MOH

Business Context and Reporting Period

Molina Healthcare, Inc. is a multi-state managed care organization serving low-income populations through government-sponsored programs, primarily Medicaid and CHIP, with a smaller segment in Medicare Advantage. As of December 31, 2008, the company operated 10 licensed health plans across California, Florida, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington, serving approximately 1,256,000 members. The company operates on a capitation model, receiving fixed payments per member per month, assuming financial risk for medical care costs.

Key Financial Metrics (Year Ended December 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Premium revenue increased 26% to $3.09 billion, driven by the acquisition of Mercy CarePlus in Missouri, enrollment growth in Ohio and New Mexico, and rate increases in Washington.
• Medical Care Costs: The medical care ratio increased slightly to 84.8% from 84.5%. The Ohio health plan's ratio was notably high at 91.1%, while Michigan improved to 79.6%.
• Investment Income: Decreased 30% to $21.1 million due to declining interest rates (average yield dropped from 5.2% in 2007 to 3.0% in 2008).
• Impairments: The company recorded a $7.2 million other-than-temporary impairment charge related to auction rate securities, offset partially by a $6.9 million gain on a rights agreement regarding those securities.
• Stock Repurchases: The company repurchased approximately 1.9 million shares of common stock for $50 million during 2008.

Guidance, Outlook, and Risks

Outlook and Strategy: Management projects continued growth in Medicare membership, targeting 12,000 members by the end of 2009. The company expects to lower the Ohio health plan's medical care ratio to approximately 87% in 2009 through risk adjustment payments and provider re-contracting. The company anticipates that cash resources will be sufficient to support operations for at least the next 12 months.

Key Risks and Contingencies:

• State Budget Pressures: Recession-driven state budget shortfalls may lead to funding cuts or delayed payments, particularly in states other than Texas. The American Recovery and Reinvestment Act of 2009 provides temporary federal matching increases, but states must still budget their share.
• Contract Renewals: Contracts in Michigan and Missouri expire in September 2009 and are subject to competitive bidding. Failure to renew could materially reduce revenue.
• Investment Liquidity: The company holds $70.5 million in auction rate securities (par value) which experienced failed auctions. While deemed temporary impairments, liquidity is constrained, and fair value is estimated using models rather than active market prices.
• Medical Cost Volatility: Profitability is highly sensitive to the medical care ratio; a 1% increase in the ratio would have reduced 2008 earnings by 29%.

Investor Verification Checklist

• Verify the status of the Michigan and Missouri contract renewals expected in 2009, as these represent significant revenue sources.
• Monitor the Ohio health plan's medical care ratio to ensure it improves toward the projected 87% target, given its historical underperformance.
• Assess the liquidity and fair value of the $70.5 million auction rate securities portfolio and the potential impact of further market disruptions.
• Review state budget announcements for Medicaid funding levels in California, Ohio, and other key operating states to gauge payment timing and rate stability.
• Confirm the progress of the Florida NetPASS acquisition and the transition of members, which was expected to complete in the third quarter of 2009.