Molina Healthcare, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Molina provides managed healthcare services through Medicaid, Medicare and Marketplace programs. At quarter-end, it served approximately 5.2 million members across 19 states.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $7.927B | $7.040B | $23.751B | $20.362B |
| Premium revenue | $7.636B | $6.800B | $22.966B | $19.689B |
| Operating income | $335M | $221M | $1.068B | $829M |
| Net income | $230M | $143M | $736M | $556M |
| Diluted EPS | $3.95 | $2.46 | $12.58 | $9.51 |
| Medical care ratio (MCR) | 88.4% | 88.9% | 87.9% | 88.1% |
| G&A ratio | 7.1% | 7.5% | 7.1% | 7.3% |
Q3 net income rose 61% year over year; nine-month net income rose 32%. Q3 after-tax margin was 2.9%, versus 2.0% a year earlier; the nine-month margin was 3.1%, versus 2.7%. Management attributed operating improvement primarily to membership growth, higher premium revenue and lower consolidated MCR. Q3 premium revenue increased 12%; nine-month premium revenue increased 17%.
Segment trends: Q3 Medicaid premium revenue grew 19% and medical margin rose to $703M from $532M; Medicaid MCR improved to 88.5% from 89.6%. Medicare premium revenue grew 8%, but Q3 medical margin fell to $108M from $151M as MCR rose to 88.7% from 82.8%. Marketplace premium revenue fell 28% to $564M, while Q3 medical margin increased to $77M from $68M and MCR improved to 86.3% from 91.3%. Marketplace membership was 353,000, down from 719,000 a year earlier.
Cash, liquidity and debt
- Operating cash flow for the first nine months was $985M, down from $1.522B. The $537M decline primarily reflected timing changes in government receivables and payables, partly offset by higher earnings.
- Investing cash use was $938M; financing cash use was $258M. Cash, cash equivalents and restricted cash decreased $211M to $4.295B. Balance-sheet cash and investments totaled $7.881B at September 30, compared with $7.640B at December 31, 2021.
- Working capital was $3.3B, versus $3.0B at year-end 2021. Long-term debt was $2.175B; no amount was drawn on the $1.0B revolving credit facility. The company reported compliance with debt covenants.
- Regulated subsidiaries exceeded estimated minimum capital requirements of approximately $2.2B. About $170M of dividends could be paid without prior regulatory approval. Management said available cash, borrowing capacity and operating cash flow should support obligations for at least 12 months.
Material changes, outlook and notable items
- Membership was 5.175M, up 337,000 (7%) year over year but down 24,000 from December 2021, chiefly reflecting Marketplace attrition. Management expected Marketplace membership to end 2022 at approximately 315,000.
- The COVID-19 net impact reduced Q3 2022 net income by approximately $0.59 per diluted share and increased MCR by 60 basis points; the respective Q3 2021 impacts were approximately $1.00 per share and 110 basis points. Management cited uncertainty in utilization recovery and expected Medicaid enrollment benefits from the PHE redetermination pause at least through mid-January 2023.
- COVID-related risk corridors reduced medical margin: Molina recognized approximately $34M in Q3 and $156M in the first nine months of 2022, versus $17M and $183M in the comparable 2021 periods. Changes to corridor terms or estimates could materially affect results.
- Prior-year medical claims estimates developed favorably by $338M through September 2022, primarily reflecting lower-than-expected utilization and improved operating performance. Such reserve development is estimation-sensitive.
- Investment income rose to $49M in Q3 from $20M, largely due to higher interest rates and invested assets. Unrealized investment losses were $243M at September 30, and nine-month other comprehensive loss, net of tax, was $180M. Management estimated a hypothetical immediate 1% rate increase would reduce fixed-income investment fair value by approximately $85M.
- In Q2, Molina repurchased approximately 658,000 shares for $200M; $300M remained under the $500M authorization as of October 26, 2022, which expired December 31, 2022. The $134M AgeWell New York purchase price was paid September 30; the acquisition closed October 1. The company expected its approximately $150M My Choice Wisconsin acquisition to close in early 2023, subject to approvals.
- Management reported contract awards or intent-to-award notices in Nebraska, Iowa, California and Mississippi, with operations under those contracts expected to begin in 2023 or 2024. Texas procurement outcomes remained pending. The company also expected savings from a smaller real-estate footprint and changes to its Infosys and CVS Caremark agreements.
Risks, contingencies and investor verification
Key risks include medical-cost and utilization estimation, Medicaid eligibility redeterminations after the PHE, state rate and risk-corridor changes, Marketplace membership and risk-adjustment estimates, and government contract renewals and procurements. The filing also describes pending Kentucky Medicaid procurement litigation and Puerto Rico litigation with ASES; outcomes were uncertain. Other risks include regulatory limits on subsidiary dividends, acquisition execution, cyber and compliance matters, and interest-rate exposure. The company stated that disclosure controls were effective and that no material internal-control changes occurred during the nine months.
- Verify subsequent medical claims development and whether the $338M favorable prior-year reserve development persists.
- Monitor COVID utilization, risk-corridor changes and the transition from the Medicaid redetermination pause.
- Track Medicare MCR, Marketplace membership attrition and Marketplace risk-adjustment settlements.
- Follow Texas contract awards, Kentucky and Puerto Rico proceedings, and the execution and funding of AgeWell and My Choice Wisconsin transactions.
- Assess cash-flow conversion, regulated-subsidiary dividend capacity, investment losses and capital allocation, including any additional repurchases.