounts in thousands)
Net income $ 16,122 $ 7,569 $ 28,431 $ 62,055
Adjustments:
Depreciation, and amortization of intangible assets and capitalized software 29,307 24,128 83,513 68,035
Interest expense 14,419 13,532 42,234 38,236
Income tax expense 8,439 3,962 24,436 33,745
EBITDA $ 68,287 $ 49,191 $ 178,614 $ 202,071

The second of these non-GAAP measures is adjusted net income, continuing operations (including adjusted net income per diluted share). The following tables reconcile net income from continuing operations (and net income per diluted share), which the Company believes to be the most comparable GAAP measure, to adjusted net income, continuing operations (and adjusted net income per diluted share).

Three Months Ended September 30,
2014 2013
(In thousands, except per diluted share amounts)
Net income, continuing operations $ 16,070 $ 0.33 $ 7,553 $ 0.16
Adjustments, net of tax:
Depreciation, and amortization of capitalized software 15,275 0.31 11,821 0.25
Amortization of convertible senior notes and lease financing obligations 4,246 0.09 4,058 0.08
Stock-based compensation 1,739 0.04 7,010 0.15
Amortization of intangible assets 3,189 0.06 3,378 0.07
Change in fair value of derivatives, net 1 (1 )
Adjusted net income, continuing operations $ 40,520 $ 0.83 $ 33,819 $ 0.71
Nine Months Ended September 30,
2014 2013
(In thousands, except per diluted share amounts)
Net income, continuing operations $ 28,645 $ 0.60 $ 53,871 $ 1.15
Adjustments, net of tax:
Depreciation, and amortization of capitalized software 42,887 0.89 33,375 0.71
Amortization of convertible senior notes and lease financing obligations 12,723 0.26 10,161 0.21
Stock-based compensation 10,960 0.23 17,026 0.36
Amortization of intangible assets 9,727 0.20 9,485 0.20
Change in fair value of derivatives, net (5 ) 3,582 0.08
Adjusted net income, continuing operations $ 104,937 $ 2.18 $ 127,500 $ 2.71

MOLINA HEALTHCARE, INC.

UNAUDITED HEALTH PLANS SEGMENT MEMBERSHIP DATA,

CONTINUING OPERATIONS

Sept. 30,
2014

June 30,
2014

Dec. 31,
2013

Sept. 30,
2013

Ending Membership by Health Plan:
California 496,000 455,000 368,000 363,000
Florida (1) 98,000 58,000 89,000 84,000
Illinois 21,000 6,000 4,000
Michigan 238,000 244,000 213,000 213,000
New Mexico 207,000 195,000 168,000 172,000
Ohio 337,000 302,000 255,000 261,000
South Carolina (2) 118,000 119,000
Texas 249,000 247,000 252,000 258,000
Utah 83,000 83,000 86,000 87,000
Washington 473,000 461,000 403,000 409,000
Wisconsin 84,000 85,000 93,000 95,000
2,404,000 2,255,000 1,931,000 1,942,000
Ending Membership by Program:
Temporary Assistance for Needy Families (TANF) 1,608,900 1,564,500 1,503,800 1,519,200
Medicaid Expansion (3) 314,500 232,300
Aged, Blind or Disabled (ABD) 314,400 305,300 288,600 283,200
Children’s Health Insurance Program (CHIP) 69,000 77,000 99,200 101,500
Medicare Special Needs Plans 46,400 44,000 39,400 38,100
Medicare-Medicaid Plan (MMP) – Medicaid Only (4)(5) 20,500 8,400
MMP – Integrated (4)(6) 14,400 5,200
Health Insurance Marketplaces (3) 15,900 18,300
2,404,000 2,255,000 1,931,000 1,942,000

(1) Enrollment at the Florida health plan declined between the first and second quarters of 2014 due to a reassignment of membership as part of the implementation of Florida’s Managed Medical Assistance program. In the third quarter of 2014, such enrollment increased by approximately 40,000 members due primarily to the addition of certain service areas effective August 1, 2014.

