Molina Healthcare, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with 2020. Molina provides Medicaid, Medicare and Marketplace managed-care services and reported approximately 5.2 million members across 18 states at year-end.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $27.8 billion | $19.4 billion | Up 43% |
| Premium revenue | $26.9 billion | $18.3 billion | Up 47% |
| Medical care costs | $23.7 billion | $15.8 billion | Up 50% |
| Medical care ratio (MCR) | 88.3% | 86.5% | Up 1.8 percentage points |
| Operating income | $1.02 billion | $1.08 billion | Down 5% |
| Net income | $659 million | $673 million | Down 2% |
| Diluted EPS | $11.25 | $11.23 | Approximately flat |
| After-tax margin | 2.4% | 3.5% | Down 1.1 percentage points |
| G&A ratio | 7.4% | 7.6% | Improved 0.2 percentage points |
Growth reflected acquisitions and membership increases across segments. Net income was lower despite substantial revenue growth, principally due to higher MCR and the absence of the $128 million Marketplace risk-corridor judgment recognized in 2020. The company estimated COVID-19’s net effect reduced diluted EPS by approximately $3.50 in 2021, versus $2.30 in 2020. Reported 2021 MCR included an estimated 90-basis-point increase from COVID-related effects.
Segment results: Medicaid premium revenue was $20.5 billion, with an 88.7% MCR; Medicare was $3.4 billion, with an 87.2% MCR; and Marketplace was $3.0 billion, with an 86.9% MCR. Marketplace MCR rose sharply from 78.7%, reflecting COVID-related costs and higher non-COVID utilization among special-enrollment members.
Cash flow, balance sheet and capital
- Operating cash flow was $2.12 billion, compared with $1.90 billion in 2020. Investing activities used $1.65 billion and financing activities used $183 million.
- Cash, cash equivalents and investments totaled $7.9 billion at year-end; working capital was $3.0 billion. Total assets were $12.2 billion and stockholders’ equity was $2.6 billion.
- Long-term debt was $2.17 billion on the balance sheet; principal outstanding was $2.20 billion, all due after 2026. Molina issued $750 million of 3.875% notes due 2032 and redeemed $700 million of 5.375% notes due 2022. It reported a $25 million debt-repayment loss for 2021.
- No borrowings were outstanding under the $1.0 billion revolving facility at year-end. Molina said it was in compliance with debt covenants and believed available resources and operating cash flow would fund obligations for at least 12 months.
- Regulated subsidiaries held approximately $2.9 billion of statutory capital and surplus against estimated minimum requirements of $2.1 billion. Approximately $197 million of dividends could be paid without prior regulatory approval. Parent-company cash and investments were $348 million, subject to restrictions on transfers from regulated subsidiaries.
- The board authorized up to $500 million of share repurchases through December 31, 2022. No shares had been purchased under that new program as of February 14, 2022. Molina did not pay cash dividends and said it intended to retain future earnings.
Material changes, outlook and commentary
- Year-end membership increased to 5.2 million from 4.0 million, including Medicaid membership of 4.329 million and Marketplace membership of 728,000. Management attributed Medicaid enrollment growth partly to the pandemic-era suspension of eligibility redeterminations.
- Molina acquired substantially all of Affinity Health Plan’s New York assets in October 2021, adding approximately 310,000 members. It completed the acquisition of Cigna’s Texas Medicaid and Medicare-Medicaid contracts on January 1, 2022. The planned AgeWell New York acquisition, for approximately $106 million, remained subject to approvals; management expected closing by the third quarter of 2022.
- For 2022, Molina expected Marketplace enrollment to decline approximately 66% to 250,000 members and Marketplace premium revenue to fall approximately 38%, consistent with its product and pricing strategy to target margins. These are management expectations, not guaranteed results.
- COVID-related state risk corridors reduced recognized premium revenue by approximately $323 million in 2021, versus $564 million in 2020. Changes to, continuation of, or termination of these arrangements could make results differ materially from estimates.
- Other significant estimates include medical claims incurred but not paid (IBNP), risk adjustment, minimum medical-loss-ratio settlements and quality incentives. Favorable prior-year claims development was $239 million in 2021. A one-percentage-point increase in the 2021 MCR, management estimated, would have reduced diluted EPS from $11.25 to approximately $7.76.
Risks, contingencies and unusual items
- Key risks include changes in Medicaid and Medicare funding or rates, state contract losses and competitive procurements, post-pandemic utilization and eligibility redeterminations, inadequate premium rates, pharmacy-cost inflation, and estimation errors in claims reserves.
- Revenue is concentrated in government programs and a relatively small number of state contracts. California, Ohio, Texas and Washington were important Medicaid markets; loss of a major contract could materially affect results.
- Cybersecurity, privacy breaches, vendor dependence, regulatory audits, fraud-and-abuse enforcement and complex risk-adjustment requirements present operational and financial risks. The filing notes prior HIPAA breaches and warns that cyber-insurance may not cover all losses.
- The Kentucky Medicaid contract award and Passport acquisition remained subject to litigation; a court order allowed the health plan to continue operating for the foreseeable future. Puerto Rico litigation included the company’s claim against ASES and ASES’s counterclaim; management said no gain or loss was probable and reasonably estimable.
- Unrealized investment losses reduced 2021 comprehensive income: other comprehensive loss, net of tax, was $42 million. Management estimated an immediate 1% rise in interest rates would reduce fixed-income investment fair value by about $69 million.
- The auditor issued unqualified opinions on the financial statements and internal control. The principal critical audit matter was valuation of the $2.486 billion fee-for-service IBNP liability, which depends on actuarial assumptions.
Important facts for investors to verify
- Whether medical utilization, COVID costs and MCR trends stabilize, particularly in Marketplace and Medicare.
- How Medicaid eligibility redeterminations after the public health emergency affect membership, premium revenue and cash flow.
- Final state settlements and estimates for COVID risk corridors, Marketplace risk adjustment, minimum MLR and other amounts due to government agencies.
- Execution and financial returns from Affinity and Cigna integration, and approval and completion of the AgeWell transaction.
- Upcoming state procurements, especially California and Texas, and the outcome of Kentucky and Puerto Rico proceedings.
- Liquidity available at the parent company after regulatory capital requirements, debt service, acquisitions and any share repurchases.