Molina Healthcare, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Molina provides managed health care services through Medicaid, Medicare and Marketplace plans; it served approximately 3.8 million members in 14 states and Puerto Rico at year-end.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $18.890 billion | $19.883 billion |
| Premium revenue | $17.612 billion | $18.854 billion |
| Operating income (loss) | $1.131 billion | $(555) million |
| Income (loss) before tax | $999 million | $(612) million |
| Net income (loss) | $707 million | $(512) million |
| Diluted EPS | $10.61 | $(9.07) |
| Medical care ratio (MCR) | 85.9% | 90.6% |
| General and administrative expense ratio | 7.1% | 8.0% |
Fourth-quarter 2018 revenue was $4.664 billion and net income was $201 million; diluted EPS was $3.01. Full-year medical care costs were $15.137 billion, against premium revenue of $17.612 billion. The Marketplace MCR was 58.9%, Medicare 84.5%, and Medicaid 90.0%.
Net cash used in operating activities was $314 million, versus $804 million provided in 2017. Cash and cash equivalents were $2.826 billion at year-end; the filing reports cash and investments of $4.629 billion and working capital of $2.216 billion. Total indebtedness, including lease financing obligations, was approximately $1.458 billion; outstanding principal debt was $1.282 billion. The company reduced outstanding debt principal by $759 million during 2018. It reported $493 million of available revolving-credit borrowing capacity, was in compliance with debt covenants, and stated that liquidity sources were expected to cover obligations for at least 12 months.
Changes versus the prior year
- Profitability rebounded sharply from the 2017 loss. Management attributed the improvement chiefly to lower MCR and administrative costs; 2017 included $470 million of impairment losses and $234 million of restructuring costs.
- Revenue declined 5%, mainly because Marketplace membership fell and Medicaid premiums decreased. Year-end membership fell from 4.453 million to 3.821 million, including a reduction in Marketplace members from 815,000 to 362,000.
- Marketplace results improved substantially after significant 2018 rate increases and a smaller footprint. The year’s Marketplace margin also included $56 million of risk-adjustment revenue and $81 million of cost-sharing-reduction benefits related to 2017 dates of service.
- Operating cash flow turned negative, reflecting timing of premium receipts, lower claims-payable balances and government-agency settlements, partly offset by improved operating performance.
- Molina sold Molina Medicaid Solutions for net cash proceeds of $233 million and recorded a $37 million pretax gain; it sold Pathways for a nominal purchase price and recorded a $52 million pretax loss.
Outlook, commentary and notable risks
- Management described a turnaround focused on margin recovery, cost control, targeted growth and strengthening the balance sheet. The company reported $344 million of run-rate savings under its 2017 restructuring plan and expected the plan’s activities to be substantially complete, apart from settling lease liabilities.
- For 2019, Molina estimated Marketplace year-end membership of 250,000–275,000 and expected Marketplace revenue to decline. It estimated that IT outsourcing could reduce annualized run-rate expenses by $15–$20 million in the first full year, rising to $30–$35 million by the fifth full year; these savings are estimates, not assured results.
- On February 4, 2019, Molina entered a three-year agreement with Infosys to manage certain IT infrastructure services. Management expects cost and reliability benefits, while identifying transition, service continuity, compliance and cybersecurity risks.
- Major contract exposures include New Mexico Medicaid, which ended January 1, 2019 while the company pursued an appeal, and Texas STAR and STAR+PLUS procurements expected to be decided in 2019. The Florida contract footprint also contracted. Loss of significant state contracts could materially affect results.
- In 2018, California retroactively reinstated a Medicaid Expansion risk corridor, reducing premium revenue by approximately $81 million. The $257 million Medicaid-related health insurer fee, plus estimated tax gross-up, required approximately $329 million in reimbursement; $141 million remained receivable at year-end.
- Other key risks include uncertainty about the ACA and Medicaid funding, premium-rate adequacy relative to medical and pharmacy costs, estimates of incurred-but-not-paid claims, Marketplace risk adjustment, Puerto Rico’s fiscal condition and payments, and government audits or contract changes. A Texas federal court ruling striking down the ACA was under appeal at the filing date.
- The company reported a securities class action dismissed by the district court, with plaintiffs’ appeal pending. Management said it could not estimate a possible loss range. The filing reports no 2018 goodwill impairment; the 2017 results included substantial impairment charges.
Important facts for investors to verify
- Whether improved MCR and cost controls persist, and how sensitive earnings remain to claims-reserve estimates and utilization.
- Actual 2019 Marketplace membership, premium revenue and risk-adjustment settlements compared with management’s estimate.
- Outcomes and financial effects of Texas contract awards, the New Mexico appeal, and other material contract renewals or procurements.
- Collection of the $141 million year-end HIF reimbursement receivable and settlement of government-agency balances.
- Operating cash generation, parent-company liquidity, debt maturities and refinancing needs, and the effect of regulatory limits on subsidiary dividends.
- Execution of the Infosys transition and delivery of forecast savings without disrupting operations, claims processing or data security.