Molina Healthcare, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Molina provides managed health care and Medicaid administration services; its Health Plans segment is the largest business. It served approximately 4.65 million members across 12 states and Puerto Rico at quarter-end.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $4,999 million | $4,359 million | $9,903 million | $8,702 million |
| Operating income (loss) | $(287) million | $105 million | $(205) million | $194 million |
| Net income (loss) | $(230) million | $33 million | $(153) million | $57 million |
| Diluted earnings (loss) per share | $(4.10) | $0.58 | $(2.74) | $1.01 |
| Medical care ratio (MCR) | 94.8% | 89.2% | 91.6% | 89.5% |
| G&A ratio | 8.1% | 8.1% | 8.5% | 7.9% |
Premium revenue grew 18% in Q2 and 17% in the first half, reflecting membership growth and higher revenue per member. Medical costs rose faster, reducing Health Plans medical margin to $249 million in Q2 from $435 million; first-half medical margin was $786 million versus $842 million. Q2 net profit margin was negative 4.6%.
For the six months, operating cash flow was $672 million, compared with $278 million in 2016; investing cash outflow was $845 million and financing cash inflow was $333 million. Cash and cash equivalents were $2.979 billion at June 30. Working capital was $1.376 billion. Reported cash and investments totaled $5.616 billion, including restricted amounts.
Total debt and lease financing obligations were approximately $1.988 billion, including $773 million classified as current. The company issued $330 million of 4.875% notes due 2025; proceeds were restricted for specified debt-related uses. It had no borrowings under its $500 million revolving facility, with $494 million available after letters of credit. It reported compliance with facility covenants.
Material changes and unusual items
- Q2 results included approximately $330 million of identified pretax adverse items: $72 million of noncash impairment, $85 million of higher-than-expected prior-year medical costs, $44 million of Marketplace estimate adjustments, a $78 million increase in the Marketplace premium deficiency reserve, and $43 million of restructuring and separation costs.
- The Marketplace premium deficiency reserve rose from $22 million at March 31 to $100 million at June 30. Q2 Marketplace MCR was 101.9%; membership increased substantially year over year.
- Pathways-related goodwill and intangible impairment totaled $70 million; an additional $2 million goodwill impairment was recorded at another subsidiary. The charges were noncash.
- First-half results included a $75 million termination fee from the abandoned Aetna-Humana Medicare acquisition. No comparable fee was reported in 2016.
- The 2017 Health Insurer Fee moratorium eliminated related revenue and expense for the year.
- Favorable prior-period medical claims development was $31 million in the first half, versus $189 million in the comparable 2016 period. Management highlighted elevated uncertainty in claims estimates, including from Marketplace enrollment growth and state-specific claims patterns.
Outlook, management actions and risks
- The company accelerated a restructuring plan involving organizational and process changes, provider-contract remediation, vendor review and direct-delivery restructuring. It expects $300–$400 million in annualized run-rate savings upon completion in late 2018, including $200 million expected to be in place by December 2017. Management said $55 million of annualized savings had already been achieved after quarter-end.
- Estimated restructuring costs were $130–$150 million for the second half of 2017, plus $40 million in 2018. Management cautioned that upfront costs would exceed 2017 savings.
- Molina plans to exit the Utah and Wisconsin ACA Marketplaces at year-end 2017, raise 2018 premiums by 55% in remaining Marketplace plans (30% if cost-sharing subsidies were funded), and reduce its Washington Marketplace participation. Further withdrawals remained possible.
- Management believed cash resources, available credit and internally generated funds would support operations, restructuring, regulatory requirements and capital spending for at least 12 months. It intended to borrow approximately $300 million under the revolving facility in early August 2017.
- Risks include ACA and Marketplace policy and rate uncertainty, higher medical utilization and costs, state contract re-procurements, state payment delays, and Puerto Rico’s debt restructuring. Illinois owed approximately $116 million for certain premiums as of July 28; Puerto Rico was current with premium payments on that date.
- Some health plans did not meet minimum statutory capital requirements at June 30, primarily due to Marketplace reserves. Molina said it intended to remedy deficiencies before statutory filings and had committed to provide capital as needed. Approximately $1.526 billion of subsidiary net assets was restricted from transfer to the parent; parent cash, cash equivalents and unrestricted investments were $165 million.
- Disclosure controls were deemed ineffective because of a material weakness involving calculation of a California Medicaid Expansion corridor liability. Management said it was implementing remediation during 2017; the financial statements were stated to be fairly presented.
- The company reported ongoing litigation and a lawsuit seeking approximately $52 million in 2015 Marketplace risk-corridor payments and estimated another $76 million due for 2016. No revenue or receivable was recorded for those unpaid claims.
Investor verification priorities
- Track whether MCR and Marketplace performance improve, and whether the $100 million deficiency reserve and related estimates prove adequate.
- Review claims development, particularly the $31 million favorable first-half development versus $189 million in the prior-year period, and the identified state-level estimation uncertainties.
- Verify delivery and timing of restructuring savings against projected costs, workforce reductions and operational execution.
- Monitor liquidity and debt obligations, including planned revolver borrowing, convertible-note cash exposure and the restrictions on note proceeds.
- Confirm remediation of the California corridor-control material weakness and resolution of health-plan statutory capital deficiencies.
- Follow Illinois receivable collection, Puerto Rico payment and contract developments, Marketplace risk-corridor litigation, and upcoming Medicaid contract re-procurements.