Washington, D.C. 20549
MOLINA HEALTHCARE, INC.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý☒ Yes ¨☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
¨ Yes ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý☒ Yes ¨☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý☒ Yes ¨☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
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| Large accelerated filer | ý☒ | | Accelerated filer | ¨☐ |
| Non-accelerated filer | ¨☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨☐ |
| Emerging growth company | ¨ | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨☐ Yes ý☒ No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2017,2020, the last business day of our most recently completed second fiscal quarter, was approximately $2,952.7 million$10.5 billion (based upon the closing price for shares of the registrant’s Common Stock as reported by the New York Stock Exchange, Inc. on June 30, 2017)2020).
As of February 23, 2018,12, 2021, approximately 59,727,00058,000,000 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 20182021 Annual Meeting of Stockholders to be held on May 2, 2018,6, 2021, are incorporated by reference into Part III of this Form 10-K, to the extent described therein.
MOLINA HEALTHCARE, INC. 2017 FORM 10-K
CROSS-REFERENCE INDEX
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| 1. | Business | 3-6, 9-16, 25-26, 43-44 |
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| 1A. | | 1-2, 44-64 |
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| 1B. | | Not Applicable. |
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| 5. | | 41-43 |
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| 6. | | 40-41 |
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| 7. | | 6-39 |
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| 7A. | | 28 |
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| 8. | | 69-129 |
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| 9B. | | Not Applicable. |
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| 11. | | (a) |
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| 12. | | (b) |
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| 13. | | (c), Note 17, Note 18 |
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| 14. | | (d) |
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| 15. | | 131-137 |
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| 16. | Form 10-K Summary | Not Applicable. |
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(a) | Incorporated by reference to “Executive Compensation” in the 2018 Proxy Statement. |
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(b) | Incorporated by reference to “Security Ownership of Certain Beneficial Owners and Management” in the 2018 Proxy Statement. |
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(c) | Incorporated by reference to “Related Party Transactions” and “Corporate Governance and Board of Directors Matters — Director Independence” in the 2018 Proxy Statement. |
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(d) | Incorporated by reference to “Fees Paid to Independent Registered Public Accounting Firm” in the 2018 Proxy Statement. |
MOLINA HEALTHCARE, INC. 20172020 FORM 10-K
TABLE OF CONTENTS
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| 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | Not Applicable. |
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| 16. | Form 10-K Summary | Not Applicable. |
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Many of the forward-looking statements are located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “guidance,” “future,” “anticipates,” “believes,” “estimates,” “expects,” “growth,” “intends,” “plans,” “predicts,” “projects,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-lookingReaders are cautioned not to place undue reliance on any forward-looking statements, as forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the risk factors identified in the section of this Form 10-K titled “Risk Factors,” as well as the following:
•the success of our profit improvement and maintenance initiatives, including the timing and amountsimpact of the benefits realized,COVID-19 pandemic and administrative savings achieved;
its associated or indirect effects on our business, operations, and financial results;•the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the “ACA”), including the ultimate outcome of the California et al. v Texas et al. matter currently pending for decision before the United States Supreme Court;
•significant budget pressures on state governments from diminished tax revenues incidental to the COVID-19 pandemic and their efforts to reduce rates or “Obamacare;”
limit rate increases, to impose profit caps or risk corridors, or to recoup previously paid premium amounts on a retroactive basis;•the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated withissues impacting enrollment, risk transfer requirements,adjustment estimates and results, the potential for disproportionate enrollment of higher acuity members, and the discontinuation of premium tax credits, credits;
•the adequacyoutcome of agreed rates,the legal proceedings in Kentucky with regard to the Medicaid contract award to our Kentucky health plan and potential disruption associated with market withdrawal from Utah, Wisconsin,our acquisition of certain assets of Passport;
•the success of our efforts to retain existing or other states;awarded government contracts, and the success of any bid submissions in response to requests for proposal, including our contracts in Ohio, California, and Texas;
•subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment/risk transfer, risk corridors,adjustment;
•the availability of adequate financing on acceptable terms to fund and reinsurance;capitalize our expansion and growth, repay our outstanding indebtedness at maturity, and meet our general liquidity needs;
•our ability to consummate, integrate, and realize benefits from acquisitions, including the completed acquisitions of Magellan Complete Care and Passport, and announced acquisition of Affinity;
•effective management of our medical costs;
•our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with seasonal flu patternsCOVID-19;
•cyber-attacks, ransomware attacks, or other newly emergent diseases;
privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected information;significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;
•the full reimbursement of the ACA health insurer fee, or HIF;
the success of our efforts to retain existing government contracts, including those in Florida, New Mexico, Puerto Rico, Texas, and Washington, including the success of any protest filings;
our ability to manage our operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;
our ability to consummate and realize benefits from acquisitions or divestitures;
•our receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;
•our ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;
•the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharingprofit-sharing arrangements, and risk adjustment provisions and requirements;
•our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
provisions and requirements;•the Medicaid expansion medical cost corridors in California, New Mexico, and Washington,corridor, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;
Molina Healthcare, Inc. 2020 Form 10-K | 1
•the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and our ability to recognize revenue amounts associated therewith;
cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
the success of our health plan in Puerto Rico, including the resolution of the Puerto Rico debt crisis, payment of all amounts due under our Medicaid contract, the effect of the PROMESA law, the impact of Hurricane Maria and our efforts to better manage the health care costs of our Puerto Rico health plan;
•the success and renewal of our duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
•the accurate estimation of incurred but not reported or paid medical costs across our health plans;
•efforts by states to recoup previously paid and recognized premium amounts;
•complications, member confusion, eligibility redeterminations, or enrollment backlogs related to the annual renewal of Medicaid coverage;
•fraud, waste and abuse matters, government audits andor reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, corrective action plan, monitoring program, or premium recovery that may result therefrom;
•our exit from Puerto Rico, including the payment in full of our outstanding accounts receivable, the effective run-out of claims, and the return of our capital;
•changes with respect to our provider contracts and the loss of providers;
•approval by state regulators of dividends and distributions by our health plan subsidiaries;
•changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
•high dollar claims related to catastrophic illness;
•the favorable resolution of litigation, arbitration, or administrative proceedings;
•the relatively small number of states in which we operate health plans, including the greater scale and revenues of our California, Ohio, Texas, and Washington health plans;
•the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;
our failure to comply with the financial or other covenants in our credit agreement our bridge credit agreement or the indentures governing our outstanding notes;
•the sufficiency of our funds on hand to pay the amounts due upon conversion or maturity of our outstanding notes;
•the failure of a state in which we operate to renew its federal Medicaid waiver;
•changes generally affecting the managed care or Medicaid management information systems industries;
industry;•increases in government surcharges, taxes, and assessments, including but not limited to assessments;
•the deductibilityunexpected loss of certain compensation costs;
the leadership of one or more of our senior executives; andnewly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm; and
•increasing competition and consolidation in the Medicaid industry.
industry.Each of the terms “Molina Healthcare,Inc.” “Molina Healthcare,” “Company,” “we,” “our,” and “us,” as used herein, refers collectively to Molina Healthcare, Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Molina Healthcare, Inc. 2020 Form 10-K | 2
OVERVIEW
ABOUT MOLINA HEALTHCARE
Molina Healthcare, Inc., a FORTUNE 500 company, provides managed health carehealthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces. marketplaces (the “Marketplace”). Molina was founded in 1980 as a provider organization serving low-income families in Southern California. We were originally organized in California as a health plan holding company and reincorporated in Delaware in 2002.
Through our locally operated health plans operating across the nation and in the Commonwealth of Puerto Rico,15 states, we serveserved approximately 4.54.0 million members.
2017 was a year of great change for Molina Healthcare. On May 2, 2017, after several disappointing quarters in which we continued to underperform relative to our own internal financial metrics and to the managed care sectormembers as a whole, the board terminated the employment of Dr. J. Mario Molina, our former president and chief executive officer, and John C. Molina, our former chief financial officer. Our former chief accounting officer, Joseph W. White, was promoted to chief financial officer and interim president and chief executive officer, while the board launched a search for a permanent president and chief executive officer. Effective as of November 6, 2017, Joseph M. Zubretsky was named as president and chief executive officer of Molina Healthcare. Over the past ten months, the executive management team has been largely restructured.
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| 2017 |
| (Dollars in millions, except per-share amounts) |
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| Total Revenue | | Net Loss per Diluted Share | | Adjusted Net Loss Per Share* |
| $19,883 | | ($9.07) | | ($8.72) |
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| Net Loss Margin | | EBITDA* | | Ending Membership |
| (2.6)% | | ($329) | | 4,453,000 |
__________________________
Non-generally accepted accounting principles (Non-GAAP) financial measures referred to in this Form 10-K are designated with an asterisk (*). For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—Non-GAAP Financial Measures,” and “MD&A—Supplemental Information.”
OUR MISSION
Our mission is to provide quality healthcare to people receiving government assistance.
OUR BUSINESS STRATEGY
We are building a plan to improve and sustain profitability
Our margin recovery and sustainability plan is designed to:
Restore margins through operational improvements and managed care fundamentals
Optimize the revenue base for profitability and future revenue growth
Enhance balance sheet and capital management discipline
Restore margins through operational improvements and managed care fundamentals
In 2017, we changed leadership, restructured our workforce to better meet the needs of our business, and improved our cost structure. As described further below in “Consolidated Results–Fiscal Year 2017 Financial Summary,” and in the Notes to the Consolidated Financial Statements, Note 15, “Restructuring and Separation Costs,” in 2017 we implemented a comprehensive restructuring and profitability improvement plan that will reduce annualized run-rate expenses by approximately $300 million to $400 million when completed by the end of 2018. As of December 31, 2017,2020. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we achieved $235 millionadded approximately 200,000 members, and now operate health plans in 18 states. These health plans are generally operated by our respective wholly owned subsidiaries in those states, and licensed as health maintenance organizations (“HMOs”).
FINANCIAL HIGHLIGHTS
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| | 2020 | | 2019 |
| | (Dollars in millions, except per-share amounts) |
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| Premium Revenue | | $18,299 | | $16,208 |
| Total Revenue | | $19,423 | | $16,829 |
Medical Care Ratio (“MCR”) (1) | | 86.5% | | 85.8% |
After-Tax Margin (2) | | 3.5% | | 4.4% |
| Net Income per Diluted Share | | $11.23 | | $11.47 |
_______________________
(1)Medical care ratio represents medical care costs as a percentage of these run-rate reductionspremium revenue.
(2)After-tax margin represents net income as a percentage of total revenue.
2020 EXECUTIVE SUMMARY
In 2020, we drove strong operating performance in a challenging COVID-19 pandemic environment, particularly in the following areas:
COVID-19 Response
•Operated remotely for majority of the year in unprecedented pandemic environment;
•Effected transition of workforce to remote status in March while maintaining or improving operating metrics;
•Addressed workforce hardships by implementing assistance programs, including dependent-care and other stipends, and a short-term incentive program for eligible non-executive employees; and
•Did not reduce workforce.
Health Plan Portfolio
•Announced health plan acquisitions including Magellan Complete Care (in Arizona, Florida, Massachusetts, New York, Virginia and Wisconsin), Affinity (in New York) and Passport (in Kentucky), representing annualized aggregate premium revenues exceeding $6 billion;
•Closed on acquisitions of Magellan Complete Care, Passport and YourCare (in New York);
•Established a dedicated integration management function to help ensure that we achieve the expected business results;
•Exited Puerto Rico operations without financial hardship; and
•Won the Medicaid contract request for proposal (“RFP”) in Kentucky, and successfully protested the outcome of the Medicaid RFP awards for certain regions of Texas, preserving our Medicaid membership in that state.
Molina Healthcare, Inc. 2020 Form 10-K | 3
Other Notable Achievements
•Organized, announced and initially funded the “MolinaCares” Molina Healthcare Charitable Foundation, an annualized basis.independent charitable organization;
We have reconfigured our organization. By reducing the workforce and number of management layers, and increasing management’s span of control, we have achieved significant savings.•Drove over 20% improvement in annual employee engagement survey;
We are simplifying our provider networks. We are terminating or renegotiating high-cost providers, narrowing networks in certain geographies, evaluating stop-loss thresholds and carve-outs, implementing value-based
contracting, evaluating ancillary services and pharmacy benefit management pricing and operations, and we have exited direct delivery operations.
We are improving the effectiveness of utilization review and care management. Areas of focus include specialist referrals, pre-authorization, concurrent review, high acuity populations and high utilizers of services, emergency room utilization and behavioral and medical integration.
We are addressing at-risk revenues and risk adjustment. We seek to more effectively engage in state rate setting, improve STAR ratings, increase retention of quality revenue withholds, and focus on coding and documentation to achieve risk scores commensurate•Completed capital structure overhaul with the acuityissuance of our population.
We are improving our claims payment function. The key areas of improvement will include provider experience, payment accuracy and oversight of claims fraud, waste and abuse.
We are evaluating information technology and management. We seektwo high-yield senior notes amounting to standardize the administrative platform, streamline operations and procedures, evaluate potential co-sourcing and/or outsource operational components, and consolidate data warehousing and data mining capabilities.
Optimize revenue base for profitability and future revenue growth
We will focus on defending existing revenue.
In early 2018, we received the disappointing news that we were unsuccessful in defending all of our New Mexico Medicaid business and most of our Florida Medicaid business during state re-procurements.
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◦ | We will lodge the necessary protests and appeals to ensure that we have exhausted every avenue available to us for retaining the managed care contracts currently held by our Florida and New Mexico health plans. |
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◦ | In addition, we have taken significant steps to improve our RFP response process to better articulate and present the Molina value proposition. Steps we have taken include marshaling more internal and external resources to support the RFP process, engaging a broader and deeper array of subject matter experts, infusing more local market knowledge into the process, and retaining outside experts in Medicaid procurement to pre-score our proposals and conduct mock reviews. |
We have also experienced some success$1.5 billion, in the pursuit of new revenueaggregate, and the defense of existing revenue:
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◦ | In May 2017, our Washington health plan was selected by the Washington State Health Care Authority to negotiate and enter into managed care contracts for the North-Central region of the state’s Apple Health Integrated Managed Care Program. The new contract commenced January 1, 2018. |
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◦ | In June 2017, Molina Healthcare of Mississippi, Inc. was awarded a Medicaid Coordinated Care Contract for the statewide administration of the Mississippi Coordinated Access Network (MississippiCAN). The operational start date for the program is currently scheduled for October 1, 2018, pending the completion of a readiness review. The initial term of the contract is through June 2020, with options to renew annually for up to two additional years.
