Molina Healthcare, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in millions of dollars except per-share data, ratios, and membership. Molina operates Medicaid, Medicare, and Marketplace health plans in 15 states and Puerto Rico, serving approximately 4.0 million members at quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $5,021 | $4,243 | $14,188 | $12,555 |
| Premium revenue | $4,768 | $4,084 | $13,444 | $12,085 |
| Operating income | $289 | $257 | $987 | $802 |
| Net income | $185 | $175 | $639 | $569 |
| Diluted EPS | $3.10 | $2.75 | $10.65 | $8.80 |
| Medical care ratio (MCR) | 85.9% | 86.3% | 84.9% | 85.7% |
| G&A ratio | 7.3% | 7.6% | 7.3% | 7.6% |
Management attributed higher operating income primarily to premium growth and lower MCR. Premium revenue increased 16.8% year over year in Q3; membership was 4.033 million, up from 3.346 million a year earlier. Growth reflected Medicaid enrollment and the YourCare and Passport acquisitions. Q3 after-tax margin was 3.7%, versus 4.1% a year earlier. The effective tax rate rose to 29.5% from 24.7%, largely due to the 2020 health insurer fee (HIF), which is nondeductible.
Q3 Health Plans medical margin was $670, versus $561 a year earlier. Medicaid and Medicare margins improved, while Marketplace medical margin declined to $70 from $103; management cited lower pricing, risk scores below member acuity, and a more pronounced utilization rebound. For the first nine months, Marketplace margin was $272 versus $388.
Cash flow, balance sheet, and debt
- Nine-month operating cash flow was $591, compared with $398 in 2019. Net cash from investing activities was $98, versus $80 used; financing activities provided $69, versus $510 used. Cash, cash equivalents, and restricted cash increased $758.
- At September 30, cash and cash equivalents were $3,196 and investments were $1,769; together these totaled $4,965. The filing reports total cash and investments of $5,058, including restricted investments. Working capital was $3,397.
- Long-term debt was $1,813, up from $1,237 at year-end 2019. Molina issued $800 principal amount of 4.375% notes due 2028, used $600 of proceeds to repay its prior term loan, and reported no revolver borrowings. The $1.0 billion revolving credit facility was available. The company reported compliance with debt covenants.
- Cash flows included $453 of common-stock purchases during the first nine months. A new authorization permits up to $500 of repurchases through December 31, 2021; none had been made under the new program through October 29, 2020.
Material changes, outlook, and risks
- COVID-19: Management said combined COVID-related effects had a negligible to slightly positive impact on Q3 earnings. Lower utilization, membership growth, and $35 of direct COVID patient-care costs were among the factors; management estimated these three medical-cost factors reduced costs and increased pretax earnings by approximately $95–$105. Separately, state Medicaid premium refunds and related actions reduced margin: $88 was recognized in Q3 and $163 year to date. Additional state actions or increased refunds could affect results. Management could not predict the timing or scale of future enrollment or utilization changes.
- Acquisitions and expansion: YourCare (approximately 47,000 members) closed July 1 for $42; Passport (approximately 325,000 members) closed September 1, with estimated total consideration of $60, including $40 contingent consideration. Molina agreed to acquire Magellan Complete Care for approximately $820, subject to approvals, and expects closing around year-end 2020. It also agreed to buy substantially all Affinity Health Plan assets for approximately $380, with closing expected as early as Q2 2021. Both planned acquisitions were expected to be funded with cash on hand.
- Other unusual items: Molina received $128.1 in October 2020 from a Marketplace risk-corridor judgment; it was treated as a gain contingency at quarter-end and is expected to be recognized in Q4. A $10 premium deficiency reserve was recorded for the planned Puerto Rico Medicaid exit when the contract expired October 31, 2020. The company also committed $150 to its charitable foundation and intended to make a sizable contribution in Q4.
- Program and contract risks: The Supreme Court was scheduled to hear the ACA constitutionality case in November 2020, with a decision expected in the first half of 2021; the filing warns that invalidation of the ACA could materially harm results. Kentucky’s 2021 Medicaid contract award faced litigation, although an October court ruling adding a sixth plan did not rescind Molina’s award; an appeal followed. Texas Medicaid procurement plans remained unresolved, and Ohio contract bidding was underway. State Medicaid contract renewals, premium adequacy, risk adjustment estimates, claims reserves, provider costs, and state restrictions on subsidiary dividends are additional risks.
- Liquidity outlook: Management believed cash, operating cash flow, and available borrowing capacity would support operations, regulatory requirements, debt service, and capital expenditure for at least the next 12 months. This is not numerical earnings guidance; the filing provides no clear formal full-year earnings forecast.
Most important facts for investors to verify
- Whether Medicaid premium refunds, utilization rebound, and member-acuity trends change medical margins, particularly in Marketplace plans.
- Final risk-adjustment and medical-claims estimates, including the net Marketplace risk-adjustment payable of $206 at September 30.
- Regulatory approvals, closing costs, integration, and expected returns for Magellan Complete Care and Affinity; and final Passport contingent consideration.
- Outcome of the ACA Supreme Court case and Kentucky contract litigation, alongside renewals and procurement outcomes in key states.
- Timing and cash impact of the $150 foundation commitment, planned acquisitions, and any share repurchases; and continued compliance with debt covenants and regulated-subsidiary capital requirements.