Molina Healthcare, Inc. — Q3 2021 Form 10-Q
Business context and period: For the quarter and nine months ended September 30, 2021. Molina provides managed healthcare services through Medicaid, Medicare, and state Marketplace programs. It served approximately 4.8 million members across 18 states at quarter-end, up about 20% from a year earlier.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $7.040 billion | $5.021 billion | $20.362 billion | $14.188 billion |
| Premium revenue | $6.800 billion | $4.768 billion | $19.689 billion | $13.444 billion |
| Medical care costs | $6.049 billion | $4.098 billion | $17.342 billion | $11.412 billion |
| Operating income | $221 million | $289 million | $829 million | $987 million |
| Net income | $143 million | $185 million | $556 million | $639 million |
| Diluted EPS | $2.46 | $3.10 | $9.51 | $10.65 |
| Medical care ratio (MCR) | 88.9% | 85.9% | 88.1% | 84.9% |
| G&A ratio | 7.5% | 7.3% | 7.3% | 7.3% |
| After-tax margin | 2.0% | 3.7% | 2.7% | 4.5% |
Cash flow and balance sheet: Nine-month operating cash flow was $1.522 billion, versus $599 million in 2020; investing used $1.106 billion, principally reflecting investment purchases, and financing used $204 million. Cash, cash equivalents, and restricted cash were $4.435 billion at September 30. Cash and investments totaled $7.4 billion; working capital was $3.3 billion. Long-term debt was $2.130 billion, with no borrowings under the $1.0 billion revolving facility. The company was in compliance with debt covenants. Its $700 million of 5.375% notes mature in November 2022.
Changes and drivers
- Revenue growth reflected membership increases and acquisitions, including Magellan Complete Care. Membership rose by about 805,000 year over year; Marketplace membership more than doubled.
- Profit and margins declined despite higher revenue. Management attributed lower operating income mainly to higher MCR and the differing effects of COVID-19: pandemic-related utilization curtailment was favorable in 2020, while 2021 included higher COVID inpatient costs and less curtailment.
- Management estimated COVID’s net effect reduced Q3 2021 diluted EPS by about $1.00; its effect was slightly positive in Q3 2020. COVID increased Q3 2021 MCR by approximately 110 basis points.
- The company recognized $183 million of state COVID-related risk-corridor effects in the first nine months of 2021, including $17 million in Q3. Outcomes remain subject to state changes and estimates.
- Prior-year claims developed favorably by $216 million through September 30, 2021, mainly because utilization was below earlier estimates. This benefit was largely absorbed by COVID-related risk corridors.
- Interest expense increased, mainly due to $650 million of notes issued in late 2020. The effective tax rate fell to 24.8% for Q3 and 24.7% year to date, principally because the health insurer fee was repealed for years after 2020.
Outlook, risks, and notable items
- Management expected Marketplace revenue growth of more than 90% for 2021 and approximately 680,000 Marketplace members at year-end. Medicaid enrollment was expected to benefit from the pause in eligibility redeterminations at least through mid-January 2022. The filing gives no consolidated earnings guidance.
- Management said cash resources, operating cash flow, and available borrowing capacity should support operations, regulatory requirements, debt repayment, and capital expenditures for at least the next 12 months. Regulatory capital minimums were estimated at $1.9 billion; subsidiaries exceeded those requirements. Dividends above an aggregate $182 million required regulatory approval.
- COVID-related utilization, medical-cost trends, state risk corridors, premium-rate adequacy, Medicaid redeterminations, Marketplace risk-adjustment estimates, contract bids and renewals, and integration of acquisitions could materially affect results.
- After quarter-end, Molina closed its Affinity Health Plan acquisition for approximately $380 million, funded with cash. It also agreed to acquire AgeWell New York’s managed long-term care business for approximately $110 million, subject to approvals, and expected to close by Q3 2022. The Cigna Texas acquisition, for approximately $60 million, was expected to close in January 2022.
- Legal matters include appeals and a court-ordered new RFP concerning Kentucky Medicaid contracts; Molina’s current Kentucky contract continues in the interim. In Puerto Rico, Molina and ASES have asserted opposing claims; the matter was in early stages and no loss or gain was considered probable and estimable.
- The board authorized a new $500 million share-repurchase program through December 31, 2022. No shares had been purchased under it as of October 28, 2021.
Important facts for investors to verify
- Whether medical utilization and MCR normalize, and how COVID-related costs and state risk corridors evolve.
- Whether the $183 million of recorded risk-corridor effects and the $216 million favorable claims development prove accurate as claims and state settlements mature.
- Marketplace membership and growth relative to management’s year-end expectations, including effects on risk adjustment and medical costs.
- Regulatory approvals, closing timing, cash funding, and integration of the announced acquisitions.
- Resolution and contract implications of the Kentucky litigation and Puerto Rico dispute; refinancing or repayment plans for the November 2022 notes.