(2) The South Carolina health plan began serving members under the state of South Carolina’s new full-risk Medicaid managed care program effective January 1, 2014.

(3) Medicaid Expansion membership phased in, and Health Insurance Marketplaces became available for consumers to access coverage, beginning January 1, 2014.

(4) Medicare-Medicaid Plans serve members who are dually eligible for Medicare and Medicaid. The Company’s MMP implementations in California and Illinois offered coverage beginning in April 2014 and Ohio beginning in June 2014.

(5) MMP members who receive Medicaid coverage only from the Company.

(6) MMP members who receive both Medicaid and Medicare coverage from the Company.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED HEALTH PLANS SEGMENT FINANCIAL DATA,

CONTINUING OPERATIONS

(In thousands, except percentages and per-member-per-month amounts)

Three Months Ended September 30, 2014
Member

Months (1)

Premium Revenue Medical Care Costs MCR (2) Medical Margin
Total PMPM Total PMPM
California 1,451 $ 384,147 $ 264.79 $ 327,389 $ 225.66 85.2 % $ 56,758
Florida 243 106,275 437.47 103,898 427.69 97.8 2,377
Illinois (3) 38 34,514 906.78 28,333 744.41 82.1 6,181
Michigan 727 208,873 287.15 177,680 244.27 85.1 31,193
New Mexico 652 284,058 435.67 265,697 407.51 93.5 18,361
Ohio 994 454,410 457.17 395,098 397.49 86.9 59,312
South Carolina 355 95,455 268.97 74,489 209.89 78.0 20,966
Texas 748 337,430 451.24 306,577 409.98 90.9 30,853
Utah 250 78,703 315.04 75,270 301.30 95.6 3,433
Washington 1,410 280,883 199.18 274,213 194.45 97.6 6,670
Wisconsin 252 42,933 170.40 38,107 151.25 88.8 4,826
Other (4) 9,078 31,085 (22,007 )
7,120 $ 2,316,759 $ 325.40 $ 2,097,836 $ 294.65 90.6 % $ 218,923
Three Months Ended September 30, 2013
Member

Months (1)

Premium Revenue Medical Care Costs MCR (2) Medical Margin
Total PMPM Total PMPM
California 1,076 $ 184,235 $ 171.16 $ 166,774 $ 154.93 90.5 % $ 17,461
Florida 251 67,688 269.58 60,127 239.46 88.8 7,561
Illinois
Michigan 641 174,706 272.65 143,498 223.95 82.1 31,208
New Mexico 435 130,318 299.19 111,599 256.21 85.6 18,719
Ohio 786 280,964 357.66 245,148 312.07 87.3 35,816
South Carolina
Texas 780 320,657 411.17 287,446 368.59 89.6 33,211
Utah 261 84,525 323.83 66,555 254.98 78.7 17,970
Washington 1,234 294,808 238.96 254,430 206.23 86.3 40,378
Wisconsin 287 39,676 138.36 27,694 96.58 69.8 11,982
Other (3)(4) 7,079 19,942 (12,863 )
5,751 $ 1,584,656 $ 275.55 $ 1,383,213 $ 240.52 87.3 % $ 201,443
(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) The MCR represents medical costs as a percentage of premium revenue.
(3) The Illinois health plan’s results prior to October 1, 2013, were insignificant and reported in “Other.”
(4) “Other” medical care costs include primarily medically related administrative costs at the parent company, and direct delivery costs.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED HEALTH PLANS SEGMENT FINANCIAL DATA,

CONTINUING OPERATIONS

(In thousands, except percentages and per-member-per-month amounts)

Nine Months Ended September 30, 2014

Member
Months (1)

Premium Revenue Medical Care Costs MCR (2)

