Molina Healthcare, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019. Molina provides managed care through Medicaid, Medicare, and the insurance Marketplaces. Its plans operated in 14 states and Puerto Rico and served 3.393 million members at quarter-end. Results are compared with the three months ended March 31, 2018, unless otherwise noted.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $4.119 billion | $4.646 billion |
| Premium revenue | $3.952 billion | $4.323 billion |
| Operating income | $280 million | $222 million |
| Net income | $198 million | $107 million |
| Diluted EPS | $2.99 | $1.64 |
| Medical care costs | $3.371 billion | $3.722 billion |
| Medical care ratio (MCR) | 85.3% | 86.1% |
| General and administrative expense ratio | 7.3% | 7.6% |
| Operating cash flow | $249 million | $394 million |
Net income increased by $91 million; management attributed the improvement principally to higher operating income, lower MCR and a lower G&A ratio. The effective tax rate fell to 23.8% from 40.3%, primarily because 2018 included nondeductible health insurer fees (HIF), which were not applicable in 2019 under the moratorium. Q1 2018 also included a $70 million benefit from the 2017 Marketplace cost-sharing reduction reconciliation; excluding it, the 2018 MCR was 87.7%.
Ending membership fell to 3.393 million from 4.061 million a year earlier. Premium revenue declined $371 million: member months decreased 17%, partly offset by a 9% increase in premium per member per month. Medicaid MCR improved to 88.5% from 90.8%; Medicare MCR was 84.7% versus 84.8%. Marketplace MCR was 62.2%, versus 50.6% reported in 2018, or approximately 66.8% excluding the prior-year CSR benefit.
Cash and cash equivalents were $3.224 billion and investments were $1.508 billion at March 31, 2019. Working capital was $2.439 billion. Total debt was $1.319 billion on the balance sheet; contractual principal outstanding was $1.336 billion. Net cash provided by investing activities was $171 million and net cash used in financing was $48 million. Operating cash flow decreased $145 million year over year, which the company attributed mainly to government-agency settlements, timing of Medicare receipts, and cash effects of membership declines.
Material changes and unusual items
- Premium revenue decreased, mainly reflecting Medicaid and Marketplace membership losses. Medicaid contracts in New Mexico and most Florida regions terminated in late 2018 or early 2019; total membership also declined in Puerto Rico.
- Health Plans medical margin decreased to $581 million from $601 million. Medicaid medical margin rose $35 million, while Marketplace medical margin fell $62 million, principally because Q1 2018 included the $70 million CSR benefit and 2019 Marketplace premium revenue was lower.
- The company recorded $3 million of restructuring costs, compared with $25 million in Q1 2018. It expects approximately $15 million of cumulative IT restructuring costs and says the plan is expected to reduce annualized run-rate expenses by $15–$20 million in its first full year, rising to $30–$35 million by the end of the fifth full year.
- In January 2019, Molina repaid $46 million principal of its 1.125% convertible notes and completed related call-option and warrant transactions; it recorded a $3 million debt-extinguishment gain. In April, it repaid another $128 million principal and drew a further $120 million under its term loan. After those transactions, the filing reports $78 million principal of convertible notes remaining, plus a $7 million conversion notice scheduled to settle in August 2019.
- Adoption of lease accounting guidance on January 1, 2019 increased opening retained earnings by $85 million. At quarter-end, finance lease liabilities were $241 million and operating lease liabilities were $93 million.
Outlook, risks, and contingencies
- Management expected Medicaid revenue to decrease in 2019 and Marketplace revenue to be lower than in 2018. It estimated 2019 Marketplace year-end enrollment of 270,000–280,000, compared with 332,000 at March 31, reflecting expected attrition. The filing provides no company-wide earnings or EPS guidance.
- Texas STAR+PLUS contract awards were expected in Q2 2019 and STAR/CHIP awards in Q3 2019, with new contract periods beginning in 2020. Management warned that losing Texas, Ohio, or California Medicaid contracts could materially harm results. Ohio faced Medicaid cost pressures from a change in the expansion risk pool and a behavioral-health benefit that management said was not adequately rated.
- Uncertainty over the ACA, Marketplace risk adjustment and subsidies, state Medicaid budgets and rates, contract renewals, utilization and medical-cost estimates, pharmacy costs, and Puerto Rico operations could affect results. Marketplace risk-adjustment payable was $568 million at quarter-end, up from $466 million at year-end.
- The company reported $2.439 billion of working capital and said cash resources, available borrowing capacity, and internally generated funds should cover operations, regulatory requirements, debt repayments, and capital expenditures for at least 12 months. It was in compliance with debt covenants; the reported net leverage ratio was 1.0x against a limit below 4.0x, and interest coverage was 14.7x against a minimum of 3.5x. Regulated subsidiaries had approximately $123 million of dividends available without prior regulatory approval through the remainder of 2019.
- A securities class-action case dismissed by the trial court was on appeal. Molina said it could not estimate a possible loss or range. The filing also notes that adverse outcomes in pending legal matters could be material, although no specific loss value is provided.
- A hypothetical immediate 1% increase in market interest rates was estimated to reduce the fair value of fixed-income investments by approximately $13 million.
Important facts for investors to verify
- Whether medical-cost and claims-reserve estimates remain sound: prior-period claims developed favorably by $189 million in Q1 2019, primarily from lower-than-expected Medicaid and Marketplace utilization and improved operations.
- Whether membership attrition, Medicaid contract exits, Marketplace enrollment, and premium rates develop as management expected—and the outcomes of pending Texas, Ohio, and California contract procurements.
- Whether Marketplace risk-adjustment liabilities and other government-agency settlements change materially; the filing reports a $568 million Marketplace risk-adjustment payable at March 31.
- Whether the post-quarter convertible-note repayments and term-loan draw, together with cash needs and regulated-subsidiary dividend limits, leave adequate parent-company liquidity.
- Whether projected IT savings are achieved and whether the ACA, state funding, legal proceedings, or other disclosed contingencies materially affect results.