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◦ | In August 2017, our Illinois health plan was awarded a statewide Medicaid managed care contract by the Illinois Department of Healthcare and Family Services. This Medicaid contract further integrates behavioral health and physical health by combining the state’s three current managed care programs into one program. The contract began January 1, 2018, and will continue for four years with options to renew annually for up to four additional years. |
We will consider opportunistic revenue growth opportunities only if specific parameters are met. Such parameters include a positive regulatory environment, manageable competitive forces, network viability, the abilityincreased credit facility capacity to leverage scale$1 billion; and operations,
•Further bolstered senior and a scalable population.middle management talent.
We will continue to identify opportunities for significant performance improvement. The under-performing geographies and lines ofOur business we have identified are under intense review for performance improvement to ensure that every product and geography contributes to the portfolio.
We have taken decisive action with respect to our Affordable Care Act (ACA) Marketplace products. Effective January 1, 2018, we have:
Exited the Utah and Wisconsin Marketplaces;
Reduced the scope of our Washington state Marketplace participation;
Increased premiums averaging 58%; and
Mitigated our exposure to uncertainties relating to cost sharing reduction (CSR) funding and reconciliation.
Enhance balance sheet and capital management discipline
We are taking steps to improve reserving accuracy, increase tangible net equity, reduce the cost of borrowing, maximize the dividend capacity of our subsidiaries, maximize parent company liquidity and cash flow, deploy excess capital in a balanced manner, and reduce the optionality in our capital structure.
OUR CORE BUSINESS FOOTPRINT TODAY
Asfootprint, as of December 31, 2017, our health plan footprint included the five largest Medicaid markets.2020, is illustrated below.
OUR SEGMENTS
We manage our operations through threeAs of December 31, 2020, we had two reportable segments. These segments consist of oursegments: the Health Plans segment, which constitutesand the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment. We regularly evaluate the appropriateness of our reportable segments, particularly in light of organizational changes, acquisition and divestiture activity, and changing laws and regulations. Therefore, these reportable segments may change in the future.
Business and financial overviews for ourOur reportable segments are provided in “MD&A—Reportable Segments.”consistent with how we currently manage the business and view the markets we serve.
The Health Plans reportable segment includes our regulated health plan operating segments, along with the recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on December 31, 2020, Magellan Complete Care’s operating results were insignificant to our consolidated results of operations for the year ended December 31, 2020. Management will continue to evaluate the composition of its operating and reportable segments for future filings. The Other segment, which is insignificant to our consolidated results of operations, includes certain corporate amounts not associated with or allocated to the Health Plans segment.
Refer to Notes to Consolidated Financial Statements, Note 16, “Segments,” for further information, including segment revenue and profit information, and Note 2, “Significant Accounting Policies” for premium revenue information by statehealth plan.
Molina Healthcare, Inc. 2020 Form 10-K | 4
MEMBERSHIP BY HEALTH PLAN
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| As of December 31, |
| 2020 | | 2019 |
| California | 593,000 | | | 565,000 | |
| Florida | 140,000 | | | 132,000 | |
| Illinois | 302,000 | | | 224,000 | |
| Kentucky | 337,000 | | | — | |
| Michigan | 400,000 | | | 362,000 | |
| Ohio | 352,000 | | | 288,000 | |
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| Texas | 357,000 | | | 341,000 | |
| Washington | 977,000 | | | 832,000 | |
Other (1) | 574,000 | | | 587,000 | |
Total (2) | 4,032,000 | | | 3,331,000 | |
__________________
(1)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health plans, which were individually insignificant to our consolidated operating results for the periods presented.
(2)The 2020 totals for both “Membership by Health Plan,” and “Membership by Program,” do not include approximately 200,000 Magellan Complete Care members from the acquisition closed on December 31, 2020.
MEMBERSHIP BY PROGRAM
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| As of December 31, |
| 2020 | | 2019 |
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| Medicaid | 3,599,000 | | | 2,956,000 | |
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| Medicare | 115,000 | | | 101,000 | |
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| Marketplace | 318,000 | | | 274,000 | |
Total (2) | 4,032,000 | | | 3,331,000 | |
MISSION
We improve the health and lives of our members by delivering high-quality healthcare.
VISION
We will distinguish ourselves as the low cost, most effective and reliable health plan delivering government-sponsored care.
STRATEGY
Our growth strategy continues to be anchored by our capital allocation priorities: first, organic growth of our core businesses; second, inorganic growth through accretive acquisitions; and Note 20, “Segment Information,third, programmatically returning excess capital to shareholders, for example, in the form of targeted share repurchase programs. The key capabilities that enable our growth strategy follow:
Low Cost: We provide low-cost health plans to our state customers for Medicaid, and to our members in the MMP and Marketplace programs.
High Quality and Appropriate Access to Care: We provide our members effective and appropriate access to care at the right time and in the right setting.
Reliable Service and Seamless Experience: We offer our state customers, members, and providers reliable service and a seamless experience.
Molina Healthcare, Inc. 2020 Form 10-K | 5
OUR BUSINESS
MEDICAID
Overview
Medicaid was established in 1965 under the U.S. Social Security Act to provide healthcare and long-term care services and support to low-income Americans. Although jointly funded by federal and state governments, Medicaid is a state-operated and state-implemented program. Subject to federal laws and regulations, states have significant flexibility to structure their own programs in terms of eligibility, benefits, delivery of services, and provider payments. As a result, there are 56 separate Medicaid programs—one for each U.S. state, each U.S. territory, and the District of Columbia.
The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance percentage (“FMAP”). A state’s FMAP is calculated annually and varies inversely with average personal income in the state. The approximate average FMAP across all jurisdictions is currently 60%, and currently ranges from a federally established FMAP floor of 50% to as high as 78%. See further discussion regarding the FMAP below in “COVID-19 Pandemic—Federal Economic Stabilization Programs.”
We participate in the following Medicaid programs:
•Temporary Assistance for Needy Families (“TANF”) - This is the most common Medicaid program. It primarily covers low-income families with children.
•Medicaid Aged, Blind or Disabled (“ABD”) - ABD programs cover low-income persons with chronic physical disabilities or behavioral health impairments. ABD beneficiaries typically use more services than those served by other Medicaid programs because of their critical health issues.
•Children’s Health Insurance Program (“CHIP”) - CHIP is a joint federal and state matching program that provides healthcare coverage to children whose families earn too much to qualify for Medicaid coverage. States have the option of administering CHIP through their Medicaid programs.
•Medicaid Expansion -In states that have elected to participate, Medicaid Expansion provides eligibility to nearly all low-income individuals under age 65 with incomes at or below 138% of the federal poverty line.
Our state Medicaid contracts typically have terms of three to five years, contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Such contracts are subject to risk of loss in states that issue requests for proposal (“RFP”) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may not be renewed.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled; and regions or service areas.
Status of Significant Contracts
Our consolidated Medicaid premium revenue constituted 73% of our total revenue in the year ended December 31, 2020. Our Medicaid contracts with each of the states of California, Ohio, Texas and Washington accounted for approximately 10% or more of our consolidated Medicaid premium revenues in each of the years ended December 31, 2020, and 2019. The current status of each of these contracts is described below.
California. Our managed care contracts with the California Department of Health Care Services (“DHCS”) cover six regions in northern and southern California (including Los Angeles County, California, as a subcontractor to another health plan holding a direct contract with the state). These contracts are effective through December 31, 2021, which we expect to be renewed annually until the effectiveness of new forms of contract following RFP awards. DHCS has publicly indicated it expects to release the final Medicaid RFP in 2021, for implementation in January 2024. Our California Medicaid contracts represented premium revenue of approximately $1,694 million, or 12%, of our consolidated Medicaid premium revenue in 2020.
Ohio. Our managed care contract with the Ohio Department of Medicaid (“ODM”) is effective through July 1, 2021. In September 2020, the ODM released the RFP for the Ohio Medicaid program, which will be regionally based on the current three regions (Central/Southeast, Northeast and West). Health plans were able to bid on one or all regions, and be awarded one or all regions. As of February 16, 2021, ODM had not announced the winning bidders
Molina Healthcare, Inc. 2020 Form 10-K | 6
for the RFP. Our Ohio Medicaid contract represented approximately $2,231 million, or 16%, of our consolidated Medicaid premium revenue in 2020.
Texas. In March 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan that HHSC had upheld our protest and had canceled all previously awarded contracts associated with the re-procurement awards announced in October 2019 for the ABD program (known in Texas as “STAR+PLUS”). In addition, HHSC canceled the pending re-procurement associated with the TANF and CHIP programs (known in Texas as “STAR/CHIP”). HHSC has indicated that the STAR+PLUS RFP will be posted in late 2021 or early 2022, with awards estimated to be announced in the second quarter of 2022, and start of operations in the fourth quarter of 2023. HHSC has also indicated that the STAR/CHIP RFP will be posted in the fourth quarter of 2022, with awards estimated to be announced in late 2022 or early 2023, and start of operations in the third quarter of 2024. Our Texas Medicaid contracts represented approximately $2,151 million, or 15%, of consolidated Medicaid premium revenue in 2020.
Washington. Our managed care contract with the Washington State Health Care Authority (“HCA”) covers all ten regions of the state’s Apple Health Integrated Managed Care program, and is effective through December 31, 2021. We expect the HCA to exercise its renewal option for at least one year, through December 31, 2022. Our Washington Medicaid contract represented approximately $2,804 million, or 20%, of consolidated Medicaid premium revenue in 2020.
A loss of any of our significant Medicaid contracts could have a material adverse effect on our business, financial condition, cash flows, and results of operations.
Other Developments
Magellan Complete Care. On December 31, 2020, we closed on our acquisition of 100% of the outstanding equity interests of the Magellan Complete Care line of business of Magellan Health, Inc., for total purchase consideration of approximately $1,037 million. Total purchase consideration paid in cash amounted to $1,008 million, which consisted of the base purchase price of $850 million, plus approximately $158 million in preliminary closing adjustments, primarily relating to excess regulatory capital. Total purchase consideration also included assumed liabilities of $29 million. Magellan Complete Care is a managed care organization serving members in six states, including Medicaid members in Arizona and statewide in Virginia, and integrated acute care members in Florida. Through its Senior Whole Health branded plans, Magellan Complete Care provides fully integrated plans for Medicaid and Medicare dual beneficiaries in Massachusetts, as well as managed long-term care in New York. As of December 31, 2020, Magellan Complete Care served approximately 200,000 members in its managed care plans. Magellan Complete Care also provides consultative services to participants who self-direct their care through Wisconsin’s long-term services and supports (“LTSS”) program. For the year ended December 31, 2020, Magellan Complete Care’s total 2020 revenue was approximately $2.9 billion.
New York. In September 2020, we entered into a definitive agreement to acquire substantially all the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.
On July 1, 2020, we closed on the acquisition of certain assets of YourCare Health Plan, Inc., a Medicaid health plan operating in certain regions of New York, for a cash purchase price of $42 million.
Kentucky. In May 2020, our Kentucky health plan was selected as an awardee pursuant to the statewide Medicaid managed care RFP issued by the Kentucky Cabinet for Health and Family Services, Department of Medicaid Services. On September 1, 2020, we closed on the acquisition of certain assets of Passport Health Plan, Inc., a Medicaid health plan, for a purchase price of $66 million. Effective on that same date, the Kentucky Medicaid agency approved the novation of Passport’s Medicaid contract to Molina Healthcare of Kentucky, Inc., thereby ensuring continuity of care for Passport’s Medicaid members.
Member Enrollment and Marketing
Most states allow eligible Medicaid members to select the Medicaid plan of their choice. This opportunity to choose a plan is typically afforded to the member at the time of first enrollment and, at a minimum, annually thereafter. In some of the states in which we operate, a substantial majority of new Medicaid members voluntarily select a plan with the remainder subject to the auto-assignment process described below, while in other states less than half of new members voluntarily choose a plan.
Our Medicaid health plans may benefit from auto-assignment of individuals who do not choose a plan, but for whom participation in managed care programs is mandatory. Each state differs in its approach to auto-assignment, but one
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or more of the following criteria is typical in auto-assignment algorithms: a Medicaid beneficiary's previous enrollment with a health plan or experience with a particular provider contracted with a health plan, enrolling family members in the same plan, a plan's quality or performance status, a plan’s network and enrollment size, awarding all auto-assignments to a plan with the lowest bid in a county or region, and equal assignment of individuals who do not choose a plan in a specified county or region.
Our Medicaid marketing efforts are regulated by the states in which we operate, each of which imposes different requirements for, or restrictions on, Medicaid sales and marketing. These requirements and restrictions are revised from time to time. None of the jurisdictions in which we operate permit direct sales by Medicaid health plans.
MEDICARE
Overview
Medicare Advantage. Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress, and administered by the Centers for Medicare and Medicaid Services (“CMS”). Medicare beneficiaries may enroll in a Medicare Advantage plan, under which managed care plans contract with CMS to provide benefits that are comparable to original Medicare. Such benefits are provided in exchange for a fixed per-member per-month (“PMPM”) premium payment that varies based on the county in which a member resides, the demographics of the member, and the member’s health condition. Since 2006, Medicare beneficiaries have had the option of selecting a prescription drug benefit from an existing Medicare Advantage plan. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain cost sharing depending upon the specific benefit design of the selected plan.
Medicare-Medicaid Plans, or MMPs. Over 12 million low-income elderly and disabled people qualify for both the Medicare and Medicaid programs (“dual eligible” individuals). These beneficiaries are more likely than other Medicare beneficiaries to be frail, live with multiple chronic conditions, and have functional and cognitive impairments. Medicare is their primary source of health insurance coverage. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental care and long-term care services and supports, and by helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs. To coordinate care and deliver services in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual-eligible individuals. The health plans participating in such demonstrations are referred to as MMPs. We operate MMPs in six states, as described further below.
Contracts
We enter into Medicare and MMP contracts with CMS, in partnership with each state’s department of health and human services. Such contracts typically have terms of one to three years.
Status of MMP Contracts
Our California, Illinois and Ohio MMP contracts are effective through December 31, 2022, which represented aggregate premium revenue of approximately $947 million in 2020. Our South Carolina and Texas MMP contracts are effective through December 31, 2023, which represented aggregate premium revenue of approximately $492 million in 2020.
In Michigan, we have a one-year contract extension effective through December 31, 2021, which represented premium revenue of approximately $281 million in 2020. The state has submitted a formal letter of intent to extend the contract for five years through 2026; the five-year contract extension is under development.
