Molina Healthcare, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with Q1 2013 unless stated otherwise. Molina provides Medicaid-focused health plans in 11 states and Medicaid information-processing services. Its plans served approximately 2.15 million members at quarter-end, up 18% from 1.82 million a year earlier.
Financial performance
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $2,069.2 | $1,590.4 | +30% |
| Premium revenue | $1,940.3 | $1,497.4 | +30% |
| Operating income | $24.3 | $67.9 | -64% |
| Income from continuing operations | $4.8 | $30.5 | -84% |
| Net income | $4.5 | $29.9 | -85% |
| Diluted EPS from continuing operations | $0.10 | $0.65 | Down |
| Medical care ratio | 88.7% | 86.0% | Up 2.7 percentage points |
| General and administrative expense ratio | 9.1% | 8.9% | Up 0.2 percentage points |
Medical care costs were $1,721.7 million, up 34%, faster than premium revenue growth. The resulting lower operating margin, the non-deductible health insurer fee (HIF), delayed quality-incentive revenue, and higher costs associated with growth weighed on earnings. Molina reported adjusted continuing-operations diluted EPS of $0.64, versus $1.08 in Q1 2013; this is a non-GAAP measure.
- Segments: Health Plans operating income was $14.0 million, versus $61.5 million. Molina Medicaid Solutions operating income rose to $10.2 million from $6.4 million, principally on increased revenue associated with Medicaid expansion.
- Cash flow: Operating cash flow was $210.9 million, versus $20.1 million. The increase was primarily associated with growth in medical claims payable. Investing cash outflow was $27.5 million; financing cash outflow was $35.9 million, including $38.1 million of contingent-consideration settlement payments.
- Liquidity: Cash and cash equivalents were $1,083.4 million at March 31. Cash and investments, including restricted investments, totaled $1,872.5 million. Working capital was $725.3 million. Management said resources and internally generated funds should support operations, regulatory requirements, and capital spending for at least 12 months.
- Debt: Convertible notes had $737.0 million aggregate principal outstanding; carrying value was $604.6 million. The $187.0 million principal amount of 3.75% notes was due October 1, 2014. The $550.0 million 1.125% cash-convertible notes mature in 2020.
Material changes and notable items
- Membership growth reflected approximately 133,000 Medicaid expansion members and 126,000 new South Carolina members beginning in January 2014; Marketplace membership added approximately 7,700.
- Premium revenue increased due to 19% growth in member months and a 9% increase in premium revenue per member per month. New and expanded populations also contributed to startup and utilization pressures; South Carolina’s medical care ratio was 94.0% in its first quarter of operation.
- Favorable prior-period claims development was $50.9 million. Management attributed reserve overestimation mainly to Ohio and Michigan experience, while noting uncertainty in estimating claims for new Medicaid expansion and South Carolina members, retroactive New Mexico enrollment, and expanded benefits. Management said reserve replenishment generally offset the prior-period benefit in reported results.
- The HIF generated $18.7 million of revenue and $22.2 million of expense in Q1. Molina recorded an estimated full-year HIF liability of $88.8 million. Management estimated that lack of reimbursement reduced Q1 earnings by approximately $16 million.
- Contingent-consideration fair-value changes produced a $4.3 million gain in general and administrative expenses, including reductions related to South Carolina and New Mexico acquisitions. The company also recorded a $5.0 million receivable under its California rate-settlement agreement.
Outlook, commentary, and risks
- Management said 2014 full-year expectations anticipate a 7.5% general and administrative expense ratio in Q4. It remained guardedly optimistic that it would secure state agreements for full HIF reimbursement before year-end and recognize most Texas quality-incentive revenue before year-end. The filing does not provide a clear full-year EPS guidance figure in the presented text.
- As of May 1, 2014, Florida, Illinois, Ohio, Washington, and Wisconsin had contractually committed to reimburse the full economic impact of the HIF. Other states had not made contractual commitments. Molina estimated an approximately 2.3% Medicaid premium-rate increase would be needed to cover the HIF and its tax effects; failure to obtain full reimbursement could materially affect results.
- Washington’s Health Care Authority demanded $14.4 million related to delayed enrollment of COPES members and $5.8 million related to psychotropic-drug claims. Molina disputed the demands and said liability was not then probable or reasonably estimable.
- Other key risks include medical-cost and reserve estimation, high-cost drugs and claims, state rate and budget pressures, Medicaid contract renewals and competitive bids, regulatory capital and dividend restrictions, and legal or regulatory proceedings. Approximately $592 million of regulated-subsidiary net assets was not transferable to the parent under applicable restrictions.
- A related-party office lease involving entities whose principals include the CEO and CFO is disclosed. Ordinary-course legal matters remain subject to uncertain outcomes; the filing does not quantify a clear aggregate range of possible losses.
Investor verification priorities
- Track medical claims development and reserve adequacy as new members, benefits, and markets mature; compare incurred claims, claims inventory, and payment trends.
- Confirm whether states reimburse the HIF on a fully grossed-up basis, and whether anticipated quality-incentive revenue is ultimately recognized.
- Monitor the Washington reimbursement dispute and any resulting liability or resolution.
- Assess repayment or refinancing of the $187 million notes due October 2014, alongside parent-level liquidity and regulated-subsidiary transfer restrictions.
- Validate that South Carolina, Medicaid expansion, and other growth cohorts achieve sustainable medical margins, and review the assumptions behind management’s Q4 expense-ratio outlook.