Molina Healthcare, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Dollar amounts are in U.S. dollars.
Business context
Molina provides Medicaid-focused managed care, Medicare and Marketplace health plans, and Medicaid information-system services. At year-end, its plans served 3.533 million members across 11 states and Puerto Rico. The company added Puerto Rico operations and acquired behavioral-health provider Pathways in November 2015; Pathways’ results are included in the Other segment from its acquisition date.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $14.178 billion | $9.667 billion |
| Premium revenue | $13.241 billion | $9.023 billion |
| Operating income | $387 million | $193 million |
| Income from continuing operations | $143 million | $62 million |
| Diluted EPS, continuing operations | $2.58 | $1.30 |
| Medical care ratio | 89.1% | 89.5% |
| General and administrative expense ratio | 8.1% | 7.9% |
| Net profit margin | 1.0% | 0.6% |
| Net cash from operating activities | $1.125 billion | $1.060 billion |
- Premium revenue grew 46.7%, reflecting 42% membership growth and a 5% increase in revenue per member. Year-end membership rose from 2.623 million to 3.533 million.
- Medical margin increased to $1.447 billion from $947 million. Management attributed the improved annual earnings to higher revenue and operating efficiency; Marketplace-related broker and exchange fees contributed to the higher reported administrative expense ratio.
- Fourth-quarter 2015 premium revenue was $3.589 billion, operating income $76 million, net income $30 million, and diluted EPS $0.52. In fourth-quarter 2014, these were $2.599 billion, $97 million, $34 million, and $0.69, respectively.
- Cash and cash equivalents were $2.329 billion; investments were $1.801 billion and restricted investments $109 million. Working capital was $1.484 billion. Management said cash resources and internally generated funds should cover operations, regulatory requirements, and capital expenditures for at least 12 months.
- Cash flows were $1.125 billion provided by operations, $1.420 billion used in investing, and $1.085 billion provided by financing. Investing outflows included acquisitions and investment purchases.
- Total indebtedness, including lease financing obligations, was approximately $1.609 billion. The company issued $700 million of 5.375% senior notes due 2022 and raised $373 million net from a common-stock offering during 2015. It reported $244 million available under its $250 million revolving facility and compliance with its financial covenants.
Material changes, outlook and risks
- Growth came from Medicaid expansion, Marketplace enrollment, acquisitions, and the launch of Puerto Rico. Marketplace membership reached approximately 205,000; Puerto Rico had approximately 348,000 members at year-end.
- Management described continued growth and geographic expansion as strategic priorities. The filing does not provide a numerical earnings or revenue forecast.
- Several acquisitions closed on January 1, 2016, adding approximately 217,000 members in Illinois, Michigan, and Washington. A further Illinois transaction was pending regulatory approval, with an expected first-half 2016 close. The new Michigan contract began in 2016 and expanded coverage into 18 additional counties.
- Pathways contributed $57 million of revenue and a $4 million net loss after its November acquisition. The purchase price was $231 million; the preliminary allocation included $155 million of goodwill.
- Puerto Rico’s fiscal and liquidity problems create payment and contract risk. The Commonwealth was withholding approximately $12 million of premiums over eligibility-confirmation issues; Molina continued paying related provider claims and said it was discussing the matter with the Commonwealth.
- Claims-reserve estimates are a significant earnings risk. Medical claims and benefits payable were $1.685 billion, including $1.191 billion of incurred-but-not-paid fee-for-service claims. Favorable prior-period claims development reduced 2015 medical costs by $141 million. Management noted heightened reserve uncertainty from new populations, Puerto Rico start-up, an ICD-10-related claims delay, and claims overpayments caused by a system configuration error.
- A one-percentage-point increase in the medical care ratio, all else equal, was estimated by the company to reduce 2015 continuing-operations diluted EPS from $2.58 to approximately $1.08.
- Other notable items include a $15 million fourth-quarter charge to settle a hospital management agreement and a $24 million reduction to revenue in 2015 related to a New Mexico retroactive-membership dispute. The company estimated the state could seek an additional $15–$20 million beyond its accrued amount; discussions were ongoing.
- Reported legal matters include a Louisiana claim alleging an incorrect pharmaceutical reimbursement formula and a qui tam action concerning alleged risk-score practices. The company disputed the claims and stated that related liabilities were not probable or reasonably estimable. The Department of Justice declined to intervene in the qui tam case.
- Broader risks include state and federal rate or funding cuts, contract rebidding and termination, medical-cost and specialty-drug inflation, regulatory changes, cyber/privacy incidents, acquisition integration, and substantial debt. The 1.125% convertible notes met a stock-price conversion trigger and were convertible for cash through at least March 31, 2016; their $448 million carrying amount was classified as current debt.
Important facts for investors to verify
- Whether lower medical care ratios and favorable reserve development persist, and how new member cohorts and claims-processing issues affect reserve adequacy.
- Collection of the approximately $12 million Puerto Rico premium receivable and the Commonwealth’s ability to fund Molina’s contract obligations.
- Resolution and final financial exposure from the New Mexico retroactive-membership dispute and disclosed legal proceedings.
- Integration, profitability, and funding effects of Pathways and the acquisitions that closed or were expected to close in 2016.
- Cash availability at the parent versus regulated subsidiaries: approximately $1.229 billion of subsidiary net assets were not transferable without restrictions, while parent cash, cash equivalents, and investments totaled $612 million.
- Debt service, potential cash settlement of convertible notes, and compliance with credit-facility covenants. The filing reports audited financial statements with an unqualified opinion; the internal-control assessment excluded Pathways, which had not yet been assessed.