Other Developments
In December 2020, CMS announced its introduction of a new direct contracting model aimed at utilizing Medicaid Managed Care Organizations (“MCOs”) to increase holistic care coordination and improve outcomes for the dually eligible population. The new model will roll out in January 2022, with requests for applications expected to be released in early 2021. Participating MCO-based direct contracting entities will have new incentives to provide whole-person care and better serve their full-benefit dually eligible enrollees.
Member Enrollment and Marketing
Our Medicare members may be enrolled through auto-assignment, as described above in “Medicaid—Member Enrollment and Marketing,” or by enrolling in our plans with the assistance of insurance agents employed by Molina, outside brokers, or via the Internet.
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Our Medicare marketing and sales activities are regulated by CMS and the states in which we operate. CMS has oversight over all marketing materials used by Medicare Advantage plans, and in some cases has imposed advance approval requirements. CMS generally limits sales activities to those conveying information regarding benefits, describing the operations of our managed care plans, and providing information about eligibility requirements.
We employ our own insurance agents and contract with independent, licensed insurance agents to market our Medicare Advantage products. We have continued to expand our use of independent agents because the cost of these agents is largely variable and we believe the use of independent, licensed agents is more conducive to the shortened Medicare selling season and the open enrollment period. The activities of our independent, licensed insurance agents are also regulated by CMS. We also use direct mail, mass media and the Internet to market our Medicare Advantage products.
MARKETPLACE
Overview
Effective January 1, 2014, the Affordable Care Act (“ACA”) authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase federally subsidized health insurance. We offer Marketplace plans in many of the states where we offer Medicaid health plans. Our plans allow our Medicaid members to stay with their providers as they transition between Medicaid and the Marketplace. Additionally, our plans remove financial barriers to quality care and seek to minimize members' out-of-pocket expenses. In 2021, we are participating in the Marketplace in all our markets except Idaho, Illinois, Kentucky, New York, and the Magellan Complete Care markets in Arizona, Massachusetts, and Virginia.
In 2021, we expect Marketplace enrollment to grow approximately 25%, to a total of 400,000 members at the end of 2021.This would represent premium revenue growth of approximately $485 million in 2021.
Contracts
We enter into contracts with CMS annually for the state Marketplace programs. These contracts have a one-year term ending on December 31, and must be renewed annually.
Other Developments
Special Enrollment Period. In January 2021, President Biden issued the Executive Order on Strengthening Medicaid and the Affordable Care Act. As a result of the order, a new three-month special enrollment period will be launched to allow uninsured and under-insured individuals to obtain Marketplace coverage. The special enrollment period will be open from February 15, 2021 to May 15, 2021.
Marketplace Risk Corridor Judgment. In April 2020, the United States Supreme Court held that §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, and that impacted insurers may sue the federal government in the U.S. Court of Federal Claims to recover damages for breach of that obligation. In June 2020, the Claims Court granted us judgment in the amount of $128 million for 2014, 2015, and 2016 Marketplace risk corridor claims, which we received in October 2020. Consistent with the timing of the cash receipt, the gain was recognized in our fourth quarter 2020 financial results and reported in “Marketplace risk corridor judgment” in our consolidated statements of income. The judgment did not create additional Minimum MLR rebates.
Member Enrollment and Marketing
Our Marketplace members enroll in our plans with the assistance of insurance agents employed by Molina, outside brokers, vendors, direct to consumer marketing and via the Internet.
While our Marketplace sales activities are regulated by CMS (such as eligibility determinations), our marketing activities are regulated by the individual states in which we operate. Some states require us to obtain prior approval of our marketing materials, others simply require us to provide them with copies of our marketing materials, and some states do not request our marketing materials. We are able to freely contact our members and provide them with marketing materials as long as those materials are fair and do not discriminate.
Our Marketplace sales and marketing strategy is to provide high quality, affordable, compliant and consumer centric Marketplace products through a variety of distribution channels. Our Marketplace products are displayed on the Federally Facilitated Marketplace (“FFM”) and the State Based Marketplace (“SBM”) in the states in which we participate in the Marketplace. We also contract with independent, licensed insurance agents to market our Marketplace products. The activities of our independently licensed insurance agents are also regulated by both CMS and the departments of insurance in the states in which we participate. Our sales cycle typically peaks during the annual Open Enrollment Period (“OEP”) as defined and regulated by CMS and the applicable FFM and SBM.
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BASIS FOR PREMIUM RATES
The following table presents our consolidated premium revenue by program for the periods indicated:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| (In millions) |
| Medicaid | $ | 14,265 | | | $ | 12,466 | |
| Medicare | 2,512 | | | 2,243 | |
| Marketplace | 1,522 | | | 1,499 | |
| Total | $ | 18,299 | | | $ | 16,208 | |
Medicaid
Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that vary by state, line of business, demographics and, in most instances, health risk factors. CMS requires these rates to be actuarially sound. In exchange for the payment received, Molina arranges, pays for, and manages healthcare services provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated with their members’ healthcare. Payments to us under each of our Medicaid contracts are subject to each state’s annual appropriation process. The amount of the premiums paid to our health plans may vary substantially between states and among various government programs. For the year ended December 31, 2020, Medicaid program PMPM premium revenues ranged from $190.00 to $1,560.00.
Medicare
Under Medicare Advantage, managed care plans contract with CMS to provide benefits in exchange for a fixed PMPM premium payment that varies based on health plan star rating and member demographics, including county residence and health risk factors. CMS also considers inflation, changes in utilization patterns and average per capita fee-for-service Medicare costs in the calculation of the fixed PMPM premium payment. Amounts payable to us under the Medicare Advantage contracts are subject to annual revision by CMS, including any federal budget cuts or tax changes applicable to Medicare. We elect to participate in each Medicare service area or region on an annual basis. Medicare Advantage premiums paid to us are subject to federal government reviews and audits which can result, and have resulted, in retroactive and prospective premium adjustments. Compared with our Medicaid plans, Medicare Advantage and MMP contracts generate higher average PMPM revenues and healthcare costs. For the year ended December 31, 2020, Medicare program PMPM premium revenues ranged from $1,060.00 to $3,150.00.
Marketplace
For Marketplace, we develop each state’s premium rates during the spring of each year for policies effective in the following calendar year. Premium rates are based on our estimates of utilization of services and unit costs, anticipated member risk acuity and related federal risk adjustment transfer amounts, and non-benefit expenses such as administrative costs, taxes, and fees. The premium rates are filed for approval with the various state and federal authorities in accordance with the rules and regulations applicable to the ACA individual market, including, but not limited to,minimum loss ratio thresholds and adjustments for permissible rate variations by age, geographic area, and variations in plan design. In the year ended December 31, 2020, Marketplace program PMPM premium revenues ranged from $310.00 to $590.00, excluding the risk corridor judgment described above.
COVID-19 PANDEMIC
As the COVID-19 pandemic continues to evolve, its ultimate impact to our business, results of operations, financial condition and cash flows is uncertain and difficult to predict. Specific trends and uncertainties related to our Health Plans segment follow.
Federal Economic Stabilization Programs
As a result of the pandemic, various stabilization programs were enacted beginning in March 2020, which may impact our business directly or indirectly, including the following:
Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted on March 6, 2020, this legislation provided $8.3 billion in COVID-19 response funding for developing a vaccine and preventing further spread of the virus.
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Families First Coronavirus Response Act. Enacted on March 18, 2020, this legislation provided $100 billion in worker assistance, temporarily increased each qualifying state and territory’s FMAP by 6.2% beginning January 1, 2020, and waived cost sharing for COVID-19 testing. The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s FMAP. The enhanced FMAP rate has been extended through the end of the second quarter of 2021. The accompanying requirement that bans the loss of coverage from state eligibility redeterminations has been extended through the end of April 2021. Redetermination is the process through which Medicaid enrollees demonstrate whether they continue to meet the requirements for participation in the Medicaid program, in particular maximum household income. This is likely a positive indicator for continued membership gains, and to provide more support for an actuarially sound rate environment.
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Enacted on March 27, 2020, the CARES Act provided an estimated $2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. This assistance included loans and support to major industries, including airlines and small businesses, direct payments to individuals and families, and $175 billion in relief funds to hospitals and other healthcare providers.
Paycheck Protection Program and Health Care Enhancement Act. Enacted on April 24, 2020, this legislation provided $310 billion for the depleted Paycheck Protection Program, and additional funding for hospitals and testing.
Coronavirus Response and Relief Supplemental Appropriations Act. Enacted on December 27, 2020, this $900 billion economic stimulus package was attached to a $1.4 trillion omnibus spending bill to fund the U.S. government through September 30, 2021. The legislation aims to support the U.S. economy by reauthorizing and providing additional funding for the fiscal support programs established by the CARES Act, and included small business relief funding of $325 billion, $82 billion in school funding, $69 billion for vaccine procurement and distribution, direct payments to individuals and families, and extended unemployment benefits, among other relief funding.
Due to the uncertainty as to the duration and breadth of the COVID-19 pandemic, we are unable to reasonably estimate the ultimate impact of the economic stabilization programs to our business, financial condition, and operating results.
Health Plan Operations
The pandemic has impacted our business, and we currently expect it to further impact our business in the areas described below. In 2020, the combination of COVID-related impacts netted to a significant negative impact on earnings.
Medical Care Costs and Demand for Healthcare Services. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. Early in the second quarter of 2020, we began to experience significantly lower utilization in a variety of cost categories, representing approximately two-thirds of our total medical cost spend, with utilization levels increasing slowly as the year progressed. We experienced several significant COVID-related impacts on medical care costs in 2020 as follows:
•Direct costs to care for COVID patients totaled $205 million in 2020, as a resurgence of COVID infections and episodes occurred in places such as Texas and California, and also disproportionately impacted certain of our Marketplace members.
•In 2020, utilization was curtailed, and generally remained below normal levels for the remainder of the year. The effect of the curtailed utilization, net of the direct cost to care discussed above, reduced medical care costs and increased pretax earnings by approximately $420 million.
•Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, and we believe that the acuity of that population is lower than our average.
With regard to the recently approved vaccines, all such vaccines are purchased by the federal government, at no cost to us or our members. For our Medicaid and Marketplace members, we will cover the costs to administer the vaccine, which we do not expect to be significant. The costs to administer the vaccine to our Medicare members is generally covered by CMS.
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Medicaid Premium Actions. In 2020, various states enacted temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which resulted in a reduction of our medical margin. In some cases, these premium actions were retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. We recognized $564 million related to these retroactive premium refunds, in the aggregate, in 2020, including approximately $37 million related to MMP plans.
It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Our position on rate adequacy has been consistent:
•We do not intend, nor do we want, to keep state Medicaid money that was supposed to be spent on medical benefits but was not due to utilization curtailment caused by COVID;
•In many of our legacy Medicaid states, there are already mechanisms in place to protect against a surplus margin, as there are Minimum MLRs in seven of our states and profit caps in two others; and
•Once the COVID-19 pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will resume.
In addition to Medicaid premium actions, COVID may impact premium revenue profitin our Medicare and total assetsMarketplace programs. For these programs, which utilize risk adjustment methodologies, medical care patterns disrupted by COVID may temporarily affect our ability to obtain complete member health status information.
Member Enrollment. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations.
It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally has fallen to 6.3% as of January 2021, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period to April 2021, with a potential extension from the Biden administration for the public health emergency to remain in place for all of 2021, will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to both serve new members, and ably partner with our state customers for increases in membership.
Capital and Financial Resources. Refer to “Liquidity and Financial Condition” below for a discussion of our capital and financial resources.
We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as it evolves, we continue to process, assemble, and assess member utilization information. We believe that our cash resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our operations, regulatory requirements, debt repayment obligations, and capital expenditures for the foreseeable future.
LEGISLATIVE AND POLITICAL ENVIRONMENT
PRESSURES ON MEDICAID FUNDING
Due to states’ budget challenges, including shortfalls resulting from the COVID-19 pandemic, and political agendas at both the state and federal levels, there are a number of different legislative proposals being considered, some of which would involve significantly reduced federal or state spending on the Medicaid program, constitute a fundamental change to the federal role in healthcare and, if enacted, could have a material adverse effect on our business, financial condition, cash flows, or results of operations. These proposals include elements such as the following, as well as numerous other potential changes and reforms:
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•Changes in the entitlement nature of Medicaid (and perhaps Medicare as well) by capping future increases in federal health spending for these programs, and shifting much more of the risk for health costs in the future to states and consumers;
•Reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults;
•Changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee basis;
•Requiring Medicaid beneficiaries to work; and
•Limiting the amount of lifetime benefits for Medicaid beneficiaries.
AFFORDABLE CARE ACT
Status of Constitutionality Court Case
In December 2018, in a case brought by the state of Texas and nineteen other states, a federal judge in Texas held that the individual mandate of the Affordable Care Act (the “ACA”) is unconstitutional. He further held that since the individual mandate is inseverable from the entire body of the ACA, the entire ACA is unconstitutional. The effect of his ruling was stayed pending the appeal of the ruling to the Fifth Circuit Court of Appeals. In December 2019, a three-judge panel of the Fifth Circuit Court of Appeal, in a two to one decision, affirmed the District Court’s ruling that the individual mandate is unconstitutional, but remanded the case back to the District Court for further consideration of the severability issue. The intervenor defendant states led by California subsequently appealed the case to the U.S. Supreme Court, and the Supreme Court heard oral arguments in the case on November 10, 2020. The Supreme Court’s decision is expected by June 2021. If the Supreme Court were to rule that the individual mandate is unconstitutional, and that the individual mandate is not severable from the balance of the ACA, or that the entirety of the ACA is unconstitutional, that ruling could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
As of December 31, 2020, we served a significant number of members enrolled in programs created by the ACA, including approximately 771,000 Medicaid Expansion members and 318,000 Marketplace members. In the year ended December 31, 2020, premium revenue associated with these members amounted to $4,904 million, and contributed Medical Margin of $826 million.
Other Proposed Changes and Reforms
Other proposed changes and reforms to the ACA have included, or may include the following:
•Prohibiting the federal government from operating Marketplaces;
•Eliminating the advanced premium tax credits, and cost sharing reductions for low income individuals who purchase their health insurance through the Marketplaces;
•Expanding and encouraging the use of private health savings accounts;
•Providing for insurance plans that offer fewer and less extensive health insurance benefits than under the ACA’s essential health benefits package, including broader use of catastrophic coverage plans, or short-term health insurance;
•Establishing and funding high risk pools or reinsurance programs for individuals with chronic or high cost conditions; and
•Allowing insurers to sell insurance across state lines.
