Molina Healthcare, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY 2019. This is an annual filing, not a standalone fourth-quarter report.
Business context
Molina provides managed healthcare services through Medicaid, Medicare and Marketplace programs. At year-end, it reported approximately 4.0 million members across 15 operating states; the December 31 acquisition of Magellan Complete Care added approximately 200,000 members and expanded the footprint to 18 states. Medicaid represented 73% of 2020 total revenue.
Financial performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Total revenue | $19.423B | $16.829B | +15% |
| Premium revenue | $18.299B | $16.208B | +13% |
| Medical care costs | $15.820B | $13.905B | +14% |
| Medical margin | $2.479B | $2.303B | +$176M |
| Medical care ratio (MCR) | 86.5% | 85.8% | +0.7 percentage points |
| Operating income | $1.078B | $1.044B | +3% |
| Net income | $673M | $737M | -9% |
| Diluted EPS | $11.23 | $11.47 | -2% |
| After-tax margin | 3.5% | 4.4% | -0.9 percentage points |
| G&A ratio | 7.6% | 7.7% | -0.1 percentage points |
Medicaid premium revenue rose to $14.265B from $12.466B; Medicare rose to $2.512B from $2.243B; Marketplace was $1.522B versus $1.499B. Marketplace MCR increased notably, to 78.7% from 68.2%, and its medical margin declined to $324M from $476M. Medicaid MCR improved to 87.4% from 88.0%; Medicare MCR increased to 86.0% from 85.3%.
Net cash provided by operating activities was $1.890B, versus $427M in 2019; management attributed the increase chiefly to membership growth and timing differences in government receivables and payables. Cash, cash equivalents and investments totaled $6.165B at year-end, versus $4.477B; working capital was $2.911B. Parent-company cash and investments were $644M, down from $997M.
Debt principal outstanding was $2.150B: $700M of 5.375% notes due 2022, $800M of 4.375% notes due 2028 and $650M of 3.875% notes due 2030. The company also had $1B available under its revolving credit facility and reported covenant compliance. Consolidated total debt and finance lease liabilities were approximately $2.352B.
Material changes and unusual items
- COVID-19 had an estimated net adverse pretax impact of approximately $180M, or $2.30 per diluted share, and increased the annual MCR by about 50 basis points. Lower utilization reduced medical costs by approximately $420M, partly offset by $205M of direct COVID patient costs and $564M of state premium refunds and related actions. Approximately $401M of the refunds was recognized in the fourth quarter.
- A $128M Marketplace risk-corridor judgment for 2014–2016 claims was received in October and recognized in fourth-quarter results. It was a non-recurring benefit.
- Medicaid redeterminations were suspended during the pandemic. Excluding acquisitions and Puerto Rico, Molina added approximately 415,000 Medicaid members from March 31, 2020; management said the timing and extent of eventual enrollment declines were uncertain.
- Acquisitions included Passport in Kentucky ($66M purchase price, including contingent consideration), YourCare in New York ($42M), and Magellan Complete Care (approximately $1.037B total consideration). Magellan closed on the last day of 2020, so its operating results were insignificant to reported FY 2020 results. The Affinity Health Plan acquisition, at an estimated $380M net purchase price, was pending and expected as early as Q2 2021.
- Molina exited Puerto Rico Medicaid when its contract expired on October 31, 2020, and recorded a $10M premium deficiency reserve during the year.
- In 2020 the company issued $1.45B of senior notes, refinanced debt, repurchased $606M of common stock, and received $635M in dividends from regulated subsidiaries. No cash dividends were paid to common shareholders.
Outlook, risks and contingencies
Management expected 2021 Marketplace enrollment to grow approximately 25% to 400,000 members at year-end, with associated premium revenue growth of approximately $485M. It stated that cash resources, available borrowing capacity and operating cash flow should support operations, regulatory requirements, debt repayment and capital expenditures for at least the next 12 months. No broader earnings guidance is provided in the supplied filing text.
Key uncertainties include the pandemic’s effects on utilization, claims costs, Medicaid enrollment and state rate actions; possible further or retroactive premium refunds; the pending Supreme Court decision on the ACA; state budget pressure; and contract renewals and competitive procurements. California’s Medicaid contracts were expected to face a new RFP process, Ohio had not announced its RFP winners as of February 16, 2021, and Texas procurements were rescheduled. Kentucky contract awards and Passport-related matters were being litigated; Molina said it intended to defend its position, but the outcome was uncertain.
Other material risks include medical-cost and incurred-but-not-paid claims estimation, Marketplace risk adjustment and member acuity, pharmacy-cost inflation, provider access, regulatory audits and potential recoupments, cybersecurity and vendor dependence, acquisition integration, and restrictions on dividends from regulated subsidiaries. State regulators limited ordinary dividends; approximately $60M was available for subsidiary dividends without prior approval at year-end. The filing reports audited financial statements and internal controls with unqualified opinions, but acquired Passport and Magellan operations were excluded from management’s year-end internal-control assessment while integration proceeded.
Investor verification priorities
- Track subsequent state decisions, settlements or adjustments relating to the $564M of COVID-era refunds, risk corridors and other amounts due government agencies.
- Assess whether utilization rebounded, Medicaid membership changed after redeterminations resume, and medical claims reserves developed as expected.
- Monitor Marketplace performance, including the elevated MCR, member acuity, risk-adjustment estimates and the projected 2021 enrollment and revenue growth.
- Follow California, Ohio and Texas contract procurements, and the Kentucky litigation and its potential effect on contract membership and contingent consideration.
- Review integration results and purchase-accounting adjustments for Magellan, Passport and YourCare, as well as the closing and economics of the pending Affinity transaction.
- Confirm debt repayment capacity, regulated-subsidiary capital and dividend availability, and the effects of share repurchases on liquidity and per-share results.