Molina Healthcare, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Molina provides managed healthcare services through Medicaid, Medicare and Marketplace programs. It served approximately 5.3 million members across 19 states.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $8.149 billion | $7.770 billion |
| Premium revenue | $7.885 billion | $7.531 billion |
| Operating income | $455 million | $372 million |
| Net income | $321 million | $258 million |
| Diluted earnings per share | $5.52 | $4.39 |
| Medical care costs | $6.871 billion | $6.563 billion |
| Medical care ratio (MCR) | 87.1% | 87.1% |
| General and administrative expense ratio | 7.2% | 7.4% |
| After-tax margin | 3.9% | 3.3% |
Revenue increased approximately 5% and net income increased 24%. Management attributed improved operating income to membership growth, higher premium revenue and investment income. Investment income rose to $71 million from $11 million, mainly reflecting higher interest rates and, to a lesser extent, more invested assets. Interest expense was $28 million in both periods; the effective tax rate was 25% in both.
Medical margin was $1.014 billion, up from $968 million. By segment, Medicaid premium revenue was $6.349 billion and medical margin was $734 million; Medicare was $1.046 billion and $126 million; Marketplace was $490 million and $154 million. Medicaid MCR increased to 88.4% from 88.1%, and Medicare MCR to 88.0% from 86.5%; Marketplace MCR declined to 68.6% from 78.6%. Marketplace margin improvement reflected, among other factors, lower MCR and a favorable change in the 2022 risk-adjustment payable. Management said Marketplace’s Q1 MCR was significantly below full-year expectations but consistent with seasonality.
Cash flow, balance sheet and debt
- Operating cash flow was $916 million, versus $363 million a year earlier. Management cited working-capital timing, operating growth and higher earnings; cash-flow movements included changes in receivables, government-agency payables and deferred revenue.
- Investing activities used $302 million, principally reflecting net investment purchases; financing activities used $65 million, including $58 million of shares withheld for employee tax obligations. Cash, cash equivalents and restricted cash increased $549 million during the quarter to $4.597 billion.
- At March 31, cash and cash equivalents were $4.554 billion and investments were $3.810 billion. Working capital was $3.5 billion. Current assets were $11.159 billion and current liabilities were $7.614 billion.
- Long-term debt was $2.177 billion, comprising $800 million of 4.375% notes due 2028, $650 million of 3.875% notes due 2030 and $750 million of 3.875% notes due 2032. No revolving-facility borrowings were outstanding; $1 billion was available. The company reported covenant compliance.
- Regulated subsidiaries’ aggregate statutory capital and surplus exceeded estimated minimum requirements of approximately $2.2 billion. Approximately $270 million of dividends could be paid without prior regulatory approval.
Material developments, outlook and risks
- Membership was 5.266 million, up 181,000 (4%) year over year and 8,000 sequentially. Medicaid membership grew while Marketplace membership fell to 271,000 from 348,000 at year-end 2022.
- Medicaid eligibility redeterminations resumed starting April 1, 2023, following the federal decoupling of redeterminations from the COVID-19 public health emergency. Molina said it expected to retain approximately half of the Medicaid membership gained since March 2020, excluding acquisitions and its Puerto Rico exit. Actual retention, member acuity and rate adjustments are important uncertainties.
- The Indiana Department of Administration recommended beginning negotiations on a proposed four-year Medicaid long-term-services-and-supports contract, with potential one-year renewals. This was a recommendation to negotiate, not a completed contract award.
- The company expected its acquisition of substantially all My Choice Wisconsin assets, for approximately $150 million net of expected tax benefits and required regulatory capital, to close in mid-2023 subject to approvals and customary conditions.
- Medical claims estimates developed favorably by $298 million for prior years, primarily due to lower-than-expected utilization and improved operating performance. The filing says minimum MLR requirements and medical cost corridors mostly absorbed the earnings impact. Claims estimates and premium adjustments remain significant areas of judgment.
- Available-for-sale investments had $164 million of net unrealized losses at quarter-end, primarily attributed to interest-rate movements rather than credit deterioration. A hypothetical immediate 1% rate increase was estimated to reduce fixed-income investment fair value by approximately $95 million.
- Key disclosed risks include Medicaid redetermination and state budget/rate pressures; medical-cost and utilization trends; Marketplace enrollment and risk adjustment; contract renewals and bidding; regulatory compliance, audits and litigation; cybersecurity; and refinancing or covenant risks. The filing provides no clear numerical full-year earnings guidance in the supplied text.
- Legal matters include the Kentucky Medicaid procurement litigation, for which the state health plan was expected to continue operating under its current contract pending further court action, and a Puerto Rico contract dispute; the company said no prediction could be made regarding the Puerto Rico matter’s outcome.
Most important facts for investors to verify
- Whether Medicaid redetermination attrition, member acuity and state rate changes align with management’s expectations, including its estimate of retaining about half of pandemic-era membership gains.
- Whether Medicaid and Medicare medical-cost trends remain within target ranges, and how much favorable prior-period claims development continues to affect reported results.
- Whether Marketplace membership, MCR and risk-adjustment estimates develop as expected, given the stated seasonality and margin strategy.
- Whether the Indiana contract negotiations and My Choice Wisconsin transaction proceed as anticipated, and the financial and operational effects of new business implementation.
- Whether investment returns, interest-rate exposure, regulated-subsidiary capital needs and dividend availability affect liquidity, alongside the company’s $2.177 billion of notes and share-repurchase authorization.