Molina Healthcare, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed October 26, 2023. Molina provides Medicaid, Medicare and Marketplace managed healthcare services. It served approximately 5.2 million members across 20 states.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $8.548bn | $7.927bn | $25.024bn | $23.751bn |
| Premium revenue | $8.240bn | $7.636bn | $24.167bn | $22.966bn |
| Operating income | $359m | $335m | $1.257bn | $1.068bn |
| Net income | $245m | $230m | $875m | $736m |
| Diluted EPS | $4.21 | $3.95 | $15.08 | $12.58 |
| Medical care ratio (MCR) | 88.7% | 88.4% | 87.8% | 87.9% |
| G&A ratio | 7.1% | 7.1% | 7.3% | 7.1% |
| After-tax margin | 2.9% | 2.9% | 3.5% | 3.1% |
Q3 net income rose 7% year over year; nine-month net income rose 19%. Management attributed improvement primarily to membership growth, higher premium revenue and investment income. Investment income was $112m in Q3 versus $49m and $280m year to date versus $82m. Interest expense was $27m in Q3 and $82m year to date.
Segment trends: Q3 Medicaid premium revenue increased 10% and medical margin rose to $752m, while Medicaid MCR edged up to 88.8%. Medicare premium revenue increased 9%, but medical margin fell to $78m as MCR increased to 92.4%; its year-to-date MCR of 89.8% was above the company’s long-term target range. Marketplace premium revenue declined as membership fell, but medical margin improved to $104m and MCR fell to 78.9%. The nine-month Marketplace MCR was 73.8%.
Cash, liquidity and debt
- Cash and cash equivalents were $5.565bn and investments were $4.111bn at September 30; together these totaled approximately $9.7bn, compared with $7.5bn at December 31, 2022. Working capital was $4.0bn versus $3.2bn.
- Nine-month operating cash flow was $2.352bn, compared with $985m a year earlier; investing cash outflow was $719m and financing cash outflow was $61m. Cash, cash equivalents and restricted cash increased $1.572bn.
- Long-term debt was $2.179bn, consisting of three senior-note issues due 2028, 2030 and 2032. No revolving-credit borrowings were outstanding; $1bn of capacity was available. The company reported compliance with debt covenants.
- Management said cash resources, borrowing capacity and internally generated funds should be sufficient for operations and obligations for at least 12 months. Regulated subsidiaries exceeded estimated $2.4bn minimum capital requirements; approximately $250m of dividends could be paid without prior regulatory approval.
Material developments, outlook and risks
- Medicaid redeterminations were underway in all states where Molina operates. The company estimated net losses of approximately 200,000 members in Q3 and 300,000 year to date, and expected to retain approximately 40% of membership gained since March 31, 2020. Reconnects could reduce reported disenrollments.
- My Choice Wisconsin was acquired September 1 for preliminary consideration of approximately $74m, adding about 40,000 mostly long-term-services-and-supports members. Purchase accounting remains preliminary.
- The proposed acquisition of Brand New Day and Central Health Plan of California for approximately $510m, net of certain tax benefits, remained subject to approvals and closing conditions. Molina expected closing by Q1 2024.
- New Iowa Medicaid coverage began July 1, serving approximately 180,000 members. Molina retained its Texas STAR+PLUS footprint; new operations were expected in September 2024. New Mexico’s planned contract was expected to begin July 2024. Mississippi’s start was delayed to July 2024.
- Indiana notified Molina it would not receive a Pathways for Aging contract effective July 2024, citing readiness requirements and the absence of a required D-SNP product by January 2024.
- A $41m credit loss, or $0.54 per diluted share, was recorded on 2022 Marketplace risk-adjustment receivables following an issuer insolvency in the Texas risk pool. This contributed to higher other operating expense.
- Medical claims estimates developed favorably by $358m for prior years during the first nine months, primarily reflecting lower-than-expected utilization; management said the benefit was mostly absorbed by minimum MLR requirements and medical-cost corridors.
- The board authorized up to $750m in share repurchases through December 31, 2024; none were made under publicly announced plans during Q3. The filing gives no specific consolidated earnings guidance.
- Key risks include Medicaid redetermination and state rate pressure, medical-cost and utilization trends, Marketplace risk adjustment and issuer insolvencies, contract procurement and implementation, acquisition execution, regulatory capital restrictions and litigation. A 1% immediate increase in market interest rates was estimated to reduce fixed-income investment fair value by about $104m.
Pending matters include a Kentucky Medicaid procurement challenge before the state Supreme Court and litigation involving Puerto Rico’s health insurance administration; the company said it could not predict outcomes or reasonably estimate potential losses.
Investor verification points
- Track redetermination-related membership, retained-member acuity and whether state rates adequately reflect the remaining population.
- Monitor Medicare MCR, utilization trends and progress toward management’s target range, alongside Marketplace risk-adjustment receivables and credit exposure.
- Verify closing and integration of the California acquisition, final My Choice purchase accounting, and readiness and launch progress for new state contracts.
- Assess claims-reserve development, government-agency liabilities and the extent to which corridor and minimum-MLR provisions offset reserve gains.
- Confirm subsidiary dividend capacity, capital requirements, covenant compliance and use of the $750m repurchase authorization.