Molina Healthcare, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Molina provides Medicaid, Medicare, and Marketplace managed-care services through plans in 14 states and Puerto Rico; it reported approximately 3.3 million members at quarter-end.
Financial results and position
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $4,243 | $4,697 | $12,555 | $14,226 |
| Operating income | $257 | $295 | $802 | $859 |
| Net income | $175 | $197 | $569 | $506 |
| Diluted EPS | $2.75 | $2.90 | $8.80 | $7.60 |
| Medical care ratio (MCR) | 86.3% | 87.4% | 85.7% | 86.2% |
| G&A expense ratio | 7.6% | 6.6% | 7.6% | 7.0% |
- Revenue and earnings: Q3 revenue fell about 10% and net income about 11% year over year. For the first nine months, revenue fell about 12%, while net income rose about 12%. Lower premium revenue reflected fewer member months, partly offset by higher per-member rates. YTD earnings benefited from a lower effective tax rate and a $15 million gain on debt repayment.
- Medical performance: Q3 Health Plans medical margin was $561 million, versus $547 million; nine-month medical margin was $1.725 billion, versus $1.812 billion. Lower Medicaid and Medicare MCRs supported performance, while Marketplace medical margin declined. Marketplace MCR was 71.2% in Q3 and 66.7% year to date, compared with 64.1% and 57.5% in 2018.
- Cash flow: Operating cash flow was $398 million for nine months, compared with cash used of $191 million in 2018. Investing activities used $80 million and financing activities used $510 million. Cash, cash equivalents, and restricted cash ended at $2.734 billion, down $192 million from the start of the period. Management attributed operating cash-flow improvement mainly to timing of receivables, payables, government settlements, and premium receipts.
- Liquidity and debt: Management reported working capital of $2.569 billion and cash and investments of $4.517 billion. Balance-sheet cash was $2.679 billion and current investments were $1.757 billion. Debt principal totaled $1.262 billion at quarter-end, including $220 million under the Term Loan Facility and $12 million remaining on convertible notes due January 15, 2020. The $500 million revolver was undrawn, with $498 million available; $380 million remained available under the delayed-draw term facility. The company reported compliance with covenants and stated liquidity was sufficient for at least 12 months.
- Other balance-sheet items: Total liabilities were $4.870 billion and equity was $1.831 billion. Amounts due government agencies declined to $612 million from $967 million at year-end, including a $285 million Marketplace risk-adjustment payable and no remaining CSR payable at September 30.
Changes, outlook, and key commentary
- Total membership fell to 3.346 million from 3.999 million a year earlier. Medicaid and Marketplace membership and premium revenue contracted, primarily following the New Mexico Medicaid contract loss and reductions in Florida, as well as Marketplace attrition. Management expected Medicaid and Marketplace premium revenue to remain lower in 2019 than in 2018.
- Management described Medicaid and Medicare performance as stable or in line with expectations. It said the strong Marketplace margin profile would allow more competitive 2020 rates, added benefits, and commissions to pursue membership growth at a lower, more sustainable margin. It estimated 2019 year-end Marketplace enrollment at approximately 270,000, versus 289,000 at September 30, 2019.
- Q3 2018 included a $37 million gain on sale of subsidiaries; service revenue and related costs also ceased in 2019 following the late-2018 sales. The 2019 health insurer fee moratorium eliminated HIF expense and reimbursement, which had been reported in 2018. Nine-month 2018 medical costs included an $81 million benefit from the 2017 Marketplace cost-sharing-reduction reconciliation.
- Favorable development of prior-year medical claims estimates was $253 million for the first nine months of 2019, primarily attributed to lower-than-expected Medicaid utilization and improved operations. The company cautioned that actual claims costs may differ from estimates.
- Debt actions included repayment of $240 million principal on the 1.125% convertible notes during the first nine months, with $12 million principal remaining at quarter-end. The associated call-spread transactions generated a net cash receipt of $64 million year to date. The company also reported a $220 million term-loan draw.
- Management estimated IT restructuring costs at approximately $15 million cumulatively, expected the plan to be substantially complete by year-end 2019, and projected annualized savings of $10–$15 million in the first full year, rising to $25–$30 million by the fifth full year. These savings are estimates, not assured results.
- Subsequent events: Texas notified Molina on October 29, 2019 of its intent to award STAR+PLUS contracts in Hidalgo and North East, with an anticipated September 1, 2020 start; the company said it was seeking to understand the award basis. The STAR/CHIP award remained pending. Molina also agreed to acquire certain YourCare Health Plan assets for about $40 million, expected to close in early 2020, subject to customary conditions.
Risks and contingencies
- Medicaid and Marketplace enrollment, premium rates, medical-cost trends, pharmacy costs, and Marketplace risk-adjustment settlements may materially affect margins and cash flows. State budget pressure and changes in Medicaid funding or benefits are additional risks.
- Renewal and competitive procurement of major state contracts are important exposures, including Texas STAR/CHIP and future Ohio and California procurements. Molina noted possible material effects if it loses significant contracts.
- The ACA’s constitutionality remained under appeal in the Texas-led litigation; an adverse final decision could materially affect the business. The filing also cites regulatory reviews, potential recoupments, cybersecurity, provider, Puerto Rico, and litigation risks.
- Legal matters are ongoing. The filing says some losses have been accrued, while certain pending matters could not yet be reasonably estimated; an adverse outcome could materially affect financial results or cash flows.
- Regulated health-plan subsidiaries must meet statutory capital requirements. Those requirements restrict cash transfers to the parent; approximately $56 million of dividends could be paid without regulatory approval through the remainder of 2019. A hypothetical immediate 1% rise in interest rates was estimated to reduce fixed-income investment fair value by about $39 million.
Investor verification priorities
- Track member counts, premium rates, and MCR by program, especially the Marketplace’s rising MCR and management’s planned 2020 pricing and growth strategy.
- Verify status and financial impact of Texas STAR+PLUS and STAR/CHIP awards, and upcoming Ohio and California Medicaid procurements.
- Review Marketplace risk-adjustment estimates and settlements, medical-claims reserve development, and government-agency payables.
- Confirm repayment or conversion of the remaining $12 million convertible notes due January 2020, and monitor debt, covenant headroom, and access to regulated-subsidiary dividends.
- Assess whether stated restructuring savings are realized and whether the YourCare acquisition closes on the disclosed terms.
- Evaluate legal and ACA litigation developments, regulatory or state funding changes, and other contingencies; the filing does not quantify a potential loss for certain pending matters.