The passage of any of these changes or other reforms could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
OPERATIONS
QUALITY
Our long-term success depends, to a significant degree, on the quality of the services we provide. As of December 31, 2020, 13 of our health plans were accredited by the National Committee for Quality Assurance (“NCQA”), of which 12 of those health plans also received the Multicultural Health Care Distinction, which is awarded to organizations that meet or exceed NCQA’s rigorous requirements for multicultural healthcare.
For the states where our health plans are accredited by the NCQA and/or have Medicare Star Ratings, the table below presents such health plans’ NCQA status, as well as their current scores as part of the Medicare Star Ratings, which measures the quality of Medicare plans across the country using a 5-star rating system.
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We believe that these objective measures of quality are important to state Medicaid agencies, as a growing number of states link reimbursement and patient assignment to quality scores. Additionally, Medicare pays quality bonuses to health plans that achieve high quality.
__________________
*NCQA Health Insurance Plan Ratings for 2020-2021 (Medicaid) have not been released due to COVID-19.
PROVIDERS
We arrange healthcare services for our members through contracts with a vast network of providers, including independent physicians and physician groups, hospitals, ancillary providers, and pharmacies. We strive to ensure that our providers have the appropriate expertise and cultural and linguistic experience.
The quality, depth and scope of our provider network are essential if we are to ensure quality, cost-effective care for our members. In partnering with quality, cost-effective providers, we utilize clinical and financial information derived by our medical informatics function, as well as the experience we have gained in serving Medicaid members, to gain insight into the needs of both our members and our providers.
Physicians
We contract with both primary care physicians and specialists, many of whom are organized into medical groups or independent practice associations. Primary care physicians provide office-based primary care services. Primary care physicians may be paid under capitation or fee-for-service contracts and may receive additional compensation by providing certain preventive care services. Under capitation payment arrangements, healthcare providers receive fixed, pre-arranged monthly payments per enrolled member, whereas under fee-for-service payment arrangements, healthcare providers are paid a fee for each particular service rendered. Our specialists care for patients for a specific episode or condition, usually upon referral from a primary care physician, and are usually compensated on a fee-for-service basis. When we contract with groups of physicians on a capitated basis, we monitor their solvency.
Hospitals
We generally contract with hospitals that have significant experience dealing with the medical needs of the Medicaid population. We reimburse hospitals under a variety of payment methods, including fee-for-service, per diems,
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diagnostic-related groups, capitation, and case rates.
Ancillary Providers
Our ancillary agreements provide coverage of medically-necessary care, including laboratory services, home health, physical, speech and occupational therapy, durable medical equipment, radiology, ambulance and transportation services, and are reimbursed on a capitation and fee-for-service basis.
Pharmacy
We outsource pharmacy benefit management services, including claims processing, pharmacy network contracting, rebate processing and mail and specialty pharmacy fulfillment services.
The following table illustrates consolidated medical care costs by type for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| Amount | | PMPM | | % of
Total | | Amount | | PMPM | | % of
Total |
| (In millions, except PMPM amounts) |
| Fee-for-service | $ | 11,590 | | | $ | 261.30 | | | 73.3 | % | | $ | 10,453 | | | $ | 256.34 | | | 75.1 | % |
| Pharmacy | 2,012 | | | 45.37 | | | 12.7 | | | 1,681 | | | 41.23 | | | 12.1 | |
| Capitation | 1,459 | | | 32.88 | | | 9.2 | | | 1,149 | | | 28.17 | | | 8.3 | |
Other (1) | 759 | | | 17.10 | | | 4.8 | | | 622 | | | 15.25 | | | 4.5 | |
| Total | $ | 15,820 | | | $ | 356.65 | | | 100.0 | % | | $ | 13,905 | | | $ | 340.99 | | | 100.0 | % |
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(1)“Other” includes all medically-related administrative costs, certain provider incentive costs, provider claims, and other healthcare expenses. Medically-related administrative costs include, for example, expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses.
MEDICAL MANAGEMENT
Our mission is to improve the health and lives of our members by delivering high-quality healthcare. We believe our singular focus on government-sponsored healthcare enables us to identify and implement efficiencies that distinguish us as the low-cost, high-quality health plan of choice. We emphasize primary care physicians as the central point of delivery for routine and preventive care, coordination of referrals to specialists, and appropriate assessment of the need for hospital care. This model has proved to be an effective method of coordinating medical care for our members.
Utilization Management
Our goal is to optimize access to low-cost, high-quality care. This is achieved by sound clinical policy based on current evidence-based practices. Additionally, we continuously monitor utilization patterns and strive to identify new opportunities to reduce cost and improve quality of care. Our utilization management process serves as a bridge to identify at-risk members for referral into internally developed case management programs such as “Transitions of Care,” which facilitates post-discharge safety and appropriate outcomes.
Population Management
We believe high-quality, affordable care is achieved through a variety of programs tailored to our members’ emerging needs. Individuals are identified for interventions, and programs are customized, based on predictive analytics and our member assessment process. These tools ensure that the appropriate level of services and support are provided to address physical health, behavioral health, and social determinants of health. This comprehensive and customized approach is designed to help members achieve their goals and improve their overall quality of life.
Pharmacy Management
Our pharmacy programs are designed to make us a trusted partner in improving member health and healthcare affordability. We strategically partner with physicians and other healthcare providers who treat our members. This collaboration results in drug formularies and clinical initiatives that promote improved patient care. We employ full-time pharmacists and pharmacy technicians who work closely with providers to educate them about our formulary products, clinical programs, and the importance of cost-effective care.
Molina Healthcare, Inc. 2020 Form 10-K | 15
INFORMATION TECHNOLOGY
Our business is dependent on effective and secure information systems that assist us in processing provider claims, monitoring utilization and other cost factors, supporting our medical management techniques, providing data to our regulators, and implementing our data security measures. Our members and providers also depend upon our information systems for enrollment, premium processing, primary care and specialist physician roster access, membership verifications, claims status, provider payments, and other information.
We have partnered with third parties to support our information technology systems. This makes our operations vulnerable to adverse effects if such third parties fail to perform adequately. In 2019, we entered into an agreement with a third-party vendor who manages certain of our information technology services including, among other things, our infrastructure operations, end-user services, data centers, public cloud and application management.As a result of the agreement, we were able to reduce our administrative expenses, while improving the reliability of our information technology functions, and maintain targeted levels of service and operating performance. A segment of these services are provided on our premises, while other portions of the services are performed at the vendor’s facilities.
Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, changing customer preferences, acquisitions and increased security risks.
CENTRALIZED SERVICES
We provide certain centralized medical and administrative services to our subsidiaries pursuant to administrative services agreements that include, but are not limited to, information technology, product development and administration, underwriting, claims processing, customer service, certain care management services, human resources, marketing, purchasing, risk management, actuarial, finance, accounting, compliance, legal and public relations.
COMPETITIVE CONDITIONS AND ENVIRONMENT
We face varying levels of competition. Health careHealthcare reform proposals may cause organizations to enter or exit the market for government sponsoredgovernment-sponsored health programs. However, the licensing requirements and bidding and contracting procedures in some states may present partial barriers to entry into our industry.
We compete for government contracts, renewals of those government contracts, members, and providers. State agencies consider many factors in awarding contracts to health plans. Among such factors are the health plan’s provider network, quality scores, medical management, degree of member satisfaction, timeliness of claims payment, and financial resources. Potential members typically choose a health plan based on a specific provider being a part of the network, the quality of care and services available, accessibility of services, and reputation or name recognition of the health plan. We believe factors that providers consider in deciding whether to contract with a health plan include potential member volume, payment methods, timeliness and accuracy of claims payment, and administrative service capabilities.
For further competitor information specific to each of our reportable segments, refer to “MD&A—Reportable Segments.”
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance to the performance of other public companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not as substitutes for or superior to, GAAP measures.
See further information regarding non-GAAP measures in the “Supplemental Information” section of this MD&A, including the reconciliations to U.S. GAAP. Non-GAAP financial measures referred to in this Form 10-K are designated with an asterisk (*).
KEY PERFORMANCE INDICATORS
(Dollars in millions except per-share amounts, membership in millions)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Ending total membership | 4.5 |
| | 4.2 |
| | 3.5 |
|
| | | | | | |
| Premium revenue | $ | 18,854 |
| | $ | 16,445 |
| | $ | 13,261 |
|
Health Plans segment medical margin (1) | $ | 1,781 |
| | $ | 1,671 |
| | $ | 1,467 |
|
| Operating (loss) income | $ | (555 | ) | | $ | 306 |
| | $ | 387 |
|
| | | | | | |
| Net (loss) income | $ | (512 | ) | | $ | 52 |
| | $ | 143 |
|
| Net (loss) income per diluted share | $ | (9.07 | ) | | $ | 0.92 |
| | $ | 2.58 |
|
| Diluted weighted average shares outstanding | 56.5 |
| | 56.3 |
| | 55.6 |
|
| | | | | | |
| Adjusted net (loss) income per diluted share* | $ | (8.72 | ) | | $ | 1.28 |
| | $ | 2.78 |
|
| EBITDA* | $ | (329 | ) | | $ | 467 |
| | $ | 508 |
|
| | | | | | |
| Operating Statistics: | | | | | |
Medical care ratio (2) | 90.6 | % | | 89.8 | % | | 88.9 | % |
G&A ratio (3) | 8.0 | % | | 7.8 | % | | 8.1 | % |
Premium tax ratio (2) | 2.3 | % | | 2.8 | % | | 2.9 | % |
| Effective income tax (benefit) expense rate | (16.4 | )% | | 74.8 | % | | 55.5 | % |
Net (loss) profit margin (3) | (2.6 | )% | | 0.3 | % | | 1.0 | % |
__________________
| |
(1) | Medical margin is equal to premium revenue minus medical costs. |
| |
(2) | Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue. |
| |
(3) | G&A ratio represents general and administrative expenses as a percentage of total revenue. Net (loss) profit margin represents net (loss) income as a percentage of total revenue. |
See discussion of Key Performance Indicators in the “Consolidated Results” and “Reportable Segments” sections of this MD&A.
CONSOLIDATED RESULTS
FISCAL YEAR 2017 FINANCIAL SUMMARY
Net loss per diluted share was $9.07 in 2017 compared with net income per diluted share of $0.92 in 2016.
Adjusted net loss per diluted share* was $8.72 in 2017 compared with adjusted net income per diluted share* of $1.28 in 2016.
The medical care ratio increased to 90.6% in 2017, from 89.8% in 2016.
The general and administrative ratio increased to 8.0% in 2017, from 7.8% in 2016.
We recorded a $73 million charge as a result of the federal government’s decision to stop paying cost sharing reduction rebates (CSRs) to health plans beginning in the fourth quarter of 2017. We believe we are legally entitled to those payments, and will pursue all available means to collect them.
We recorded $47 million in charges for Marketplace changes in estimates, including risk adjustment and CSRs, related to 2016 dates of service that were estimated at December 31, 2016, and finalized during the second quarter of 2017.
We recognized the $30 million release of the Marketplace-related premium deficiency reserve we had established as of December 31, 2016.
We incurred non-cash impairment losses of $470 million in 2017. These losses included $269 million, primarily in connection with our Florida, New Mexico, and Illinois health plans. The impairments at Florida and New Mexico were the result of our recent Medicaid contract losses. The Illinois impairment was the result of management’s determination, in the course of its annual impairment assessment of the goodwill of the Illinois health plan, that the plan’s future cash flow projections were insufficient to produce an estimated fair value in excess of its carrying amount. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago.
Also during 2017, we recorded impairment losses of $28 million for our Molina Medicaid Solutions segment because management determined that Molina Medicaid Solutions will provide fewer future benefits for its support of the Health Plans segment than previously anticipated. In addition, we recorded impairment losses of $173 million for our Other segment, primarily relating to our Pathways business, because management determined that Pathways will not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected.
We incurred restructuring and separation costs of $234 million in 2017 as a result of the implementation of our restructuring and profit improvement plan in 2017 (the 2017 Restructuring Plan). As previously disclosed, we estimate that our 2017 Restructuring Plan will reduce annualized run-rate expenses by approximately $300 million to $400 million when completed by the end of 2018. As of December 31, 2017, we achieved $235 million of these run-rate reductions by the elimination of administrative costs (some of which are classified as medical care costs) on an annualized basis. As of December 31, 2017 we had also achieved an undetermined amount of medical care cost savings on an annualized basis through the re-negotiation of various medical provider contracts and the restructuring of our direct delivery operations. We expect to have more visibility into the actual value of these medical care cost savings later in 2018. We incurred substantially all of the costs associated with the 2017 Restructuring Plan in 2017.
We incurred $14 million in expenses, including transaction fees, relating to our exchange of equity for $141 million face value of our 1.625% convertible senior notes.
We recognized $75 million of other income for fees we received in connection with the termination of a proposed Medicare acquisition in early 2017.
We recognized approximately $54 million in additional tax expense during the fourth quarter, due to the revaluation of our deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017.
