Molina Healthcare, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing was signed February 28, 2013. This is an annual report, not a standalone fourth-quarter filing; unaudited quarterly results are also included.
Business context
Molina provides Medicaid-focused managed health plans and Medicaid information-system services to state agencies. Its Health Plans segment operated in nine states and served about 1.8 million members at year-end; Molina Medicaid Solutions provided MMIS and related services to state customers. Health Plans revenue is primarily fixed per-member premiums, while Molina bears the medical-cost risk.
Financial and operating results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $6.03 billion | $4.77 billion |
| Premium revenue | $5.83 billion | $4.60 billion |
| Service revenue | $187.7 million | $160.4 million |
| Operating income | $35.5 million | $80.2 million |
| Net income | $9.8 million | $20.8 million |
| Diluted EPS | $0.21 | $0.45 |
| Medical care ratio | 89.9% | 86.8% |
| Cash from operating activities | $347.8 million | $225.4 million |
| Cash and cash equivalents | $795.8 million | $493.8 million |
| Long-term debt, including current maturities | $262.9 million | $218.1 million |
Revenue increased 26%, mainly from membership growth, higher-revenue member mix, and expanded benefits. Membership grew 100,000 year over year to 1.797 million. Medical care costs rose to $5.10 billion, and the medical care ratio increased 3.1 percentage points. General and administrative expenses were $532.6 million, or 8.8% of revenue; premium tax expense was $159.0 million.
Health Plans operating income fell to $11.7 million from $78.1 million. Molina Medicaid Solutions operating income improved to $23.7 million from $2.1 million, principally as Idaho and Maine contracts stabilized. The company reported working capital of $521.1 million and cash and investments of $1.20 billion at year-end. Cash provided by investing activities was $93.6 million; financing activities provided $47.7 million.
Changes, unusual items, and outlook
- Management attributed lower earnings chiefly to low-margin growth in aged, blind, and disabled (ABD) membership in California and Texas. Newly managed populations had pent-up medical demand, while initial state rates assumed savings that management characterized as unrealistic. Rate increases and improving cost trends supported better results in the fourth quarter.
- Quarterly results were volatile: the second quarter recorded an operating loss of $59.3 million and net loss of $37.3 million; the fourth quarter recorded operating income of $54.1 million and net income of $25.6 million. The filing does not provide a clear single explanation for the full quarterly swing.
- The Missouri health-plan contract ended June 30, 2012, after the company lost the state’s competitive bid. Missouri contributed $113.8 million of premium revenue through June 30. A $64.6 million non-cash impairment related to the contract was recorded in fourth-quarter 2011; no impairment was recorded in 2012.
- Management cited ACA-related opportunities, including Medicaid expansion, dual-eligible programs, and insurance marketplaces, but emphasized uncertainty around implementation, rates, utilization, and costs. As of the filing, six states where Molina operated had indicated intent to expand Medicaid, two had declined, and Utah was undecided.
- A potentially material ACA health-insurer assessment was estimated by the company at about $100 million for 2014. Management warned that rates might not fully offset the assessment; the filing describes this estimate as uncertain.
- After year-end, Molina issued $550 million of 1.125% cash-convertible senior notes due 2020, used about $40 million of proceeds to repay and terminate its revolving credit facility, and repurchased $50 million of common stock. The notes settle only in cash upon conversion; related warrants could dilute shares above their strike price.
- Other significant risks include medical-claims reserve estimation, state rate reductions or delayed payments, contract rebidding and renewals, provider access, regulatory and audit exposure, and concentration in government-funded business. The company reported $494.5 million of medical claims and benefits payable, including $377.6 million of fee-for-service claims incurred but not paid; favorable prior-period claims development reduced 2012 medical costs by $39.3 million.
- Health-plan subsidiaries had $557.9 million of aggregate statutory capital and surplus against $345.7 million of required minimums and were compliant at year-end. Regulatory restrictions limited transfer of $549.7 million of subsidiary net assets to the parent. The independent auditor gave unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Whether ABD membership growth and expanded benefits earn adequate rates and improve medical care ratios, particularly in California and Texas.
- How actual claims payments develop against the $494.5 million year-end claims liability, given reserve-estimation sensitivity and favorable prior-period development.
- Implementation, pricing, and profitability of Medicaid expansion, dual-eligible, long-term-care, and other new state programs; and the realized impact of the estimated 2014 health-insurer assessment.
- Contract renewals and bids, especially the transition from the Louisiana MMIS contract and upcoming state Medicaid procurement decisions.
- The effect of the 2020 note issuance, cash-funded share repurchase, warrants, and the 2014 convertible notes on leverage, liquidity, and potential dilution.
- Whether restricted subsidiary capital and dividend limits constrain parent-company access to cash, despite consolidated liquidity.