MOH

Molina Healthcare, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Molina Healthcare, Inc. is a multi-state managed care organization providing healthcare services primarily to Medicaid, Medicare, and other government-sponsored program beneficiaries. Operations are conducted through licensed health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. The company terminated its Nevada Medicare plan operations effective January 1, 2010.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Amounts derived from thousands in source document.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenue increased 12.6% year-over-year, driven by a 13.5% increase in total member months (1.48 million members vs. 1.30 million). However, revenue per member per month (PMPM) decreased 0.8% due to rate declines in Ohio, Missouri, and Washington.
• Profitability Decline: Net income decreased 13.3% to $10.6 million. This was primarily due to the absence of a $1.5 million gain on the retirement of convertible senior notes recorded in Q1 2009, and higher administrative costs.
• Medical Cost Efficiency: The medical care ratio improved to 85.3% from 86.1%. Medical care costs decreased 1.7% on a PMPM basis, attributed to a less severe flu season, the transfer of pharmacy risk back to states (Ohio and Missouri), and medical management initiatives.
• Cash Flow: Net cash used in operating activities was $26.5 million, a significant shift from the $66.9 million provided in Q1 2009. This was primarily caused by a $90.7 million decrease in deferred revenue due to a change in the state of Ohio's premium payment timing (from advance to mid-month).

Outlook, Risks, and Unusual Items

• Subsequent Event (Acquisition): Effective May 1, 2010, the company acquired the Healthcare Information Management (HIM) business of Unisys Corporation for $135 million. The deal was funded with $30 million cash and a $105 million draw on the company's credit facility. The acquired entity operates as Molina Medicaid Solutions.
• Regulatory Risks: The filing highlights significant uncertainty regarding the recently enacted Patient Protection and Affordable Care Act, including potential industry assessments and changes to Medicaid eligibility. Additionally, the Michigan Department of Community Health is investigating alleged overpayments and enrollment errors, which could lead to rate reductions or recoveries.
• Contractual Contingencies: Revenue recognition is subject to "at-risk" provisions in New Mexico, Ohio, and Texas, where portions of revenue may be refunded if performance measures are not met. The company has recorded liabilities for these potential refunds.
• Investment Portfolio: The company holds approximately $62.9 million in par value of auction rate securities. While deemed temporarily impaired due to market liquidity issues rather than credit quality, these assets are classified as non-current and subject to valuation uncertainty.

Investor Verification Checklist

• Ohio Payment Timing: Verify the impact of the state of Ohio's shift from advance premium payments to mid-month payments on future cash flow projections.
• Michigan Regulatory Action: Monitor developments regarding the Michigan Department of Community Health's investigation into enrollment errors and rate overpayments.
• Acquisition Integration: Assess the financial impact and integration progress of the Unisys HIM acquisition (Molina Medicaid Solutions), including the "go-live" dates for Idaho and Maine systems.
• Claims Reserve Adequacy: Review the sensitivity analysis regarding Incurred But Not Paid (IBNP) reserves, noting that a 1% change in completion factors could impact net income by approximately $7.5 million.
• Auction Rate Securities: Confirm the liquidity status and fair value assumptions for the $62.9 million portfolio of auction rate securities.