The following table summarizes significant items affecting 2017 financial results (in millions, except per diluted share amounts).
|
| | | | | | | |
| | Year Ended December 31, 2017 |
| | Amount | | Per Diluted Share (1) |
| Termination of CSR subsidy payments for the fourth quarter of 2017 | $ | 73 |
| | $ | 0.82 |
|
| Marketplace adjustments related to risk adjustment, CSR subsidies, and other items for 2016 dates of service | 47 |
| | 0.52 |
|
| Change in Marketplace premium deficiency reserve for 2017 dates of service | (30 | ) | | (0.33 | ) |
| Impairment losses | 470 |
| | 6.01 |
|
| Restructuring and separation costs | 234 |
| | 2.86 |
|
| Loss on debt extinguishment | 14 |
| | 0.24 |
|
| Fee received for terminated Medicare acquisition | (75 | ) | | (0.84 | ) |
| | $ | 733 |
| | $ | 9.28 |
|
___________________________
| |
(1) | Amounts shown are before considering revaluation of related deferred tax assets as a result of theTax Cuts and Jobs Act of 2017, as applicable. Except for certain items that are not deductible for tax purposes, per diluted share amounts are generally calculated at a statutory income tax rate of 37%, which is in excess of the effective tax rate recorded in our consolidated statements of operations.
|
TRENDS AND UNCERTAINTIES
Medicaid Contract Re-Procurement
The following table illustrates Health Plans segment Medicaid contracts scheduled for re-procurement in the near term. While we have been notified of the Medicaid regulators’ intention to re-procure the contracts, the anticipated award dates and effective dates are management’s current best estimates; such dates are subject to change. Premium revenue is stated in millions.
|
| | | | | | | | | | | | | |
| | | | | | | Premium Revenue | | | | |
| | | | | Membership as of | | Year Ended | | Anticipated |
| Health Plan | | Medicaid Program(s) | | December 31, 2017 | | December 31, 2017 | | Award Date | | Effective Date |
| Puerto Rico | | All | | 314,000 |
| | $ | 732 |
| | Q2 2018 | | 10/1/2018 |
| Texas | | ABD, MMP | | 100,000 |
| | $ | 1,814 |
| | Q3 2018 | | 1/1/2020 |
Washington (1) | | All in 7 of 9 regions | | 574,000 |
| | $ | 1,861 |
| | Q2 2018 | | 1/1/2019 |
__________________
| |
(1) | The re-procurement information presented for the Washington health plan includes all Medicaid membership in the following regions: Northeast, Northwest, Central and Southeast, Pierce County, King County, Olympic Peninsula, and West-Central. Five of the seven largest regions’ contracts that are awarded will be effective January 1, 2019. The remaining two will be effective on January 1, 2020. |
Florida Health Plan. On February 1, 2018, we were selected by the Florida Agency for Health Care Administration (AHCA) to negotiate for the award of a managed care contract in only one region of Florida. That region—Region 11—comprises Miami-Dade and Monroe counties, where we currently serve 59,000 Medicaid members. As of December 31, 2017, we served approximately 360,000 Medicaid members in Florida, which represented approximately $1,486 million premium revenue for the year ended December 31, 2017. This decision does not affect the Florida health plan’s current contracts with AHCA, which run through December 31, 2018. We recorded impairment losses in connection with this event. Refer to the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,” for further information regarding all impairment losses recorded in 2017.
New Mexico Health Plan. In January 2018, our New Mexico health plan was notified by the New Mexico Human Services Department (HSD) that the health plan had not been selected for the tentative award of a Medicaid contract effective January 1, 2019. As of December 31, 2017, we served approximately 224,000 Medicaid members in New Mexico, which represented approximately $1,205 million premium revenue for the year ended December 31, 2017. This decision does not affect the New Mexico plan’s current contract with HSD which runs through December 31, 2018. We recorded impairment losses in connection with this event.
Illinois Health Plan. In August 2017, our Illinois health plan was awarded a statewide Medicaid managed care contract by the Illinois Department of Healthcare and Family Services. This Medicaid contract further integrates behavioral health and physical health by combining the state’s three current managed care programs into one program. The contract began January 1, 2018, and will continue for four years with options to renew annually for up to four additional years.
Washington Health Plan. In May 2017, our Washington health plan was selected by the Washington State Health Care Authority to negotiate and enter into managed care contracts for the North-Central region of the state’s Apple Health Integrated Managed Care Program. The new contract commenced January 1, 2018.
Pressures on Medicaid Funding
Currently, there are a number of different legislative proposals being considered, some of which would involve significantly reduced federal spending on the Medicaid program, and constitute a fundamental change in the federal role in health care. These proposals include elements such as the following:
Ending the entitlement nature of Medicaid by capping future increases in federal health spending for these programs, and shifting more of the risk for health costs in the future to states and consumers;
Reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults;
Changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee basis (a “per capita cap”);
Requiring Medicaid beneficiaries to work;
Limiting the amount of lifetime benefits for Medicaid beneficiaries; and
Numerous other potential changes and reforms.
ACA and the Marketplace
The future of the Affordable Care Act (ACA) and its underlying programs, including the Marketplace, is subject to substantial uncertainty. Effective January 1, 2018, we have:
Exited the Utah and Wisconsin Marketplaces;
Reduced the scope of our Washington state Marketplace participation;
Increased premiums averaging 58%;
Mitigated our exposure to uncertainties relating to cost sharing reduction (CSR) funding and reconciliation; and
Adjusted broker commissions to market rates.
As a result of these actions, we estimate that our ACA Marketplace membership will decline to approximately 300,000 members by the end of 2018, from 815,000 members as of December 31, 2017.
REPORTABLE SEGMENTS
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.
One of the key metrics used to assess the performance of our most significant segment, the Health Plans segment, is the medical care ratio (“MCR”). The medical care ratio represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying gross margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other segments, as “Service margin.” The service margin is equal to service revenue minus cost of service revenue. Management’s discussion and analysis of the changes in the individual components of medical margin and service margin follows.
SEGMENT SUMMARY
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
Health Plans segment medical margin (1) | $ | 1,781 |
| | $ | 1,671 |
| | $ | 1,467 |
|
Molina Medicaid Solutions segment service margin (2) | 16 |
| | 21 |
| | 55 |
|
Other segment service margin (2) | 13 |
| | 33 |
| | 5 |
|
| | $ | 1,810 |
| | $ | 1,725 |
| | $ | 1,527 |
|
| | | | | | |
| Health Plans segment medical care ratio | 90.6 | % | | 89.8 | % | | 88.9 | % |
_______________________
| |
(1) | Represents premium revenue minus medical care costs. |
| |
(2) | Represents service revenue minus cost of service revenue. |
HEALTH PLANS
| |
▪ | 97.3% of total revenue in 2017 |
| |
▪ | 96.9% of total revenue in 2016 |
| |
▪ | Employees: approximately 5,300 |
Our Industry
Medicaid. Medicaid was established in 1965 under the U.S. Social Security Act to provide health care and long-term care services and supports to low-income Americans. Although jointly funded by federal and state governments, Medicaid is a state-operated and state-implemented program. Subject to federal laws and regulations, states have significant flexibility to structure their own programs in terms of eligibility, benefits, delivery of services, and provider payments. As a result, there are 56 separate Medicaid programs—one for each U.S. state, each U.S. territory, and the District of Columbia.
The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance percentage (FMAP). A state’s FMAP is calculated annually and varies inversely with average personal income in the state. The average FMAP across all jurisdictions is currently about 59%, and ranges from a federally established FMAP floor of 50% to as high as 75%.
We participate in the following Medicaid programs:
Temporary Assistance for Needy Families, or TANF - The most common Medicaid program, covers primarily low-income families with children.
Aged, Blind or Disabled, or ABD - Medicaid ABD programs cover low-income persons with chronic physical disabilities or behavioral health impairments. ABD beneficiaries typically use more services than those served by other Medicaid programs because of their critical health issues.
Children’s Health Insurance Program, or CHIP - A joint federal and state matching program that provides health care coverage to children whose families earn too much to qualify for Medicaid coverage. States have the option of administering CHIP through their Medicaid programs.
Medicaid Expansion -In states that have elected to participate, Medicaid Expansion provides eligibility to nearly all low-income individuals under age 65 with incomes at or below 138% of the federal poverty line.
Marketplace.The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in California, Florida, Michigan, New Mexico, Ohio, Texas and Washington. As previously announced, we exited the Utah and Wisconsin ACA Marketplaces effective January 1, 2018.
Medicare. Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress, and administered by the Centers for Medicare and Medicaid Services (CMS). Medicare beneficiaries may enroll in a Medicare Advantage plan, under which managed care plans contract with CMS to provide benefits that are comparable to original Medicare. Such benefits are provided in exchange for a fixed per-member per-month (PMPM) premium payment that varies based on the county in which a member resides, the demographics of the member, and the member’s health condition. Since 2006, Medicare beneficiaries have had the option of selecting a new prescription drug benefit from an existing Medicare Advantage plan. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain cost sharing depending upon the specific benefit design of the selected plan.
Medicare-Medicaid Plans, or MMPs. Approximately nine million low-income elderly and disabled people are covered under both the Medicare and Medicaid programs. These beneficiaries are more likely than other Medicare beneficiaries to be frail, live with multiple chronic conditions, and have functional and cognitive impairments. Medicare is their primary source of health insurance coverage. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental care and long-term care services and support, and by helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual eligible”), and to
deliver services to these individuals in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual eligible individuals. The health plans participating in such demonstrations are referred to as MMPs. We operate MMPs in six states.
Significant Trends and Developments
Refer to the discussion above, in the “Consolidated Results,” and also below, in “Financial Performance by Program” sections of this MD&A.
Competition
The Medicaid managed care industry is subject to ongoing changes as a result of health carehealthcare reform, business consolidations and new strategic alliances. We compete with national, regional, and local Medicaid service providers, principally on the basis of size, location, quality of the provider network, quality of service, and reputation. Our primary competitors in the Medicaid managed care industry include Centene Corporation, WellCare Health Plans, Inc., UnitedHealth Group Incorporated, Anthem, Inc., and Aetna Inc., and other large not-for-profit healthcare organizations. Competition can vary considerably from state to state.
RegulationMedicare
The Medicare market is highly competitive across the country, with large competitors, such as UnitedHealth Group Incorporated, Humana Inc., and Aetna Inc., holding significant market share.
Molina Healthcare, Inc. 2020 Form 10-K | 16
Marketplace
Low-income members who receive government subsidies comprise the vast majority of Marketplace membership, which is served by a limited number of health plans. Our primary competitor for low-income Marketplace membership is Centene Corporation.
REGULATION
Our health plans are highly regulated by both state and federal government agencies. Regulation of managed care products and health carehealthcare services varies from jurisdiction to jurisdiction, and changes in applicable laws and rules occur frequently. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Such agencies have become increasingly active in recent years in their review and scrutiny of health insurers and managed care organizations, including those operating in the Medicaid and Medicare programs.
HIPAA. HIPAA AND THE HITECH ACT
In 1996, Congress enacted the Health Insurance Portability and Accountability Act (HIPAA)(“HIPAA”). All health plans are subject to HIPAA, including ours. HIPAA generally requires health plans to:
•Establish the capability to receive and transmit electronically certain administrative health carehealthcare transactions, such as claims payments, in a standardized format;
•Afford privacy to patient health information; and
•Protect the privacy of patient health information through physical and electronic security measures.
In 2009, the Health careInformation Technology for Economic and Clinical Health Act (“HITECH”) imposed requirements on uses and disclosures of health information; included requirements for HIPAA business associate agreements; extended parts of HIPAA privacy and security provisions to business associates; added data breach notification requirements for covered entities and business associates and reporting requirements to the U.S. Department of Health and Human Services (“HHS”) and, in some cases, to the media; strengthened enforcement; and imposed higher financial penalties for HIPAA violations. In the conduct of our business, depending on the circumstances, we may act as either a covered entity and/or a business associate. HIPAA privacy regulations do not preempt more stringent state laws and regulations that may apply to us.
We maintain a HIPAA compliance program, which we believe complies with HIPAA privacy and security regulations, and have dedicated resources to monitor compliance with this program.
Healthcare reform created additional tools for fraud prevention, including increased oversight of providers and suppliers participating or enrolling in Medicaid, CHIP, and Medicare. Those enhancements included mandatory licensure for all providers, and site visits, fingerprinting, and criminal background checks for higher risk providers.
Regulatory Capital RequirementsFRAUD AND ABUSE LAWS AND THE FALSE CLAIMS ACT
Because we receive payments from federal and Dividend Restrictions.state governmental agencies, we are subject to various laws commonly referred to as “fraud and abuse” laws, including federal and state anti-kickback statutes, prohibited referrals, and the federal False Claims Act, which permit agencies and enforcement authorities to institute a suit against us for violations and, in some cases, to seek treble damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result in exclusion, debarment, temporary or permanent suspension from participation in government healthcare programs, or the institution of corporate integrity agreements. Liability under such federal and state statutes and regulations may arise if we know, or it is determined that we should have known, that information we provide to form the basis for a claim for government payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was out of compliance with program requirements.
Fraud, waste and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a provider, upcoding, payments made to excluded providers, improper marketing, and the violation of patient privacy rights. In particular, there has recently been increased scrutiny by the Department of Justice on health plans’ risk adjustment practices, particularly in the Medicare program. Companies involved in public healthcare programs such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often the subject of fraud, waste and abuse investigations and audits.
Molina Healthcare, Inc. 2020 Form 10-K | 17
The federal government has taken the position that claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. In addition, under the federal civil monetary penalty statute, the HHS Office of Inspector General has the authority to impose civil penalties against any person who, among other things, knowingly presents, or causes to be presented, certain false or otherwise improper claims. Qui tam actions under federal and state law can be brought by any individual on behalf of the government. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines, or be excluded from the Medicare, Medicaid, or other state or federal healthcare programs as a result of an investigation arising out of such action.
LICENSING AND SOLVENCY
Our health plans are generally licensed by the insurance departments in the states in which they operate, except the following: our California health plan is licensed by the California Department of Managed Health Care; one of our New York health plans is licensed as a prepaid health services plan by the New York State Department of Health; and our Massachusetts Plan acquired on December 31, 2020, is regulated as a risk-bearing entity by the Massachusetts Executive Office of Health and Human Services.
Our health plans are subject to stringent requirements to maintain a minimum capitalization requirementsamount of statutory capital determined by statute or regulation, and restrictions that limit their ability to pay dividends to us. For further information, refer to the Notes to Consolidated Financial Statements, Note 19,15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Quality
Our long-term success depends, in large part, on the quality of the services we provide. As of December 31, 2017, 11 of our 13 health plans were accredited by the National Committee for Quality Assurance (NCQA), including the Multicultural Health Care Distinction, which is awarded to organizations that meet or exceed its rigorous requirements for multicultural health care.
The table below presents our health plans’ NCQA status, as well as their scores as part of the CMS 2017 Star Ratings, which measures the quality of Medicare plans across the country using a 5-star rating system.
We believe that these objective measures of quality are important to state Medicaid agencies, as a growing number of states link reimbursement and patient assignment to quality scores. Additionally, Medicare pays quality bonuses to health plans that achieve high quality.
Programs and ServicesHUMAN CAPITAL
As of December 31, 2017,2020, we had approximately 10,500 employees, and added approximately 2,500 employees from the Magellan Complete Care and Passport acquisitions, effective January 1, 2021. Our employee base is multicultural and reflects the diverse membership we serve.
Over the past few years, management has launched a workplace modernization program that regularly introduces new human capital programs related to development, compensation and other workplace practices. We believe this workplace modernization program will allow us to achieve our overarching goal to become a destination employer in the government-sponsored healthcare industry.