Medical
Margin

Total PMPM Total PMPM
California 4,040 $ 1,059,860 $ 262.34 $ 889,656 $ 220.21 83.9 % $ 170,204
Florida 742 312,864 421.80 290,224 391.28 92.8 22,640
Illinois (3) 69 68,948 998.03 63,299 916.26 91.8 5,649
Michigan 2,077 567,706 273.28 476,392 229.33 83.9 91,314
New Mexico 1,818 777,120 427.55 702,257 386.36 90.4 74,863
Ohio 2,615 1,061,335 405.81 909,142 347.62 85.7 152,193
South Carolina 1,109 287,928 259.69 249,437 224.97 86.6 38,491
Texas 2,239 978,492 437.00 897,434 400.80 91.7 81,058
Utah 745 233,931 314.13 215,564 289.47 92.1 18,367
Washington 4,050 941,303 232.40 877,418 216.63 93.2 63,885
Wisconsin 782 118,386 151.48 100,059 128.03 84.5 18,327
Other (4) 16,365 82,911 (66,546 )
20,286 $ 6,424,238 $ 316.69 $ 5,753,793 $ 283.64 89.6 % $ 670,445
Nine Months Ended September 30, 2013

Member
Months (1)

Premium Revenue Medical Care Costs MCR (2)

Medical
Margin

Total PMPM Total PMPM
California 3,132 $ 552,950 $ 176.54 $ 497,314 $ 158.78 89.9 % $ 55,636
Florida 712 187,689 263.62 161,446 226.76 86.0 26,243
Illinois
Michigan 1,941 508,748 262.14 432,105 222.65 84.9 76,643
New Mexico 984 298,767 303.59 252,001 256.07 84.3 46,766
Ohio 2,234 819,879 367.03 688,266 308.11 83.9 131,613
South Carolina
Texas 2,417 969,063 400.90 829,854 343.31 85.6 139,209
Utah 781 236,992 303.41 193,261 247.42 81.5 43,731
Washington 3,722 892,627 239.85 779,339 209.41 87.3 113,288
Wisconsin 780 104,540 134.04 82,543 105.84 79.0 21,997
Other (3)(4) 12,563 49,705 (37,142 )
16,703 $ 4,583,818 $ 274.43 $ 3,965,834 $ 237.43 86.5 % $ 617,984
(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) The MCR represents medical costs as a percentage of premium revenue.
(3) The Illinois health plan’s results prior to October 1, 2013, were insignificant and reported in “Other.”
(4) “Other” medical care costs include primarily medically related administrative costs at the parent company, and direct delivery costs.

MOLINA HEALTHCARE, INC.

UNAUDITED SELECTED FINANCIAL DATA

(Dollars in thousands, except per-member-per-month amounts)

The following tables provide the details of the Company’s medical care costs from continuing operations for the periods indicated:

Three Months Ended September 30,
2014 2013
Amount PMPM % of

Total

Amount PMPM % of

Total

Fee for service $ 1,469,765 $ 206.43 70.1 % $ 928,165 $ 161.39 67.1 %
Pharmacy 337,150 47.35 16.1 237,073 41.22 17.1
Capitation 190,277 26.73 9.1 162,554 28.27 11.8
Direct delivery 24,863 3.49 1.1 9,612 1.67 0.7
Other 75,781 10.65 3.6 45,809 7.97 3.3
$ 2,097,836 $ 294.65 100.0 % $ 1,383,213 $ 240.52 100.0 %
Nine Months Ended September 30,
2014 2013
Amount PMPM % of

Total

Amount PMPM % of

Total

Fee for service $ 4,028,863 $ 198.61 70.0 % $ 2,674,785 $ 160.14 67.5 %
Pharmacy 919,374 45.32 16.0 691,903 41.42 17.4
Capitation 536,533 26.45 9.3 441,287 26.42 11.1
Direct delivery 69,947 3.45 1.2 27,739 1.66 0.7
Other 199,076 9.81 3.5 130,120 7.79 3.3
$ 5,753,793 $ 283.64 100.0 % $ 3,965,834 $ 237.43 100.0 %

The following table provides the details of the Company’s medical claims and benefits payable as of the dates indicated:

Sept. 30,

2014

Dec. 31,

2013

Fee-for-service claims incurred but not paid (IBNP) $ 796,433 $ 424,173
Pharmacy payable 62,322 45,037
Capitation payable 31,535 20,267
Other (1) 233,556 180,310
$ 1,123,846 $ 669,787

(1) “Other” medical claims and benefits payable include amounts payable to certain providers for which the Company acts as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Such non-risk provider payables amounted to $136.0 million and $151.3 million as of September 30, 2014 and December 31, 2013, respectively.

