Molina Healthcare, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the respective 2020 periods. Molina provides managed healthcare services through Medicaid, Medicare and state Marketplaces. It served approximately 4.7 million members in 18 states at quarter-end. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $6.80 billion | $4.62 billion | $13.32 billion | $9.17 billion |
| Premium revenue | $6.58 billion | $4.37 billion | $12.89 billion | $8.68 billion |
| Operating income | $273 million | $424 million | $608 million | $698 million |
| Net income | $185 million | $276 million | $413 million | $454 million |
| Diluted earnings per share | $3.16 | $4.65 | $7.05 | $7.54 |
| Medical care ratio (MCR) | 88.4% | 82.3% | 87.6% | 84.3% |
| General and administrative expense ratio | 7.1% | 7.5% | 7.2% | 7.2% |
Q2 premium revenue increased 51% year over year, supported by membership growth and acquisitions; net income fell 33% and operating income fell 36%. For the first half, revenue rose 45%, while net income declined 9%. Management attributed lower operating income in both comparisons principally to higher MCRs, reflecting the differing effects of COVID-19 on utilization and costs. Q2 medical margin was $764 million versus $774 million a year earlier. Q2 after-tax margin was 2.7%, compared with 6.0%.
By segment, Q2 premium revenue was $5.03 billion for Medicaid, $814 million for Medicare and $735 million for Marketplace. Their MCRs were 89.0%, 87.6% and 84.8%, respectively. Marketplace membership reached 638,000, versus 325,000 a year earlier; Medicaid had 3.928 million members and Medicare 130,000. Total membership growth also reflects the Magellan Complete Care acquisition.
Cash, debt and liquidity
- Operating cash flow was $1.061 billion for the first six months, up from $757 million. Investing activities used $408 million, mainly reflecting purchases of investments; financing activities used $200 million, including share repurchases and employee tax withholding.
- At June 30, cash and cash equivalents were $4.608 billion and investments were $2.241 billion. Working capital was $3.2 billion. Cash and investments totaled approximately $7.0 billion, up from $6.2 billion at year-end 2020.
- Long-term debt was $2.129 billion, primarily notes due 2022, 2028 and 2030. No amounts were drawn on the $1.0 billion revolving facility; Molina reported compliance with debt covenants. Management said available cash, borrowing capacity and operating cash flow should support obligations for at least 12 months.
- Amounts due government agencies rose to $2.072 billion from $1.253 billion, including a $719 million Marketplace risk-adjustment payable. Medical claims and benefits payable were $2.942 billion, versus $2.696 billion at year-end.
Changes, outlook and risks
- COVID-19 and utilization: Molina estimated COVID’s net effect reduced Q2 2021 diluted EPS by about $1.00, compared with a $1.10–$1.65 benefit in Q2 2020. The 2021 effect included higher COVID inpatient costs, less utilization curtailment and risk-sharing corridors. Management cautioned that deferred care may return and utilization remains uncertain.
- Enrollment and outlook: Management expected the Medicaid enrollment benefit from suspended eligibility redeterminations to continue through 2021 while the federal public health emergency remained in place. It estimated each additional month of extension could increase its full-year revenue estimate by $150 million. Marketplace revenue growth was expected to exceed 70% in 2021, with approximately 590,000 members at year-end. The filing provides no full-year earnings-per-share guidance.
- Risk corridors and estimates: Risk corridors reduced medical margin; Molina recognized approximately $56 million for Q2 and $166 million for the first half of 2021. States could change existing corridors or introduce new ones, and final settlements may differ from estimates. Prior-year claims estimates developed favorably by $193 million in the first half, mainly due to lower-than-expected Medicaid utilization and improved performance.
- Transactions and contracts: Molina expected its approximately $380 million Affinity Health Plan acquisition to close in Q4 2021 and its approximately $60 million Cigna Texas Medicaid/MMP acquisition to close in January 2022, subject to approvals. It was selected for all three Ohio Medicaid regions, with the contract expected to begin in early 2022. California’s Medicaid RFP was expected at year-end.
- Kentucky litigation: A state court upheld Molina’s Kentucky contract award and Passport acquisition but ordered a new RFP. Molina’s current contract continues in the interim; appeals and cross-appeals were filed in July 2021, leaving the outcome uncertain.
- Other exposures: Risks include government rate and payment changes, Marketplace risk adjustment, medical-cost estimation, contract renewals and bidding, acquisition execution, regulatory capital and dividend restrictions, and legal and compliance matters. A hypothetical immediate 1% interest-rate increase was estimated to reduce fixed-income investment fair value by approximately $56 million.
Key facts for investors to verify
- Whether medical utilization, COVID-related costs and risk-corridor settlements evolve as management estimates, and how they affect MCR and margins.
- Actual Medicaid eligibility redeterminations and Marketplace enrollment relative to the stated outlook, including the estimated revenue effect of any PHE extension.
- Final Marketplace risk-adjustment payable and government-agency settlement amounts, including the $719 million gross payable at quarter-end.
- Progress and closing conditions for the Affinity and Cigna transactions, and the status and consequences of the Kentucky RFP litigation.
- Availability of regulated-subsidiary dividends, capital requirements, debt repayment planning for the $700 million notes due 2022, and remaining share-repurchase authorization.