Examples of recent programs include a cash bonus plan for all non-executive employees, improvements to our employee benefits, development resources for all employees, enhanced employee recognition programs, and the launch of a formal diversity, equity, and inclusion program. Additionally, we routinely engage with employees through use of engagement surveys, to evaluate employee satisfaction and obtain feedback on various facets of employee-related matters including workplace modernization programs.
Management continually evaluates human capital opportunities such as employee retention, engagement, succession planning and talent pipelines, performance rating distributions, and associated compensation actions. The board of directors is updated regularly on employee engagement, key executive vacancies, succession planning and workplace modernization progress.
We also offer formal leadership development programs such as new leader orientation, executive onboarding, front- line leadership essentials, and experienced leader training. We have targeted development plans for critical roles in the organization with an emphasis on leadership and business skills.
We invest in our workforce by offering competitive salaries and wages, as well as other employee benefits. Our compensation programs are designed to attract, retain, motivate, and reward employees, and recruit new employees. In addition, to foster a stronger sense of ownership and align the interests of employees with shareholders, we offer employees ownership in Molina through an employee stock purchase program, and grant eligible employees equity-based compensation under our equity incentive plan.
We also offer a comprehensive suite of benefits to all eligible employees, including, among others:
•Comprehensive health insurance coverage for employees working 30 hours or more per week;
•401(k) matching contributions of up to 100% on the first 4% contributed by the employee;
•Personal time off that provides employees with paid time away from work, combining vacation and sick leave;
•COVID-19 time off that provides employees with up to 80 hours of paid time away from work to recover from COVID-19;
Molina Healthcare, Inc. 2020 Form 10-K | 18
•Volunteer time off that provides employees with paid time away from work to build strong community partnerships and connect with the people we serve;
•Employee wellness programs that provide tools and incentives to live a healthy life focusing on physical, emotional, financial and work well-being;
•Up to ten dependent-care back-up visits per year for a low co-pay, and five hours of homework and tutoring support per child per month at no cost;
•Employee assistance program benefits that provides up to six confidential counseling sessions per rolling 12-month period and includes assistance with physical, emotional, and financial related matters; and
•Employee discount and other programs, including tuition reimbursement.
AVAILABLE INFORMATION
Our principal executive offices are located at 200 Oceangate, Suite 100, Long Beach, California 90802, and our telephone number is (562) 435-3666. The Company also maintains corporate offices in New York City, New York.
You can access our website at www.molinahealthcare.com to learn more about our Company. From that site, you can download and print copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, along with amendments to those reports. You can also download our Corporate Governance Guidelines, board of directors committee charters, and Code of Business Conduct and Ethics. We make periodic reports and amendments available, free of charge, as soon as reasonably practicable after we file or furnish these reports to the U.S. Securities and Exchange Commission (“SEC”). We will also provide a copy of any of our corporate governance policies published on our website free of charge, upon request. To request a copy of any of these documents, please submit your request to: Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, California 90802, Attn: Investor Relations. Information on or linked to our website is neither part of nor incorporated by reference into this Form 10-K or any other SEC filings.
RISK FACTORS
You should carefully consider the risks described below and all of the other information set forth in this Form 10-K, including our consolidated financial statements and accompanying notes. These risks and other factors may affect our forward-looking statements, including those we make in this Form 10-K or elsewhere, such as in press releases, presentations to securities analysts or investors, or other communications made by or with the approval of one of our executive officers. The risks described in the following section are not the only risks facing our Company.
Additional risks that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. In addition to the risks relating to the COVID-19 pandemic that are specifically described in these risk factors, the effects of the COVID-19 pandemic may also have the effect of significantly heightening many of the other risks associated with our business, including those described below. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, among other effects, the trading price of our common stock could decline, and you could lose part or all of your investment.
RISKS RELATED TO OUR INDUSTRY
Our business, financial condition, cash flows, and results of operations will continue to be impacted by the COVID-19 pandemic, and the extent of such impact cannot be reasonably foreseen at this time.
We currently expect that the COVID-19 pandemic will continue to impact our business, financial condition, cash flows, and results of operations in a number of ways, including the following:
•It will have an adverse impact on the health of an indeterminate number of our members, resulting in increases in their medical care costs, as well as increased costs related to testing and vaccination protocols;
•Uncertainty and variability associated with the demand for medical services may lead states to pursue retroactive rate refunds (as has already occurred in certain instances), or to impose medical cost risk corridors or rate cuts that exceed the ultimate demand for medical services;
•Disrupted care patterns, as a result of the pandemic, may temporarily affect the ability to obtain complete member health status information, impacting future revenue in our Medicare and Marketplace lines of business, which utilize risk adjustment methodologies;
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•As a result of the pandemic’s impact on the national economy, state tax revenues have declined significantly and may not recover in 2021, resulting in the extension of risk corridors or rate cuts, and also threatening the ability of states to make timely monthly capitation payments to us;
•The reduced demand for certain routine and non-critical medical services has created financial stress for certain providers and could result in the insolvency of such providers;
•The pandemic may continue to cause increased volatility in the capital markets and such volatility could have a negative impact on our ability to access those markets on acceptable terms;
•We will continue to incur increased costs associated with the measures we are currently implementing and planning to implement to mitigate the implications of the COVID-19 pandemic;
•The continuing work-from-home status of our workforce may heighten the risk of a cybersecurity incident or HIPAA (as defined below) breach; and
•The pandemic may impact the ability of our outsourced information technology service providers, and other third-party vendors, to perform contracted services.
Due to the uncertainty around the duration and breadth of the COVID-19 pandemic and its broad cascading effects, the ultimate impact on our business, financial condition, cash flows, and operating results cannot be reasonably estimated at this time.
We operate in an uncertain political and judicial environment which creates uncertainties with regard to our future prospects.
In December 2018, in a case brought by the state of Texas and nineteen other states, a federal judge in Texas held that the individual mandate of the Affordable Care Act (the “ACA”) is unconstitutional. He further held that since the individual mandate is inseverable from the entire body of the ACA, the entire ACA is unconstitutional. The effect of his ruling was stayed pending the appeal of the ruling to the Fifth Circuit Court of Appeals. In December 2019, a three-judge panel of the Fifth Circuit Court of Appeal, in a two to one decision, affirmed the District Court’s ruling that the individual mandate is unconstitutional, but remanded the case back to the District Court for further consideration of the severability issue. The intervenor defendant states led by California subsequently appealed the case to the U.S. Supreme Court, and the Supreme Court heard oral arguments in the case on November 10, 2020.The Supreme Court’s decision is expected by June 2021. If the Supreme Court were to rule that the individual mandate is unconstitutional, and that the individual mandate is not severable from the balance of the ACA, or that the entirety of the ACA is unconstitutional, that ruling could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid, Medicare, and CHIP programs. The states in which we operate regularly face significant budgetary pressures. State budgetary pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts which could reduce our revenues and profit margins. For example, in 2020, various states enacted temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which resulted in a reduction of our medical margin. In some cases, these premium actions were retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. We recognized $564 million related to these retroactive premium actions, in the aggregate, in 2020. It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
The Medicare-Medicaid Duals Demonstration Pilot Programs could be discontinued or altered, resulting in a loss of premium revenue.
To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual eligibles”), and to deliver services to these individuals in a more financially efficient manner, under the direction of CMS some states implemented demonstration pilot programs to integrate Medicare and Medicaid services for the dual eligibles. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (“MMPs”). We operate MMPs in six states: California, Illinois, Michigan, Ohio, South Carolina, and Texas. At December 31, 2020, our membership included approximately 62,000 integrated MMP members, representing approximately 2% of our total membership. However, the capitation paid to us for dual eligibles is significantly higher than the capitation paid for other members, representing 9% of our total premium revenues in 2020. If the states running the MMP pilot programs conclude that the demonstration pilot programs are not delivering better coordinated care and reduced
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costs, they could decide to discontinue or substantially alter such programs, resulting in a reduction to our premium revenues.
If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may negatively affect our ability to meet our debt service and other obligations.
We are a corporate parent holding company and hold most of our assets in, and conduct most of our operations through, our direct subsidiaries. As a holding company, our results of operations depend on the results of operations of our subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend on their operating results and will be subject to applicable laws and restrictions contained in agreements governing the debt of such subsidiaries. In addition, our health plan subsidiaries are subject to laws and regulations that limit the amount of ordinary dividends and distributions that they can pay to us without prior approval of, or notification to, state regulators. In general, our health plans must give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective state departments of insurance for amounts that exceed either (a) ten percent of surplus or net worth at the prior year end or (b) the net income for the prior year, depending on the respective state statute. The discretion of the state regulators, if any, in approving or disapproving a dividend is not clearly defined. Our health plans generally must provide notice to the applicable state regulator prior to paying a dividend or other distribution to us. Our parent company received $635 million and $1,373 million in dividends from our regulated health plan subsidiaries during 2020 and 2019, respectively. If the regulators were to deny or significantly restrict our subsidiaries’ requests to pay dividends to us, the funds available to our Company as a whole would be limited, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our use and disclosure of personally identifiable information and other non-public information, including protected health information or PHI, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
State and federal laws and regulations including, but not limited to, the Health Plans segment consistedInsurance Portability and Accountability Act, as amended by the Health Information Technology for Economic and Clinical Health Act, and all regulations promulgated thereunder (collectively, “HIPAA”), the California Consumer Privacy Act (the “CCPA”) and the Gramm-Leach-Bliley Act, govern the collection, dissemination, use, privacy, confidentiality, security, availability, and integrity of personally identifiable information (“PII”), including protected health information (“PHI”). HIPAA establishes basic national privacy and security standards for protection of PHI by covered entities and business associates, including health plans such as ours. HIPAA requires covered entities like us to develop and maintain policies and procedures regarding PHI, and to adopt administrative, physical, and technical safeguards to protect PHI.
HIPAA violations may result in significant civil penalties. HIPAA authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. We have experienced HIPAA breaches in the past, including breaches affecting over 500 individuals.
Even when HIPAA does not apply, according to the Federal Trade Commission (the “FTC”), failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA security regulations.
In addition, certain state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. For example, California enacted the CCPA, which became effective on January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach.
If we do not comply with existing or new laws and regulations related to PHI, PII, or non-public information, we could be subject to criminal or civil sanctions. Any security breach involving the misappropriation, loss, or other unauthorized disclosure or use of confidential member information, whether by us or a third party, such as our
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vendors, could subject us to civil and criminal penalties, divert management’s time and energy, and have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Unforeseen changes in pharmaceutical regulations or market conditions may impact our revenues and adversely affect our results of operations.
Pharmaceutical products and services are a significant component of our healthcare costs. Evolving regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, the price of pharmaceuticals, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. The unpredictable nature of these factors may have a material adverse effect on our business, financial condition, cash flows, or results of operations.
The exorbitant cost of specialty drugs and new generic drugs could have a material adverse effect on the level of our medical costs and our results of operations.
Introduction of new high cost specialty drugs and sudden cost spikes for existing drugs increase the risk that the pharmacy cost assumptions used to develop our capitation rates are not adequate to cover the actual pharmacy costs, which jeopardizes the overall actuarial soundness of our rates. Bearing the high costs of new specialty drugs or the high cost inflation of generic drugs without an appropriate rate adjustment or other reimbursement mechanism would have an adverse impact on our financial condition and results of operations. In addition, evolving regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. Although we will continue to work with state Medicaid agencies in an effort to ensure that we receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceuticals trends, there can be no assurance that we will be successful in this regard.
Large-scale medical emergencies in one or more states in which we operate our health plans could significantly increase utilization rates and medical costs.
Large-scale medical emergencies can take many forms and be associated with widespread illness or medical conditions. For example, natural disasters, such as a major earthquake or wildfire in California, or a major hurricane affecting Florida, South Carolina or Texas, could have a significant impact on the health of a large number of our covered members. Other conditions that could impact our members include a virulent flu season or epidemic, newly emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus, or the Chikungunya virus, or new viruses such as COVID-19, conditions for which vaccines may not exist, are not effective, or have not been widely administered.
In addition, federal and state law enforcement officials have issued warnings about potential terrorist activity involving biological or other weapons of mass destruction. All of these conditions, and others, could have a significant impact on the health of the population of wide-spread areas. If one of the states in which we operate were to experience a large-scale natural disaster, a significant terrorist attack, or some other large-scale event affecting the health of a large number of our members, our covered medical expenses in that state would rise, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
We face various risks inherent in the government contracting process that could materially and adversely affect our business and profitability, including periodic routine and non-routine reviews, audits, and investigations by government agencies.
We are subject to various risks inherent in the government contracting process. These risks include routine and non-routine governmental reviews, audits, and investigations, and compliance with government reporting requirements. Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations of those laws and regulations, could result in the imposition of civil or criminal penalties, the cancellation of our government contracts, the suspension or revocation of our licenses, the exclusion from participation in government sponsored health programs, or the revision and recoupment of past payments made based on audit findings. If we are unable to correct any noted deficiencies, or become subject to material fines or other sanctions, we could suffer a substantial reduction in profitability, and could also lose one or more of our government contracts. In addition, government receivables are subject to government audit and negotiation, and government contracts are vulnerable to disagreements with the government. The final amounts we ultimately receive under government contracts may be different from the amounts we initially recognize in our financial statements.
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Any changes to the laws and regulations governing our business, or the interpretation and enforcement of those laws or regulations, could require us to modify our operations and could negatively impact our operating results.
Our business is extensively regulated by the federal government and the states in 12which we operate. The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than managed care organizations. The government agencies administering these laws and regulations have broad latitude in interpreting and applying them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with our members and the public. For instance, some states mandate minimum medical expense levels as a percentage of premium revenues. These laws and regulations, and their interpretations, are subject to frequent change. The interpretation of certain contract provisions by our governmental regulators may also change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations, could reduce our profitability by imposing additional capital requirements, increasing our liability, increasing our administrative and other costs, increasing mandated benefits, forcing us to restructure our relationships with providers, requiring us to implement additional or different programs and systems, or making it more difficult to predict future results. Changes in the interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a prior interpretation.
We are subject to extensive fraud and abuse laws that may give rise to lawsuits and claims against us, the outcome of which may have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Because we receive payments from federal and state governmental agencies, we are subject to various laws commonly referred to as “fraud and abuse” laws, including federal and state anti-kickback statutes, prohibited referrals, and the federal False Claims Act, which permit agencies and enforcement authorities to institute a suit against us for violations and, in some cases, to seek treble damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result in exclusion, debarment, temporary or permanent suspension from participation in government healthcare programs, or the institution of corporate integrity agreements. Liability under such federal and state statutes and regulations may arise if we know, or it is determined that we should have known, that information we provide to form the basis for a claim for government payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was out of compliance with program requirements.
