Molina Healthcare, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Molina provides managed healthcare services through Medicaid, Medicare, and Marketplace programs. It served approximately 5.2 million members across 19 states at quarter-end.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $8.327 billion | $8.054 billion | $16.476 billion | $15.824 billion |
| Premium revenue | $8.042 billion | $7.799 billion | $15.927 billion | $15.330 billion |
| Operating income | $443 million | $361 million | $898 million | $733 million |
| Net income | $309 million | $248 million | $630 million | $506 million |
| Diluted EPS | $5.35 | $4.25 | $10.87 | $8.63 |
| Medical care ratio (MCR) | 87.5% | 88.1% | 87.3% | 87.6% |
| G&A ratio | 7.4% | 6.8% | 7.3% | 7.1% |
Q2 net income rose 25% year over year. Management attributed improved operating income to membership growth, higher premium revenue and investment income. Q2 investment income was $97 million versus $22 million; six-month investment income was $168 million versus $33 million, primarily reflecting higher interest rates and, to a lesser extent, higher invested assets. Interest expense was unchanged at $27 million for Q2 and $55 million for the first half.
Q2 medical margin was $1.004 billion, up from $927 million. Medicaid MCR increased to 88.3% from 88.0%; Medicare MCR increased to 89.2% from 86.9%, reflecting higher utilization and lower risk-adjusted premiums on newer members. Marketplace MCR improved to 73.7% from 91.2%, mainly reflecting product/pricing strategy and a favorable change in the 2022 risk-adjustment payable. Marketplace results benefited from this item and should be assessed for sustainability.
Liquidity, cash flow and debt
- Cash and cash equivalents were $4.910 billion at June 30, 2023, versus $4.006 billion at year-end 2022; current investments were $3.886 billion versus $3.499 billion. Management reported cash and investments of $9.0 billion and working capital of $3.9 billion.
- Six-month operating cash flow was $1.403 billion, compared with $731 million in 2022. Investing cash use was $439 million; financing cash use was $55 million. Cash, cash equivalents and restricted cash increased $909 million.
- Long-term debt was $2.178 billion, comprising senior notes due 2028, 2030 and 2032. No revolving-credit-facility borrowings were outstanding; $1.0 billion of capacity was available. The company reported compliance with debt covenants.
- Regulated subsidiaries’ minimum statutory capital and surplus requirement was approximately $2.3 billion; subsidiary capital and surplus exceeded that requirement. Approximately $270 million of dividends could be paid without prior regulatory approval.
Changes, outlook and notable items
- Premium revenue grew 3% in Q2 and 4% in the first half. Medicaid and Medicare growth, including AgeWell, was partly offset by Marketplace membership decline. Ending membership was 5.176 million, up from 5.118 million a year earlier but down from 5.258 million at December 2022.
- Following the end of the COVID-19 Public Health Emergency and resumption of Medicaid eligibility redeterminations, Medicaid membership fell by 93,000 in Q2, within expectations. Management continued to expect to retain approximately half of the roughly 800,000 Medicaid members added since March 2020, excluding acquisitions and the Puerto Rico exit.
- G&A expense increased, and the G&A ratio rose year over year, due mainly to implementation spending for contract wins beginning in July 2023 and in 2024.
- Six-month prior-year claims reserve development was favorable by $271 million, primarily due to lower-than-expected utilization and improved operating performance; management said its earnings effect was mostly absorbed by minimum MLRs and medical cost corridors.
- The Iowa Medicaid contract began July 1, 2023. Mississippi’s new four-year contract start was delayed from July 2023 to July 2024 after the state extended existing contracts.
- Molina agreed to acquire Brand New Day and Central Health Plan of California for approximately $510 million, net of certain tax benefits, with closing expected by Q1 2024 subject to approvals and other conditions. The My Choice Wisconsin acquisition, approximately $150 million net of expected tax benefits and required regulatory capital, was expected to close in Q4 2023. Management said it expected available resources and borrowing capacity to support operations and obligations for at least 12 months.
- Key risks include Medicaid redeterminations and related membership, acuity and rate effects; medical-cost and utilization uncertainty; government rate and contract changes; Marketplace enrollment and risk-adjustment estimates; contract procurement and implementation; acquisition approvals and execution; regulatory capital and dividend restrictions; and legal, compliance and cybersecurity exposures. A 1% immediate increase in market interest rates was estimated to reduce fixed-income investment fair value by approximately $99 million.
- Disclosed legal matters include the Kentucky Medicaid procurement litigation, under review by the Kentucky Supreme Court, and a Puerto Rico contract dispute; outcomes were uncertain. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track redetermination-related enrollment, retained-member acuity, state rate adjustments and the resulting Medicaid MCR.
- Assess whether Medicare utilization and MCR pressure persist, and whether Marketplace margin and risk-adjustment benefits recur.
- Verify execution, regulatory approvals, funding and integration of the pending acquisitions and new contracts.
- Monitor claims reserve development, amounts due government agencies ($2.589 billion at June 30), regulated-subsidiary capital and cash available to the parent.
- Review litigation developments, investment-portfolio interest-rate exposure and the timing and use of remaining share-repurchase authorization ($300 million available through December 31, 2023).