Molina Healthcare, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; comparative results are for the three and nine months ended September 30, 2015. Amounts are in millions of dollars except per-share data and membership. Financial statements are unaudited.
Business context
Molina provides managed healthcare to people receiving government assistance. Its Health Plans segment is the largest business; the other segments are Molina Medicaid Solutions and Other, which includes Pathways. Health Plans served 4.246 million members at September 30, 2016, up from 3.470 million a year earlier, reflecting organic growth and acquisitions.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $4,546 | $3,611 | $13,248 | $10,307 |
| Operating income | $118 | $113 | $312 | $311 |
| Net income | $42 | $46 | $99 | $113 |
| Diluted EPS | $0.76 | $0.77 | $1.77 | $2.07 |
| Medical care costs | $3,748 | $3,016 | $10,930 | $8,581 |
| Medical care ratio | 89.4% | 89.3% | 89.5% | 88.9% |
- Revenue increased 26% in Q3 and 29% year to date. Premium revenue rose 24% and 27%, respectively, driven chiefly by higher membership and acquisitions. Medical margin increased 23% in Q3 and 20% year to date.
- Net income declined 9% in Q3 and 12% year to date, while operating income was nearly flat year to date. Higher interest expense—$76 million year to date versus $45 million—primarily reflects the $700 million senior-note issue in late 2015. The effective tax rate was 54.0% in Q3 and 58.0% year to date.
- Cash from operations was $633 million for the first nine months, down from $906 million in 2015. Investing activities used $131 million; financing activities provided $11 million. Cash and cash equivalents ended at $2,842 million, versus $2,329 million at year-end 2015.
- At September 30, working capital was $1,448 million and cash plus investments was approximately $4,577 million, excluding $116 million of restricted investments. Total debt had a $1,437 million carrying value and $1,552 million principal balance; lease financing obligations were $198 million. The $466 million carrying value of the 1.125% convertible notes was classified as current because the notes became convertible.
- The $250 million revolving credit facility had no borrowings outstanding; $244 million remained available after letters of credit. The company reported compliance with its debt covenants. Cash, cash equivalents and investments held at the parent company were $388 million, compared with $612 million at year-end; regulatory restrictions limit transfers from health-plan subsidiaries.
Material changes versus the prior comparable period
- Membership growth and acquisitions increased scale: ending membership rose about 22% year over year. Marketplace membership increased to 568,000 from 226,000.
- Medical costs rose at a similar pace to premium revenue, but the medical care ratio worsened 0.1 percentage point in Q3 and 0.6 point year to date. Marketplace risk-adjustment charges and weaker margins in Medicaid Expansion contributed to pressure.
- Molina recognized $190 million of favorable prior-period medical claims development during the first nine months, versus $141 million for all of 2015. Reserve-estimation uncertainty remains, including for recently acquired and newly covered populations.
- Texas quality-related revenue included a $51 million second-quarter recognition of previously deferred amounts, $44 million of which related to 2014 and 2015 service dates. Without that out-of-period revenue, Texas’s year-to-date medical care ratio would have been approximately 88%.
- Molina Medicaid Solutions service margin fell to $17 million year to date from $43 million, mainly due to higher costs on re-procured legacy state contracts. The Other segment contributed $29 million of service margin, largely reflecting Pathways, acquired in 2015.
Outlook, commentary, risks and unusual items
- No specific full-year earnings guidance is provided in the supplied filing text. Management said full-year 2016 Marketplace performance, measured on 2016 dates of service, was expected to be approximately breakeven, while anticipating declining Marketplace margins in the second half.
- Management attributed Q3 improvement versus Q2 to better profitability outside Marketplace, administrative efficiency and a lower effective tax rate. Adjusted diluted EPS rose to $0.85 from $0.67 quarter over quarter; this is a non-GAAP measure.
- Management cited expected Medicaid rate increases in California, Puerto Rico, Texas and Florida, rate decreases for Medicaid Expansion in California and Ohio, and an 86% medical-care-ratio floor in South Carolina. Cost-saving execution and medical utilization remain important uncertainties.
- Marketplace risk adjustment was a major exposure: Molina recorded a net risk-adjustment payable of $370 million at September 30, including $372 million for the current benefit year, and estimated these payments reduced Marketplace premium revenue by approximately 25% for the first nine months. The company also disclosed an approximately $80 million unrecorded risk-corridor receivable because federal funding is uncertain.
- Other estimation and policy risks include medical-claims reserves, premium-rate adequacy, pharmacy-cost trends, state contract terms, government audits, and state budget and payment delays. Illinois was operating under a stopgap budget; it owed Molina approximately $43 million for May and June premiums as of October 24. Puerto Rico was current on premiums at that date but faced a significant fiscal crisis and potential depletion of ACA funds in fiscal 2018.
- The proposed acquisition of certain Aetna and Humana Medicare Advantage assets was estimated at $117 million and expected to close in 2017, subject to completion of the Aetna-Humana merger, litigation resolution, regulatory approvals and other conditions. A Barclays commitment letter provides for up to $400 million of financing.
- A proposed $14 million settlement in the Rodriguez litigation involving Pathways was being finalized; Molina expected full recovery under seller indemnification. A separate risk-adjustment-related lawsuit was dismissed with prejudice, but the plaintiff appealed.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Marketplace risk-adjustment estimates, risk-corridor recoveries and expected breakeven performance prove accurate, and how these affect subsequent results.
- Whether medical claims reserves remain adequate given the $190 million favorable prior-period development and the uncertainties identified for particular plans and populations.
- Whether premium rates and medical-cost trends support sustainable margins, particularly in Marketplace, Medicaid Expansion, South Carolina and other plans with rising medical care ratios.
- Whether Illinois resolves its budget impasse and pays premiums on time, and whether Puerto Rico’s fiscal and federal-funding pressures affect contract funding or payments.
- Whether the Medicare asset acquisition closes on expected terms and timing, and how it is financed and integrated.
- Near-term liquidity at the parent level, given restricted subsidiary assets and the convertible notes’ current classification; also verify debt maturities, covenant compliance and any conversion-related cash requirements.