Fraud, waste and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a provider, upcoding, payments made to excluded providers, improper marketing, and the violation of patient privacy rights. In particular, there has recently been increased scrutiny by the Department of Justice on health plans’ risk adjustment practices, particularly in the Medicare program. Companies involved in public healthcare programs such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often the subject of fraud, waste and abuse investigations and audits.
The federal government has taken the position that claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. In addition, under the federal civil monetary penalty statute, the U.S. Department of Health and Human Services’ Office of Inspector General has the authority to impose civil penalties against any person who, among other things, knowingly presents, or causes to be presented, certain false or otherwise improper claims. Qui tam actions under federal and state law can be brought by any individual on behalf of the government. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines, or be excluded from the Medicare, Medicaid, or other state or federal healthcare programs as a result of an investigation arising out of such action. We have been the subject of qui tam actions in the past and other qui tam actions may be filed against us in the future. If we are subject to liability under a qui tam or otheractions, our business, financial condition, cash flows, or results of operations could be adversely affected.
RISKS RELATED TO OUR BUSINESS
The May 2020 contract award to our Kentucky Medicaid plan, and its acquisition of Passport, is the subject of a legal challenge.
In October 2020, pursuant to the appeal of a protest denial with regard to the May 2020 Kentucky RFP awards, a court ordered the addition of a sixth health plan to the Kentucky Medicaid program for 2021. That ruling did not
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rescind the Medicaid contract award to our Kentucky health plan for 2021, nor did it impact the earlier novation of the Passport Medicaid contract to us. On October 27, 2020, a different health plan filed an appeal with regard to the court’s October 2020 order. In addition, another health plan filed a legal challenge with regard to our acquisition of Passport.The outcome of this litigation and any appellate proceedings is inherently unpredictable. In the event the contract award to our Kentucky health plan or the novation of the Passport Medicaid contract is overturned, the business and revenues of our Kentucky health plan may be materially affected.
If the responsive bids of our health plans for new or renewed Medicaid contracts are not successful, or if our government contracts are terminated or are not renewed on favorable terms, our premium revenues could be materially reduced and our operating results could be negatively impacted.
We currently derive our premium revenues from health plans that operate in 18 states, including the states added in our acquisition of Magellan Complete Care on December 31, 2020. Our consolidated Medicaid premium revenue constituted 73% of our total revenue in the year ended December 31, 2020. Measured by Medicaid premium revenue by health plan, our top four health plans were in California, Ohio, Texas, and Washington, with aggregate Medicaid premium revenue of $8.9 billion, or approximately 63% of consolidated Medicaid premium revenue, in the year ended December 31, 2020. If we are unable to continue to operate in any of our existing jurisdictions, or if our current operations in those jurisdictions or any portions of those jurisdictions are significantly curtailed or terminated entirely, our revenues could decrease materially.
Many of our government contracts are effective only for a fixed period of time and will only be extended for an additional period of time if the contracting entity elects to do so. For example, our contract in California is expected to be subject to re-procurement in late 2021. When our government contracts expire, they may be opened for bidding by competing health plans, and there is no guarantee that the contracts will be renewed or extended. Even if our contracts are renewed or extended, there can be no assurance that they will be renewed or extended on the same terms or without a reduction in the applicable service areas.
Even if our responsive bids are successful, the bids may be based upon assumptions regarding enrollment, utilization, medical costs, or other factors which could result in the contract being less profitable than we had expected or could result in a net loss. Furthermore, our contracts contain certain provisions regarding, among other things, eligibility, enrollment and dis-enrollment processes for covered services, eligible providers, periodic financial and information reporting, quality assurance and timeliness of claims payment, and are subject to cancellation if we fail to perform in accordance with the standards set by regulatory agencies.
If we sustain a cyber-attack or suffer data privacy or security breaches that disrupt our information systems or operations, or result in the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure to significant liability, reputational harm, loss of business, and other serious negative consequences.
As part of our normal operations, we routinely collect, process, store, and transmit large amounts of data, including sensitive personal information as well as proprietary or confidential information relating to our business or third parties. To ensure information security, we have implemented controls designed to protect the confidentiality, integrity and availability of this data and the systems that store and transmit such data. However, our information technology systems and safety control systems are subject to a growing number of threats from computer programmers, hackers, and other adversaries that may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions, or cause damage, security issues, or shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or otherwise exploit security vulnerabilities. As a result of the COVID-19 pandemic, we may face increased cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Because the techniques used to circumvent, gain access to, or sabotage security systems can be highly sophisticated and change frequently, they often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world. We may be unable to anticipate these techniques or implement adequate preventive measures, resulting in potential data loss and damage to our systems. Our systems are also subject to compromise from internal threats such as improper action by employees, including malicious insiders, or by vendors, counterparties, and other third parties with otherwise legitimate access to our systems. Our policies, employee training (including phishing prevention training), procedures and technical safeguards may not prevent all improper access to our network or proprietary or confidential information by employees, vendors, counterparties, or other third parties. Our facilities may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human errors, or other similar events that could negatively affect our systems and our and our members’ data.
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Moreover, we face the ongoing challenge of managing access controls in a complex environment. The process of enhancing our protective measures can itself create a risk of systems disruptions and security issues. Given the breadth of our operations and the increasing sophistication of cyberattacks, a particular incident could occur and persist for an extended period of time before being detected. The extent of a particular cyberattack and the steps that we may need to take to investigate the attack may take a significant amount of time before such an investigation could be completed and full and reliable information about the incident is known. During such time, the extent of any harm or how best to remediate it might not be known, which could further increase the risks, costs, and consequences of a data security incident. In addition, our systems must be routinely updated, patched, and upgraded to protect against known vulnerabilities. The volume of new software vulnerabilities has increased substantially, as has the importance of patches and other remedial measures. In addition to remediating newly identified vulnerabilities, previously identified vulnerabilities must also be updated. We are at risk that cyber attackers exploit these known vulnerabilities before they have been addressed. The complexity of our systems and platforms, the increased frequency at which vendors are issuing security patches to their products, our need to test patches, and in some instances, coordinate with third-parties before they can be deployed, all could further increase our risks.
We may be unable to successfully integrate our acquisitions or realize the anticipated benefits of such acquisitions.
Our growth strategy includes the pursuit of targeted inorganic growth opportunities that we believe will provide a strategic fit, leverage operational synergies, and lead to incremental earnings accretion. For example, in the third quarter of 2020, we closed on two business combinations, the acquisition of certain assets of YourCare Health Plan, Inc. and the acquisition of certain assets of Passport Health Plan, Inc. On December 31, 2020, we closed on our acquisition of the Magellan Complete Care line of business of Magellan Health, Inc. and, in the second quarter of 2021, we expect to close on our pending acquisition of substantially all of the assets of Affinity Health Plan, Inc. The integration of acquired businesses with our existing business is a complex, costly and time-consuming process. The success of acquisitions we make will depend, in part, on our ability to successfully combine our existing business with such acquired businesses and realize the anticipated benefits, including synergies, cost savings, growth in earnings, innovation, and operational efficiencies, from the combinations. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected.
Our acquisitions and the related integration activities involve a number of risks, including the following:
•The transition services that a seller may have agreed to provide following the closing, such as those Magellan Health, Inc. has agreed to provide following the closing of the Magellan Complete Care transaction, may not be provided in a timely or efficient manner, or certain necessary transition services may not be provided at all;
•Unforeseen expenses or delays associated with the acquisition and/or integration;
•The assumptions underlying our expectations regarding the integration process or the expected benefits to be achieved from an acquisition may prove to be incorrect;
•Maintaining employee morale and retaining key management and other employees;
•Difficulties retaining the business and operational relationships of the acquired business, and attracting new business and operational relationships;
•Unanticipated attrition in the membership of the acquired business pending the completion of the proposed transaction or after the closing of the transaction;
•Unanticipated difficulties or costs in integrating information technology, communications and other systems, consolidating corporate and administrative infrastructures, and eliminating duplicative operations;
•Attention to integration activities may divert management’s attention from ongoing business concerns, which could result in performance shortfalls;
•Successfully addressing the challenges inherent in managing a larger company and coordinating geographically separate organizations; and
•Delays in obtaining, or inability to obtain, necessary state or federal regulatory approvals, or such approvals may impose conditions that were not anticipated.
Many of these factors are outside of our control and any one of them could result in delays, increased costs, decreases in the amount of expected revenues, and diversion of management's time and energy, which could materially affect our financial position, results of operations, or cash flows. There can be no assurances that we will be successful in managing our expanded operations as a result of acquisitions or that we will realize the expected growth in earnings, operating efficiencies, cost savings, or other benefits.
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If we lose contracts that constitute a significant amount of our premium revenue, we will lose the administrative cost efficiencies or cost leverage that is inherent in a larger revenue base. In such circumstances, we may not be able to reduce fixed costs proportionally with our lower revenue, and the financial impact of lost contracts may exceed the net income ascribed to those contracts.
We currently spread the cost of centralized services over a large revenue base. Many of our administrative costs are fixed in nature, and will be incurred at the same level regardless of the size of our revenue base. If we lose contracts that constitute a significant amount of our revenue, we may not be able to reduce the expense of centralized services in a manner that is proportional to that loss of revenue. In such circumstances, not only will our total dollar margins decline, but our percentage margins, measured as a percentage of revenue, will also decline. This loss of cost efficiency or cost leverage, and the resulting stranded administrative costs, could have a material and adverse impact on our business, financial condition, cash flows, or results of operations.
Our health plans operate with very low profit margins, and small changes in operating performance or slight changes to our accounting estimates will have a disproportionate impact on our reported net income.
A substantial portion of our premium revenue is subject to contract provisions pertaining to medical cost expenditure floors and corridors, administrative cost and profit ceilings, premium stabilization programs, and cost-plus and performance-based reimbursement programs. Many of these contract provisions are complex, or are poorly or ambiguously drafted, and thus are subject to differing interpretations by us and the relevant government agency with whom we contract. If the applicable government agency disagrees with our interpretation or implementation of a particular contract provision, we could be required to adjust the amount of our obligation under that provision. Any such adjustment could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In addition, many of our contracts contain provisions pertaining to at-risk premiums that require us to meet certain quality performance measures to earn all of our contract revenues. If we are unsuccessful in achieving the stated performance measure, we will be unable to recognize the revenue associated with that measure, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
We are subject to retroactive adjustment to our Medicaid premium revenue as a result of retroactive risk adjustment; retroactive changes to contract terms and the resolution of differing interpretations of those terms; the difficulty of estimating performance-based premium.
The complexity of some of our Medicaid contract provisions, imprecise language in those contracts, the desire of state Medicaid agencies in some circumstances to retroactively adjust for the acuity of the medical needs of our members, and state delays in processing rate changes, can create uncertainty around the amount of revenue we should recognize. Any circumstance such as those described above could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If, in the interest of long-term profitability, we decide to exit certain state contractual arrangements, make changes to our provider networks, or make changes to our administrative infrastructure, we may incur disruptions to our business that could in the short term materially reduce our premium revenues and our net income.
Decisions that we make with regard to retaining or exiting our portfolio of state or federal contracts, and changes to the manner in which we serve the members of those contracts, could generate substantial expenses associated with the run out of existing operations and the restructuring of those operations that remain. Such expenses could include, but would not be limited to, goodwill and intangible asset impairment charges, restructuring costs, additional medical costs incurred due to the inability to leverage long-term relationships with medical providers, and costs incurred to finish the run out of businesses that have ceased to generate revenue, all of which could materially reduce our premium revenues and net income.
A failure to accurately estimate incurred but not paid medical care costs may negatively impact our results of operations.
Because of the lag in time between when medical services are actually rendered by our providers and when we receive, process, and pay a claim for those medical services, we must continually estimate our medical claims liability at particular points in time and establish claims reserves related to such estimates. Our estimated reserves for such incurred but not paid, or IBNP, medical care costs are based on numerous assumptions. We estimate our medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known incidence of disease, including COVID-19, or increased incidence of illness such as the flu,
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provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our ability to accurately estimate claims for our newer lines of business or populations is negatively impacted by the more limited experience we have had with those newer lines of business or populations.
The IBNP estimation methods we use and the resulting reserves that we establish are reviewed and updated, and adjustments, if deemed necessary, are reflected in the current period. Given the numerous uncertainties inherent in such estimates, our actual claims liabilities for a particular quarter or other period could differ significantly from the amounts estimated and reserved for that quarter or period. Our actual claims liabilities have varied and will continue to vary from our estimates, particularly in times of significant changes in utilization, medical cost trends, and populations and markets served.
If our actual liability for claims payments is higher than previously estimated, our earnings in any particular quarter or annual period could be negatively affected. Our estimates of IBNP may be inadequate in the future, which would negatively affect our results of operations for the relevant time period. Furthermore, if we are unable to accurately estimate IBNP, our ability to take timely corrective actions may be limited, further exacerbating the extent of the negative impact on our results.
If we fail to accurately predict and effectively manage our medical care costs, our operating results could be materially and adversely affected.
Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our medical care costs. Historically, our medical care ratio, meaning our medical care costs as a percentage of our premium revenue, has fluctuated substantially, and has varied across our health plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small changes in our medical care ratio can create significant changes in our overall financial results. For example, if our overall medical care ratio of 86.5% for the year ended December 31, 2020, had been one percentage point higher, or 87.5%, our net income per diluted share for the year ended December 31, 2020 would have been approximately $8.88 rather than our actual net income per diluted share of $11.23, a difference of $2.35.
Many factors may affect our medical care costs, including:
•the level of utilization of healthcare services;
•the impact of the COVID-19 pandemic;
•changes in the underlying risk acuity of our membership;
•unexpected patterns in the annual flu season;
•increases in hospital costs;
•increased incidences or acuity of high dollar claims related to catastrophic illnesses or medical conditions for which we do not have adequate reinsurance coverage;
•increased maternity costs;
•changes in state eligibility certification methodologies;
•relatively low levels of hospital and specialty provider competition in certain geographic areas;
•increases in the cost of pharmaceutical products and services;
•changes in healthcare regulations and practices;
•epidemics;
•new medical technologies; and
•other various external factors.