MOLINA HEALTHCARE, INC.
UNAUDITED CHANGE IN MEDICAL CLAIMS AND BENEFITS PAYABLE

The Company’s claims liability includes an allowance for adverse claims development based on historical experience and other factors including, but not limited to, variations in claims payment patterns, changes in utilization and cost trends, known outbreaks of disease, and large claims. The Company’s reserving methodology is consistently applied across all periods presented. The amounts displayed for “Components of medical care costs related to: Prior period” represent the amount by which the Company’s original estimate of claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The following table shows the components of the change in medical claims and benefits payable from continuing and discontinued operations as of the periods indicated:

Nine Months Ended
September 30,

Year Ended
December 31, 2013

2014 2013
(Dollars in thousands, except per-member amounts)
Balances at beginning of period $ 669,787 $ 494,530 $ 494,530
Components of medical care costs related to:
Current period 5,795,404 4,021,461 5,434,443
Prior period (41,033 ) (54,040 ) (52,779 )
Total medical care costs 5,754,371 3,967,421 5,381,664
Change in non-risk provider payables (15,344 ) 83,671 111,267
Payments for medical care costs related to:
Current period 4,841,429 3,534,392 4,932,195
Prior period 443,539 378,524 385,479
Total paid 5,284,968 3,912,916 5,317,674
Balances at end of period $ 1,123,846 $ 632,706 $ 669,787
Benefit from prior period as a percentage of:
Balance at beginning of period 6.1 % 10.9 % 10.7 %
Premium revenue, trailing twelve months 0.5 % 0.9 % 0.9 %
Medical care costs, trailing twelve months 0.6 % 1.0 % 1.0 %
Claims Data:
Days in claims payable, fee for service 50 41 43
Number of members at end of period 2,404,000 1,942,000 1,931,000
Number of claims in inventory at end of period 315,900 137,100 145,800
Billed charges of claims in inventory at end of period $ 749,300 $ 257,600 $ 276,500
Claims in inventory per member at end of period 0.13 0.07 0.08
Billed charges of claims in inventory per member

at end of period

$ 311.69 $ 132.65 $ 143.19
Number of claims received during the period 19,703,300 15,751,500 21,317,500
Billed charges of claims received during the period $ 21,506,500 $ 15,848,900 $ 21,414,600

MOLINA HEALTHCARE, INC.

ACA HIF MEDICAID REVENUE DETAILS BY HEALTH PLAN

(In thousands)

Three Months Ended

Nine Months
Ended
Sept. 30, 2014

Required
ACA HIF
Reimbursement through
Dec. 31, 2014

March 31,
2014

June 30,
2014

Sept. 30,
2014

Gross (1)
California $ $ $ $ $ 11,616
Florida 1,416 1,473 1,487 4,376 5,835
Illinois 40 42 40 122 162
Michigan 8,011 8,011 17,471
New Mexico 11,322
Ohio 7,791 8,117 6,912 22,820 30,426
Texas 18,518
Utah 3,000 3,000 5,332
Washington 6,229 6,489 6,217 18,935 25,246
Wisconsin 1,080 1,126 1,372 3,578 4,771
Medicaid 16,556 17,247 27,039 60,842 130,699
Medicare 2,892 3,199 3,068 9,159 12,212
$ 19,448 $ 20,446 $ 30,107 $ 70,001 $ 142,911

(1) Amounts in the table include the full economic impact of the excise tax including premium tax and the income tax effect.

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