Molina Healthcare, Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. Molina operates government-sponsored Medicaid and Medicare health plans and ACA Marketplace plans across 14 states and Puerto Rico; year-end membership was approximately 3.3 million.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $16.829 billion | $18.890 billion |
| Premium revenue | $16.208 billion | $17.612 billion |
| Operating income | $1.044 billion | $1.131 billion |
| Income before tax | $972 million | $999 million |
| Net income | $737 million | $707 million |
| Diluted earnings per share | $11.47 | $10.61 |
| Medical care ratio (MCR) | 85.8% | 85.9% |
| General and administrative expense ratio | 7.7% | 7.1% |
- Net income rose 4% and diluted EPS rose 8%, despite an 8% decline in total revenue. The filing attributes the earnings increase in part to lower restructuring and interest costs, the 2019 HIF moratorium, and a lower effective tax rate.
- Premium revenue fell mainly because of Medicaid contract and membership losses in New Mexico and most of Florida, and lower Marketplace enrollment. Member months declined 18%, partly offset by a 10% increase in PMPM revenue.
- Medicaid MCR improved to 88.0% from 90.0%; Medicare MCR increased to 85.3% from 84.5%; Marketplace MCR rose to 68.2% from 58.9%. Marketplace margin remained strong but fell materially from 2018.
- Operating cash flow was $427 million, versus $314 million used in 2018. Cash and cash equivalents were $2.452 billion; cash and investments totaled $4.477 billion. Working capital was $2.698 billion.
- Total debt, including current maturities, was $1.486 billion on the balance sheet; contractual principal was $1.262 billion. The company reported $380 million of remaining Term Loan Facility capacity and $499 million under its revolving facility, and was in covenant compliance.
- Stockholders’ equity was $1.960 billion. Regulated health plans held $1.852 billion of statutory capital and surplus against a $1.110 billion minimum; only about $41 million of aggregate dividends could be paid without regulatory approval.
Material changes and unusual items
- Year-end membership declined to 3.331 million from 3.821 million, primarily due to Medicaid contract exits and Marketplace attrition. Medicaid membership fell to 2.956 million from 3.361 million; Marketplace membership fell to 274,000 from 362,000.
- Medical margin decreased to $2.303 billion from $2.475 billion. The 2018 comparison benefited from an $81 million California Medicaid Expansion risk-corridor adjustment and approximately $137 million of favorable Marketplace risk-adjustment and cost-sharing-reduction settlements.
- Claims estimates developed favorably by $271 million in 2019, reducing current-year medical costs; 2018 favorable prior-period development was $341 million. These estimates are judgmental and can change as claims mature.
- The Health Insurer Fee was not incurred or reimbursed in 2019 under a moratorium. The filing estimates a 2020 Medicaid-related HIF assessment of $217 million and approximately $280 million of reimbursement needed including tax effects; recovery depends on state partners.
- 2019 included $6 million of restructuring costs versus $46 million in 2018. The company also adopted lease accounting, recognizing right-of-use assets and lease liabilities, and recorded an $85 million increase to opening retained earnings.
Outlook, management commentary, and risks
- Management described the turnaround as moving from margin recovery toward margin sustainability and disciplined growth. Long-term targets are premium revenue growth of 10%–12%, after-tax margins of 3.8%–4.2%, net income growth of 9%–11%, and diluted EPS growth of 12%–15% after deploying excess capital. These are long-term targets, not specific 2020 earnings guidance.
- For 2020, management expected Marketplace membership of approximately 310,000, up 13% from year-end 2019, with higher Marketplace MCR than in 2019 due to lower pricing and increased rebates. The filing also describes two planned acquisitions: approximately 46,000 New York Medicaid members for about $40 million and 50,000 Illinois members for about $50 million, both expected to close in the first half of 2020.
- Contract concentration is significant: California, Ohio, Texas, and Washington represented approximately 65% of 2019 premium revenue. Texas STAR+PLUS awards would reduce Molina’s footprint; the company was protesting the awards, while STAR/CHIP awards were pending. California and Ohio contracts faced future procurement processes.
- Other key exposures include the ACA’s contested constitutionality, state and federal Medicaid funding or rate changes, Marketplace risk adjustment and member acuity, medical-cost and pharmacy inflation, claims-reserve estimation, quality and contract performance, Puerto Rico’s fiscal condition, and government audits, litigation, cybersecurity, and privacy risks.
- The filing notes that a one-percentage-point increase in the 2019 consolidated MCR would have reduced diluted EPS from $11.47 to approximately $9.52, illustrating earnings sensitivity to medical-cost assumptions.
Important facts for investors to verify
- Progress and final outcomes of Texas STAR+PLUS protests and STAR/CHIP awards, and upcoming California and Ohio procurement timelines.
- Whether the New York and Illinois acquisitions closed as planned, and whether they deliver the anticipated margin improvement and growth.
- Actual 2020 Marketplace enrollment, MCR, and risk-adjustment settlements relative to management’s expectations.
- Claims reserve development and the sustainability of favorable prior-period claims development.
- State reimbursement of the 2020 HIF, and the impact of any ACA or Medicaid policy and funding changes.
- Cash available at the parent versus regulated subsidiaries, dividend approvals, debt repayment requirements, and execution of the authorized $500 million share repurchase program.