Molina Healthcare, Inc. — Q1 2021 Form 10-Q
Business and period: Molina provides managed healthcare services through Medicaid, Medicare and Marketplace programs. This summary covers the three months ended March 31, 2021, compared with the same period in 2020; balance-sheet comparisons are to December 31, 2020. The company served approximately 4.6 million members at quarter-end, up 35% from 3.4 million a year earlier. In Q1, it realigned reporting segments to Medicaid, Medicare, Marketplace and Other.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $6.522 billion | $4.549 billion |
| Premium revenue | $6.306 billion | $4.304 billion |
| Medical care costs | $5.474 billion | $3.716 billion |
| Medical margin | $832 million | $588 million |
| Operating income | $335 million | $274 million |
| Net income | $228 million | $178 million |
| Diluted EPS | $3.89 | $2.92 |
| Operating cash flow | $568 million | $143 million |
- Premium revenue grew 47%, primarily on membership growth and acquisitions completed in 2020. Total revenue rose approximately 43%.
- Consolidated medical care ratio (MCR) increased to 86.8% from 86.3%; general and administrative expense ratio rose to 7.3% from 7.0%. After-tax margin was 3.5%, compared with 3.9%.
- Segment results: Medicaid premium revenue was $4.840 billion and medical margin $604 million, with MCR of 87.5% (88.9% prior year). Medicare premium revenue was $799 million and medical margin $77 million, with MCR of 90.3% (81.7%). Marketplace premium revenue was $667 million and medical margin $151 million, with MCR of 77.3% (72.3%).
- Investment income declined to $9 million from $25 million, attributed to low interest rates and a temporary shift toward shorter-term investments. Interest expense rose to $30 million from $21 million, mainly following the 2020 issuance of $650 million of 3.875% notes. The effective tax rate decreased to 25.2% from 29.8%, largely because the health insurer fee was repealed for years after 2020.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $4.431 billion, investments $1.938 billion and restricted investments $138 million. Working capital was $3.0 billion; management reported cash and investments of approximately $6.5 billion.
- Long-term debt was $2.128 billion, consisting of $800 million of 4.375% notes due 2028, $700 million of 5.375% notes due 2022 and $650 million of 3.875% notes due 2030. No amounts were drawn on the $1.0 billion revolving credit facility; the company reported compliance with debt covenants.
- Operating cash flow was $568 million, versus $143 million a year earlier, reflecting growth and timing differences in government receivables and payables. Investing activities used $87 million; financing activities used $207 million, including stock repurchases and employee tax withholding.
- The company repurchased approximately 577,000 shares for $122 million in January and February. Approximately $219 million remained under its $500 million repurchase authorization as of April 29, 2021.
Material changes, outlook and risks
- Medicaid growth benefited from the COVID-19 public health emergency (PHE), which suspended eligibility redeterminations, and from acquisitions. Marketplace membership reached 620,000, up 302,000 sequentially, exceeding the company’s prior expectation of about 500,000 at the start of the year.
- Management said the net effect of COVID-19 on Q1 results was negligible overall, but varied by segment. Medicaid benefited from lower utilization, severe winter weather and a mild flu season; COVID-related state risk corridors partly offset that benefit. Higher direct COVID medical costs contributed to increased Medicare and Marketplace MCRs.
- The company recognized approximately $110 million in Q1 related to state COVID-19 risk corridors, primarily in Medicaid. The filing warns that states could expand or introduce retroactive corridors, and actual amounts may differ materially from estimates. Prior-year medical claims estimates developed favorably by $194 million in Q1 2021, primarily due to lower-than-expected Medicaid utilization and improved operating performance.
- Management expected Medicaid enrollment to continue benefiting from the PHE and paused redeterminations through the end of Q3 2021, estimating that each additional month of PHE could add $150 million to full-year revenue. Marketplace revenue growth was expected to exceed 50% in 2021, with year-end membership slightly above 500,000. The filing does not provide a clear full-year earnings or EPS guidance figure.
- After quarter-end, Molina announced a planned purchase of Cigna’s Texas Medicaid and Medicare-Medicaid contracts and certain assets for approximately $60 million, expected to close in the second half of 2021, subject to approvals. The Affinity Health Plan acquisition, at an estimated net purchase price of approximately $380 million, was expected to close in Q3 2021. Both were to be funded with cash. Molina also reported selection as an awardee in all three Ohio Medicaid regions, with the new contract expected to begin in early 2022.
- Material risks include uncertain post-pandemic utilization and medical costs; Medicaid rate and risk-corridor adjustments; Marketplace risk adjustment; state contract renewals and procurement; acquisition approvals and integration; regulatory capital and limits on subsidiary dividends; and the pending Affordable Care Act constitutionality case, with a Supreme Court decision then expected by June 2021.
- In Kentucky litigation, a court’s April 28, 2021 order upheld Molina’s contract award and Passport asset acquisition but ordered a new RFP due to perceived scoring irregularities. Molina said its Kentucky plan would continue operating under its current contract in the interim; further proceedings could affect the ultimate outcome.
Important facts for investors to verify
- Whether Medicaid utilization rebounds as deferred care resumes, and how that affects MCR and medical claims reserves.
- Final state risk-corridor and Marketplace risk-adjustment settlements, including the $110 million Q1 risk-corridor recognition and the $500 million net Marketplace risk-adjustment payable at March 31.
- Progress and final terms, approvals and integration costs for the Affinity and Cigna transactions, and implementation of the Ohio contract.
- Developments in the Kentucky RFP litigation and the ACA case, as well as any resulting contract, enrollment or regulatory effects.
- Cash availability at the parent versus regulated subsidiaries, permitted dividend capacity, the 2022 note maturity and continued covenant compliance.