Molina Healthcare, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context
Molina provides managed healthcare services through Medicaid, Medicare, and Marketplace programs. Its health plans operated in 14 states and Puerto Rico and served approximately 3.4 million members at quarter-end. The company reports Health Plans and Other segments.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $4,549 | $4,119 |
| Premium revenue | $4,304 | $3,952 |
| Medical care costs | $3,716 | $3,371 |
| Operating income | $274 | $280 |
| Net income | $178 | $198 |
| Diluted EPS | $2.92 | $2.99 |
| Medical care ratio (MCR) | 86.3% | 85.3% |
| G&A ratio | 7.0% | 7.3% |
| After-tax margin | 3.9% | 4.8% |
| Operating cash flow | $136 | $249 |
Health Plans medical margin was $588, versus $581 a year earlier. The effective tax rate rose to 29.8% from 23.8%, primarily because the 2020 health insurer fee (HIF) is nondeductible. Interest expense was $21, compared with $23.
At March 31, cash and cash equivalents were $2,365 and investments were $2,010; including $82 of restricted investments, cash and investments totaled $4,457. Working capital was $2,754. Debt totaled $1,622, including $600 outstanding under the term loan facility. The company had $499 of available revolving-credit capacity and reported compliance with debt covenants. Net leverage was 1.4x against a maximum of 2.5x; interest coverage was 13.5x against a minimum of 3.5x.
Operating cash flow declined by $113 year over year, which management attributed to timing of government receivables and payables and accelerated provider payments. Cash and restricted cash decreased by $85 during the quarter. The parent received $50 in subsidiary dividends and contributed $10 to regulated plans. Subsidiary dividends are subject to regulatory limits; $114 could be paid without prior approval at quarter-end.
Material changes versus the prior comparable period
- Revenue rose about 10%, mainly from approximately 10% higher premium revenue per member per month in Medicaid and Medicare, partly offset by slightly lower member months.
- Net income fell about 10% and operating income declined modestly. Diluted EPS decreased less, partly because the share repurchase reduced shares outstanding.
- Consolidated MCR increased by 100 basis points. Q1 2019 benefited from approximately 140 basis points of favorable prior-period reserve development; Q1 2020 reserve development was negligible.
- Marketplace medical margin fell to $106 from $150, with a higher MCR of 72.3% versus 62.2%, mainly reflecting lower 2020 pricing and reduced membership. Medicare medical margin increased to $117 from $85.
- The company repurchased approximately 3.4 million shares for $446 and completed its $500 share-purchase authorization. It drew the remaining $380 available under its term loan facility; long-term debt increased from $1,237 at year-end to $1,596, excluding current maturities.
Outlook, management commentary, and risks
- COVID-19: The pandemic had no material effect on Q1 consolidated results, and the company reported no significant service interruptions. Management could not estimate the full-year impact. It expected increased Medicaid enrollment, but also potentially higher COVID-19 costs, lower near-term routine utilization, and a possible rebound in deferred care. Management noted that pandemic-related utilization effects could move the MCR in either direction. Remote-work and related operating protocols added $6 of Q1 expense.
- Liquidity outlook: Management believed cash, available borrowing capacity, and operating cash flow would support operations, regulatory requirements, debt obligations, and capital expenditures for at least 12 months. It cautioned that state fiscal pressure could affect premium-payment timing and subsidiary dividends.
- Investment income: Management expected it to decline in 2020 as investments mature or roll over at lower yields. A hypothetical immediate 1% rise in interest rates would reduce fixed-income investment fair value by approximately $52.
- HIF: The 2020 fee was reinstated and then repealed for years after 2020. The company accrued an estimated $271 liability, payable by September 30, 2020, and reported reimbursement arrangements or payments from all states where it operates Medicaid programs.
- Contracts and operations: Molina decided to sell its Puerto Rico Medicaid business. Texas canceled its STAR+PLUS award contracts and STAR/CHIP procurement; next steps were undetermined. California’s current contracts run through 2020, with a new RFP anticipated later. The company also terminated its agreement to acquire NextLevel Health Partners in Illinois.
- Acquisitions: On April 30, 2020, Molina agreed to acquire Magellan Complete Care for approximately $820, subject to regulatory and other approvals, with closing expected in Q1 2021. It intended to fund the purchase with cash and had a commitment for up to $400 of debt financing. A separate YourCare transaction was expected to close in mid-2020.
- Marketplace risk corridors: Following a favorable Supreme Court ruling, Molina cited summary judgment of approximately $52 for its 2014–2015 claims and a separate approximately $76 claim for 2016. Timing of judgment and collection remained uncertain.
- Other material risks include medical-cost estimation, Medicaid contract renewals and rate adequacy, Marketplace risk adjustment, provider financial stress, regulatory capital and dividend restrictions, litigation, and acquisition integration. The filing provides no specific numerical earnings guidance.
Important facts for investors to verify
- Whether COVID-19 enrollment, treatment costs, deferred-care rebound, and provider support materially change medical costs and MCR in later quarters.
- Whether the $380 million Marketplace risk-adjustment net payable and other government-agency balances are resolved as estimated.
- Timing and collectability of the approximately $128 million in cited Marketplace risk-corridor claims.
- Regulatory approvals, funding, closing, and integration risks for the Magellan Complete Care and YourCare transactions, and progress on the Puerto Rico exit.
- Debt, cash availability, subsidiary dividend capacity, and covenant headroom after the term-loan draw, completed buyback, and planned acquisition spending.