Molina Healthcare, Inc. — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Amounts are in millions of dollars except per-share data. Molina operates government-sponsored health plans and Medicaid administration services; its health plans served 4.22 million members across 11 states and Puerto Rico at quarter-end.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $4,343 | $3,171 |
| Premium revenue | $3,995 | $2,971 |
| Operating income | $89 | $82 |
| Net income | $24 | $28 |
| Diluted EPS | $0.43 | $0.56 |
| Medical care ratio (medical costs / premium revenue) | 89.8% | 88.7% |
| Health Plans medical margin | $407 | $335 |
| Operating cash flow | $139 | $554 |
| Cash and cash equivalents, March 31 | $2,156 | $2,329 at Dec. 31, 2015 |
| Investments, March 31 | $2,070 | $1,801 at Dec. 31, 2015 |
| Working capital, March 31 | $1,387 | $1,484 at Dec. 31, 2015 |
Medical care costs were $3,588, up 36%; total operating expenses were $4,254. General and administrative expense was $340, or 7.8% of revenue, versus 8.1% a year earlier. Interest expense rose to $25 from $15, and the effective tax rate was 61.7% versus 58.2%. Investing activities used $314; financing activities provided $2. Cash and cash equivalents declined $173 during the quarter.
Debt had $1,553 of principal and approximately $1,420 of net carrying value at quarter-end. The $454 carrying amount of 1.125% cash convertible notes was classified as current because the notes became convertible through at least June 30, 2016. The $250 revolving credit facility had no borrowings outstanding; $244 remained available after letters of credit. Parent-company cash, cash equivalents and investments were $542. The filing states that resources and internally generated funds should cover operations, regulatory requirements and capital expenditures for at least 12 months.
Material changes and operating drivers
- Revenue increased 37%, primarily reflecting 41% membership growth, Marketplace expansion, Puerto Rico operations beginning in April 2015, and acquisitions. Premium revenue per member per month fell about 6%, mainly due to lower Medicaid Expansion and Marketplace rates.
- Management attributed about $50 of lower pretax income, or $0.55 per diluted share, to Medicaid Expansion rate cuts. The overall medical care ratio worsened despite medical costs per member per month declining about 5%, as premium revenue per member declined faster.
- Marketplace membership rose to 630,000 from 266,000 a year earlier. The company increased 2015 Marketplace-related liabilities by about $30 in Q1 2016, including approximately $20 for risk-adjustment payments, and estimated the 2015 Marketplace medical care ratio at approximately 77%.
- Favorable prior-period claims development was $167 in Q1, benefiting reported medical costs. The company cited delayed or denied claims associated with revised diagnostic codes, overstated high-dollar claims in New Mexico, and recoverable Washington overpayments as contributing factors.
- Five health-plan acquisitions closed in Illinois, Michigan and Washington, adding approximately 251,000 members. Initial/final purchase prices totaled about $132; the company recorded $98 of goodwill and identified $34 of intangible assets. A separate New York plan acquisition announced in April was expected to close in the second half of 2016 for approximately $41, subject to adjustments and approvals.
- Molina Medicaid Solutions revenue was $52, unchanged, but service margin fell to $6 from $16, largely because of higher costs on re-procured legacy contracts.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management’s stated liquidity outlook covers at least the next 12 months.
- Puerto Rico presents significant collection and operating risk: the government defaulted on approximately $422 of bond obligations on May 2, 2016, and advised it could not make the final approximately $15 April capitation installment. Molina also reported about $30 of Puerto Rico premiums receivable at March 31, of which approximately $15 had been collected, plus a separate $12 disputed eligibility-related amount. The company was evaluating whether to exit the market.
- Illinois was operating without a fiscal-year budget; as of April 25, the state had paid premiums through February but not March. State budget pressure may delay payments or affect rates and benefits.
- Medical claims estimates carry heightened uncertainty because of rapid Marketplace growth, newly acquired memberships and identified claims-payment issues. Actual claims can differ materially from recorded estimates.
- Other exposures include Medicaid medical-cost floors and profit limits, Marketplace risk adjustment and minimum-MLR obligations, the New Mexico retroactive-enrollment dispute (the state’s interpretation could imply repayment $25–$30 above the amount accrued), regulatory requirements, and ordinary-course litigation. Several disclosed legal claims were not considered probable and reasonably estimable.
- Regulated subsidiaries held approximately $1,221 of net assets that were not readily transferable to the parent. Aggregate statutory capital and surplus was approximately $1,349, above the $854 required minimum; all health plans were reported compliant.
Key investor verification points
- Track Medicaid Expansion and Marketplace premium rates, per-member revenue, and medical care ratios, including subsequent Marketplace risk-adjustment and rebate settlements.
- Assess claims-reserve development after the unusually large $167 favorable prior-period adjustment and the effects of rapid enrollment and acquisitions.
- Monitor Puerto Rico capitation collections, the $12 eligibility dispute, potential Zika-related medical costs, and any decision about market participation; verify subsequent Illinois payment status as well.
- Review cash conversion and working-capital movements: operating cash flow fell to $139, with receivables and deferred revenue among the major cash-flow drivers.
- Monitor cash requirements if the 1.125% notes are converted, alongside debt maturities, covenant compliance and the availability of parent-level liquidity given dividend restrictions.