Molina Healthcare, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Molina provides managed health care services primarily through Medicaid and Medicare programs and ACA Marketplaces. It reported 4.453 million members at year-end across health plans in 12 states and Puerto Rico.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $19.883 billion | $17.782 billion |
| Premium revenue | $18.854 billion | $16.445 billion |
| Operating income (loss) | ($555) million | $306 million |
| Net income (loss) | ($512) million | $52 million |
| Diluted earnings (loss) per share | ($9.07) | $0.92 |
| Adjusted diluted earnings (loss) per share, non-GAAP | ($8.72) | $1.28 |
| EBITDA, non-GAAP | ($329) million | $467 million |
| Medical care ratio | 90.6% | 89.8% |
| General and administrative expense ratio | 8.0% | 7.8% |
| Health Plans medical margin | $1.781 billion | $1.671 billion |
Revenue increased 12%, with premium revenue up 15%. Management attributed premium growth to higher membership and revenue per member. Medical margin rose 7%, but higher medical costs relative to premiums and significant impairment and restructuring charges drove the company to a net loss.
- Cash flow: Operating activities provided $804 million, compared with $673 million in 2016. Investing activities used $1.073 billion and financing activities provided $636 million. Cash and cash equivalents ended the year at $3.186 billion.
- Liquidity: Working capital was $1.954 billion; cash and investments totaled $6.0 billion. The company stated it expected available resources and internally generated funds to cover operations, regulatory requirements and capital expenditures for at least 12 months.
- Debt: Total debt and lease financing obligations were approximately $2.169 billion. The company had $300 million drawn on its revolving credit facility, with $194 million of remaining borrowing capacity. Credit Facility leverage and interest coverage ratios were 3.1x and 6.7x, respectively; the company reported covenant compliance at year-end.
Material changes and unusual items
- Non-cash impairment losses were $470 million, primarily tied to Florida and New Mexico contract losses, Illinois health-plan performance, Molina Medicaid Solutions and Pathways.
- Restructuring and separation costs were $234 million, including $36 million related to the former CEO and CFO. The former CEO and CFO were terminated in May 2017; Joseph M. Zubretsky became CEO in November.
- The federal government’s cessation of Marketplace cost-sharing reduction payments resulted in a $73 million 2017 charge. The company also recorded $47 million of Marketplace estimate adjustments for 2016 service periods and released a $30 million Marketplace premium deficiency reserve.
- A $75 million termination fee from a proposed Medicare acquisition partially offset costs. The company recorded a $14 million loss on a convertible-note exchange and approximately $54 million of additional tax expense from revaluing deferred tax assets after the Tax Cuts and Jobs Act.
- Cash flow benefited from the timing of premium receipts, including a reported $325 million positive effect. Operating cash flow should therefore be considered alongside changes in working capital and amounts owed to government agencies.
Outlook, management commentary and risks
- Turnaround plan: Management targeted $300–$400 million in annualized run-rate expense reductions by the end of 2018. It reported $235 million of annualized reductions achieved by year-end 2017, largely from administrative cost reductions; additional medical-cost savings were not yet quantified.
- Contract exposure: In early 2018, Florida selected Molina to negotiate for only one region, where it served about 59,000 Medicaid members, out of approximately 360,000 Florida Medicaid members at year-end 2017. New Mexico did not tentatively select Molina for its contract effective in 2019; the plan served about 224,000 Medicaid members. Existing contracts were expected to run through December 31, 2018, and the company said it would pursue protests and appeals.
- Marketplace: Effective January 2018, Molina exited Utah and Wisconsin, reduced its Washington participation and increased premiums by an average of 58%. Management estimated Marketplace membership would fall to about 300,000 by year-end 2018 from 815,000 at year-end 2017.
- Other developments: The company reported new Illinois and Washington contracts commencing in 2018 and a Mississippi Medicaid contract scheduled to begin in October 2018, subject to readiness review. Puerto Rico’s financial distress, Hurricane Maria’s effects, and the upcoming contract re-procurement remain risks; the Commonwealth was current on premium payments as of February 23, 2018.
- Key risks: Medicaid contract renewals and state funding, medical-cost and pharmacy inflation, claims-reserve estimation, retroactive premium and risk-adjustment settlements, Marketplace risk selection and subsidy uncertainty, regulatory capital and dividend restrictions, debt and convertible-note cash settlement requirements, and cybersecurity, privacy, audit and litigation exposure.
- The company disclosed that prior-period claims development was unfavorable by $36 million in 2017, following favorable development of $192 million in 2016. It identified elevated uncertainty in claims estimates at several plans, including following claims-processing backlogs, provider disputes, Hurricane Maria and increased influenza activity.
Important facts for investors to verify
- Progress toward the $300–$400 million savings target, including realized medical-cost savings and any ongoing restructuring costs.
- Outcomes of Florida and New Mexico protests, contract transitions and effects on revenue, membership, margins and stranded overhead.
- Actual Marketplace membership, medical performance and risk-adjustment or cost-sharing reconciliation compared with management’s 2018 estimates.
- Claims reserve adequacy and subsequent development, particularly given the $1.717 billion incurred-but-not-paid estimate and the 2017 claims-processing issues.
- Collection and timing of the company’s unrecorded $128 million claim for Marketplace risk-corridor payments, and expected state reimbursement of the 2018 health insurer fee.
- Liquidity and refinancing plans for convertible-note conversion or put rights, and compliance with debt covenants as operating results evolve.
- The company reported that management and the auditor concluded internal control over financial reporting was effective at December 31, 2017, after remediation of two previously identified material weaknesses. The financial-statement audit opinion was unqualified.