Molina Healthcare, Inc. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. Although the request references 2014 Q4, this filing reports full-year results; selected fourth-quarter results are included below. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Molina provides Medicaid-focused managed care and Medicaid systems services to government agencies. Its two reportable segments are Health Plans, operating in 11 states, and Molina Medicaid Solutions, which provides Medicaid management information systems and related services. At year-end, the plans served approximately 2.623 million members, up 36% from 1.931 million a year earlier. Growth reflected Medicaid expansion, new Illinois and South Carolina operations, and Florida contract acquisitions.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $9.667 billion | $6.589 billion |
| Premium revenue | $9.023 billion | $6.179 billion |
| Operating income | $192.9 million | $136.6 million |
| Income from continuing operations | $62.6 million | $44.8 million |
| Net income | $62.2 million | $52.9 million |
| Diluted EPS from continuing operations | $1.30 | $0.96 |
| Reported diluted EPS | $1.29 | $1.13 |
| Medical care ratio | 89.5% | 87.1% |
| General and administrative expense ratio | 7.9% | 10.1% |
| Operating cash flow | $1.060 billion | $190.1 million |
Premium revenue rose 46%, driven by 28% membership growth and an 18% increase in premium revenue per member. Total revenue increased about 47%. Operating income improved, while operating margin edged down to 2.0% from 2.1%. The effective tax rate rose to 53.8% from 44.8%, primarily because the health insurer fee is nondeductible. Management’s non-GAAP adjusted diluted EPS from continuing operations was $3.43, compared with $3.13; it should not be treated as a substitute for GAAP EPS.
Fourth quarter: Premium revenue was $2.598 billion and income from continuing operations was $33.9 million; diluted net income per share was $0.69. The filing reports a substantial increase in Health Plans segment operating income in Q4, but does not explain it as a recurring quarterly run rate.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $1.539 billion; current investments were $1.019 billion and restricted investments were $102.5 million. Working capital was $1.071 billion.
- Operating cash flow of $1.060 billion was substantially influenced by increases in medical claims payable and amounts due government agencies, including accruals for medical-cost-floor contract provisions. These working-capital movements warrant attention when assessing cash-flow sustainability.
- Year-end long-term debt, including current maturities, was approximately $905.4 million. Convertible-note principal totaled $851.6 million; the notes’ balance-sheet carrying value was $704.1 million. The company also reported lease financing obligations, including related-party obligations.
- Cash and investments are largely held within regulated subsidiaries. Approximately $859 million of subsidiary net assets was not transferable to the parent in the form of loans, advances or dividends under applicable restrictions. The parent reported $202.6 million of cash, cash equivalents and investments available to it, and received no health-plan dividends in 2014.
- 2014 financing activity generated $122.6 million of net proceeds from 1.625% convertible notes and extended or refinanced notes previously due in 2014. Total contractual obligations were reported at $3.387 billion, including claims payable, amounts due government agencies, debt and lease commitments.
Material changes versus the prior year
- Membership rose to 2.623 million from 1.931 million, with approximately 385,000 Medicaid expansion members, 18,000 integrated Medicare-Medicaid Plan members and 15,000 Marketplace members at year-end.
- Medical care costs increased to $8.076 billion from $5.380 billion. The medical care ratio worsened by 2.4 percentage points, reflecting growth in lower-margin long-term services and supports, premiums that did not keep pace with medical cost trends, and contract designs that limited offsets between product-level gains and losses.
- G&A expense ratio improved to 7.9% from 10.1%, principally through leverage of fixed administrative costs over higher revenue.
- Molina Medicaid Solutions operating income increased to $42.8 million from $32.6 million, mainly from higher transaction volumes and operating efficiencies.
- Operating cash flow increased sharply, but was accompanied by higher medical claims payable and government-agency liabilities. Medical claims and benefits payable rose to $1.201 billion from $669.8 million.
Outlook, commentary, risks and unusual items
- Expansion outlook: Puerto Rico’s managed-care contract was expected to begin enrolling members April 1, 2015, with approximately 350,000 members and anticipated annualized revenue of $750 million. These are expectations, not assured results. Management also expected further Marketplace growth and planned additional Medicare-Medicaid Plan launches in 2015.
- Health insurer fee: The company expected a 2015 Medicaid-related assessment of approximately $143 million and estimated that about $231 million of reimbursement would be needed to cover the assessment and its tax effects. California had not formally committed to reimbursement; Michigan and Utah had not formally committed to reimbursement of related tax effects. Approximately $20 million of 2014 HIF-related revenue was not recognized pending agreements.
- Medical-cost and reserve exposure: A one-percentage-point increase in the 2014 medical care ratio would, according to the filing, have reduced continuing-operations diluted EPS from $1.30 to approximately $0.12. Management highlighted uncertainty in claims estimates for new Medicaid expansion, MMP, ABD and long-term-services populations. A 1% change in claims completion factors was estimated to affect net income by about $23 million, and a 1% change in per-member cost assumptions by about $14 million.
- Contract and rate risks: State contracts are subject to renewal, competitive bidding, termination and changing funding or rates. Michigan’s Medicaid contract was scheduled for a new RFP in 2015. The company cited a $26 million pretax impact from Texas quality revenue it could not recognize, including about $20 million for measures for which it lacked sufficient information.
- Other cost and regulatory risks: Management identified specialty-drug costs, including hepatitis C treatment, inadequate rate adjustments, Medicaid and Medicare funding changes, audits, provider access, cybersecurity, and implementation of ICD-10 as risks. The filing provides no quantified earnings guidance.
- Unusual settlements and legal matters: A Washington state settlement produced an $11.2 million net premium revenue reduction in 2014. The company disclosed a Louisiana claim concerning pharmaceutical reimbursement formulas and two qui tam lawsuits; relators sought $62.3 million plus interest and penalties in one matter and $3 billion plus interest and penalties in another. The company disputed the allegations and stated that liability was not probable or reasonably estimable; government authorities declined to intervene in the two qui tam matters.
- Other items: The board authorized a new share repurchase program of up to $50 million through December 31, 2015. The filing reported no cash dividends. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether medical care ratios and claims reserves remain appropriate as new and higher-acuity populations mature, and whether favorable prior-period claims development continues.
- Whether states reimburse the full health insurer fee and tax effects, particularly amounts not formally committed or recognized in 2014.
- Whether the large operating-cash-flow increase is sustained after the effects of rising claims payable and government-agency accruals.
- Progress and profitability of the Puerto Rico launch, 2015 program expansions, and Michigan contract rebid; confirm actual membership and revenue against management’s expectations.
- Resolution and potential financial impact of the Texas quality-revenue uncertainty, Washington settlement matters, Louisiana claim and qui tam lawsuits.
- Parent-level liquidity and capital availability given regulatory limits on subsidiary dividends, debt service requirements, and the company’s planned repurchase authorization.