Many of these factors are beyond our control. The inability to forecast and manage our medical care costs or to establish and maintain a satisfactory medical care ratio, either with respect to a particular health plan or across the consolidated entity, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If we are unable to deliver quality care, and maintain good relations with the physicians, hospitals, and other providers with whom we contract, or if we are unable to enter into cost-effective contracts with such providers, our profitability could be adversely affected.
We contract with physicians, hospitals, and other providers as a means to ensure access to healthcare services for our members, to manage medical care costs and utilization, and to better monitor the quality of care being delivered. We compete with other health plans to contract with these providers. We believe providers select plans in which they participate based on criteria including reimbursement rates, timeliness and accuracy of claims payment, potential to deliver new patient volume and/or retain existing patients, effectiveness of resolution of calls and complaints, and other factors. There can be no assurance that we will be able to successfully attract and retain providers to maintain a competitive network in the geographic areas we serve. In addition, in any particular market,
Molina Healthcare, Inc. 2020 Form 10-K | 27
providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher medical care costs, disruption to provider access for current members, a decline in our growth rate, or difficulty in meeting regulatory or accreditation requirements.
The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures, some states may reduce rates paid to providers, which may further discourage participation in the Medicaid program.
In some markets, certain providers, particularly hospitals and some specialists, may have significant market positions or even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate favorable contracts which are disadvantageous to us, our profitability in those areas could be adversely affected.
Some providers that render services to our members are not contracted with our health plans. In those cases, there is no pre-established understanding between the provider and our health plan about the amount of compensation that is due to the provider. In some states, the amount of compensation is defined by law or regulation, but in most instances it is either not defined or it is established by a standard that is not clearly translatable into dollars. In such instances, providers may claim they are underpaid for their services and may either litigate or arbitrate their dispute with our health plan. The uncertainty of the amount to pay to such providers and the possibility of subsequent adjustment of the payment or litigation with the provider that results in an adverse decision could adversely affect our business, financial condition, cash flows, or results of operations.
We rely on the accuracy of eligibility lists provided by state governments. Inaccuracies in those lists would negatively affect our results of operations.
Premium payments to our health plans are based upon eligibility lists produced by state governments. From time to time, states require us to reimburse them for premiums paid to us based on an eligibility list that a state later discovers contains individuals who are not in fact eligible for a government sponsored program or are eligible for a different premium category or a different program. Alternatively, a state could fail to pay us for members for whom we are entitled to payment. Our results of operations would be adversely affected as a result of such reimbursement to the state if we make or have made related payments to providers and are unable to recoup such payments from the providers. Further, when a state implements new programs to determine eligibility, establishes new processes to assign or enroll eligible members into health plans, or chooses new subcontractors, there is an increased potential for an unanticipated impact on the overall number of members assigned to managed care health plans. Whenever a state effects an eligibility redetermination for any reason, there is generally an associated reduction in Medicaid membership, which could have an adverse effect on our premium revenues and results of operations.
The insolvency of a delegated provider could obligate us to pay its referral claims, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount per member per month to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Due to insolvency or other circumstances, such providers may be unable or unwilling to pay claims they have incurred with third parties in connection with referral services provided to our members. The inability or unwillingness of delegated providers to pay referral claims presents us with both immediate financial risk and potential disruption to member care, as well as potential loss of members. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally, competitive pressures or practical regulatory considerations may force us to pay such claims even when we have no legal obligation to do so; or we have already paid claims to a delegated provider and such payments cannot be recouped when the delegated provider becomes insolvent. Liabilities incurred or losses suffered as a result of provider insolvency or other circumstances could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial condition, cash flows, or results of operations.
Our premium revenues consist of fixed monthly payments per member, and supplemental payments for other services such as maternity deliveries. These premiums are fixed by contract, and we are obligated during the contract periods to provide healthcare services as established by the state governments. We use a large portion of our revenues to pay the costs of healthcare services delivered to our members. If premiums do not increase when
Molina Healthcare, Inc. 2020 Form 10-K | 28
expenses related to healthcare services rise, our medical margins will be compressed, and our earnings will be negatively affected. A state could increase hospital or other provider rates without making a commensurate increase in the rates paid to us, or could lower our rates without making a commensurate reduction in the rates paid to hospitals or other providers. In addition, if the actuarial assumptions made by a state in implementing a rate or benefit change are incorrect or are at variance with the particular utilization patterns of the members of one or more of our health plans, our medical margins could be reduced. Any of these rate adjustments in one or more of the states in which we operate could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or such application is denied, our membership in that state will likely decrease.
States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations. Waivers and programs under demonstrations are approved for two- to five-year periods and can be renewed on an ongoing basis if the state applies and the waiver request is approved or renewed by CMS. We have no control over this renewal process. If a state in which we operate does not renew its mandated program or the federal government denies the state’s application for renewal, our business would suffer as a result of a likely decrease in membership.
Failure to attain profitability in any newly acquired health plans or new start-up operations could negatively affect our results of operations.
Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract and process claims. Often, we are also required to contribute significant capital to fund mandated net worth requirements, performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the certificate of authority, winning the bid to provide services, or attracting members in sufficient numbers to cover our costs, the new business could fail.
The expenses associated with starting up a health plan in a new jurisdiction, expanding a health plan in an existing jurisdiction, or acquiring a new health plan, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our business depends on our information and medical management systems, and our inability to effectively integrate, manage, update, and keep secure our information and medical management systems could disrupt our operations.
Our business is dependent on effective and secure information systems that assist us in processing provider claims, monitoring utilization and other cost factors, supporting our medical management techniques, providing data to our regulators, and implementing our data security measures. Our members and providers also depend upon our information systems for enrollment, premium processing, primary care and specialist physician roster access, membership verifications, claims status, provider payments, and other information. If we experience a reduction in the performance, reliability, or availability of our information and medical management systems, our operations, ability to pay claims, ability to produce timely and accurate reports, and ability to maintain proper security measures could be adversely affected.
We have partnered with third parties to support our information technology systems. This makes our operations vulnerable to adverse effects if such third parties fail to perform adequately. For example, in February 2019, we entered into a master services agreement with a third party vendor who manages certain of our information technology infrastructure services including, among other things, our information technology operations, end-user services, and data centers. If any licensor or vendor of any technology which is integral to our operations were to become insolvent or otherwise fail to support the technology sufficiently, our operations could be negatively affected.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with third party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Some of these third-parties have direct access to our systems. Our arrangements with third party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data or the information and data relating to our members or customers. We are also at risk of a data security incident involving a vendor or third party, which could result in a breakdown of such third party’s data protection processes or cyber-attackers gaining access to our infrastructure through the third party. To the extent that a vendor or third party suffers a data security incident that compromises its operations, we could incur significant costs and possible service interruption. Any contractual remedies and/or indemnification obligations
Molina Healthcare, Inc. 2020 Form 10-K | 29
we may have for vendor or service provider failures or incidents may not be adequate to fully compensate us for any losses suffered as a result of any vendor’s failure to satisfy its obligations to us or under applicable law. Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by third party vendors and service providers could increase our exposure to liability to our members, providers, or other third parties, or could result in sanctions and/or fines from the regulators that oversee our business. In turn, this could increase the costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur significant costs and/or experience significant disruption to our operations in connection with any such vendor or service provider transition. As a result, we may not be able to meet the full demands of our members or customers and, in turn, our business, financial condition, and results of operations may be harmed.
Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on our results of operations, financial condition, cash flows and ability to bid for, and continue to participate in, certain programs.
Our contracts require the submission of complete and correct encounter data. The accurate and timely reporting of encounter data is increasingly important to the success of our programs because more states are using encounter data to determine compliance with performance standards and to set premium rates. We have been, and continue to be, exposed to operating sanctions and financial fines and penalties for noncompliance. In some instances, our government clients have established retroactive requirements for the encounter data we must submit. There also may be periods of time in which we are unable to meet existing requirements. In either case, it may be prohibitively expensive or impossible for us to collect or reconstruct this historical data.
We have experienced challenges in obtaining complete and accurate encounter data, due to difficulties with providers and third-party vendors submitting claims in a timely fashion in the proper format, and with state agencies in coordinating such submissions. As states increase their reliance on encounter data, these difficulties could adversely affect the premium rates we receive and how membership is assigned to us and subject us to financial penalties, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations, and on our ability to bid for, and continue to participate in, certain programs.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our growth strategy.
As of December 31, 2020, we had $2,352 million of indebtedness outstanding, including long-term finance lease liabilities. As of December 31, 2020, we also had approximately $1 billion available for borrowings under our Revolving Credit Facility.
Our substantial indebtedness could have a material adverse effect on our business, financial condition, cash flows, or results of operations by, among other things:
•increasing our vulnerability to adverse economic, industry, or competitive developments;
•requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, capital expenditures, and future acquisitions;
•making it more difficult for us to satisfy our obligations with respect to our indebtedness, including under our Credit Agreement and our outstanding senior notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under our Credit Agreement or the indenture governing our outstanding senior notes;
•limiting our ability to obtain additional financing; and
•limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our substantial indebtedness may prevent us from exploiting.
An impairment charge with respect to our recorded goodwill, or our finite-lived intangible assets, could have a material impact on our financial results.
As of December 31, 2020, the carrying amount of goodwill was $692 million, and intangible assets, net, were $249 million.
Goodwill represents the excess of the purchase consideration over the fair value of net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Impairment indicators may include experienced or expected operating cash-flow
Molina Healthcare, Inc. 2020 Form 10-K | 30
deterioration or losses, significant losses of membership, loss of state funding, loss of state contracts, and other factors. Goodwill is impaired if the carrying amount of the reporting unit (one of our state health plans) exceeds its estimated fair value. This excess is recorded as an impairment loss and adjusted if necessary for the impact of tax-deductible goodwill. The loss recognized may not exceed the total goodwill allocated to the reporting unit.
An event could occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill, and intangible assets, net. For example, if the responsive bid of one or more of our health plans is not successful, we will lose our Medicaid contract in the applicable state or states. If such state health plans have recorded goodwill and intangible assets, net, the contract loss would result in a non-cash impairment charge. Such a non-cash impairment charge could have a material adverse impact on our financial results.
GENERAL RISK FACTORS
We are dependent on the leadership of our chief executive officer and other executive officers and key employees.
The success of our business and the ability to execute our strategy are highly dependent on the efforts of Mr. Zubretsky, our chief executive officer, and our other key executive officers and employees. The loss of their leadership, expertise, and experience could negatively impact our operations. Our ability to replace them or any other key employee may be difficult and may take an extended period of time because of the limited number of individuals in the healthcare industry who have the breadth and depth of skills and experience necessary to operate and lead a business such as ours. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain, or motivate these personnel. If we are unsuccessful in recruiting, retaining, managing, and motivating such personnel, our business, financial condition, cash flows, or results of operations could be adversely affected.
We face claims related to litigation which could result in substantial monetary damages.
We are subject to a variety of legal actions, including provider claims, employment related disputes, healthcare regulatory law-based litigation and enforcement actions, breach of contract actions, qui tam or False Claims Act actions, and securities class actions. If we incur liability materially in excess of the amount for which we have insurance coverage, our profitability would suffer. Even if any claims brought against us are unsuccessful or without merit, we may have to defend ourselves against such claims. The defense of any such actions may be time-consuming and costly, and may distract our management’s attention. Such legal actions could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Because our corporate headquarters are located in Southern California, our business operations may be significantly disrupted as a result of a major earthquake or wildfire.
Our corporate headquarters are located in Long Beach, California. In addition, some of our health plans’ claims are processed in Long Beach, California. Southern California is exposed to a statistically greater risk of a major earthquake and wildfires than most other parts of the United States. If a major earthquake or wildfire were to strike Southern California, our corporate functions and claims processing could be significantly impaired for a substantial period of time. If there is a major Southern California earthquake or wildfire, there can be no assurances that our disaster recovery plan will be successful or that the business operations of our health plans, including those that are remote from any such event, would not be substantially impacted.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results, and stock price, and could subject us to sanctions by regulatory authorities.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We have identified material weaknesses in our internal control over financial reporting in the past, which have subsequently been remediated. If additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
Molina Healthcare, Inc. 2020 Form 10-K | 31
PROPERTIES
We own and lease certain real properties to support the business operations of our reportable segments. While we believe our current and anticipated facilities are adequate to meet our operational needs in the near term, we continually evaluate the adequacy of our properties for our anticipated future needs.
LEGAL PROCEEDINGS
Kentucky RFP. On September 4, 2020, Anthem Kentucky Managed Care Plan, Inc. brought an action in Franklin County Circuit Court against the Kentucky Finance and Administration Cabinet, the Kentucky Cabinet for Health and Family Services and all of the winning bidder health plans, including Molina Healthcare of Kentucky, Inc., Civil Action No. 20-CI-00719. In its action, Anthem requested that the court disqualify Molina Healthcare of Kentucky, find that the Kentucky RFP scoring was erroneous and violated procedures or was arbitrary and capricious, set aside the contract awards and conduct a new RFP evaluation process, and award injunctive relief, including stopping the implementation of the contracts awarded under the RFP. On September 28, 2020, the court issued a temporary restraining order preserving the status quo, and on October 23, 2020, the court issued a temporary injunction directing that the RFP readiness review and open enrollment proceed with six health plans, including both Anthem and Molina Healthcare.
On December 22, 2020, the court granted a motion by UnitedHealthcare of Kentucky LTD. to assert a cross-claim against the Kentucky Cabinet for Health and Family Services, which sought in part a disqualification of Anthem or Molina Healthcare and a declaratory judgment that the Kentucky Medicaid program proceed with only five health plans. On December 23, 2020, Humana Health Plan, Inc. brought a separate action against the Commonwealth of Puerto Rico.Kentucky and the winning bidder health plans, including Molina Healthcare of Kentucky, Civil Action 20-CI-00987. On January 11, 2021, both actions were consolidated before the Franklin County Circuit Court. Humana requests a declaratory judgment finding that the Commonwealth violated the Medicaid contract by allocating Passport members to Molina Healthcare for 2021 so that Passport members would instead be allocated to Humana and other winning health plans, or, in the alternative, monetary damages from the Commonwealth.
Molina Healthcare believes it has meritorious defenses to the claims of Anthem, United, and Humana, and intends to vigorously defend its position, including its twice being a winning bidder of the Kentucky Medicaid RFP, and its protection of the continuity of care for Passport Medicaid members. This matter remains subject to significant additional legal proceedings, and no assurances can be given regarding the ultimate outcome. Under the court’s temporary injunction, Molina Healthcare of Kentucky continues to operate under its contract and provide care to Kentucky Medicaid members.
Refer to the Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Legal Proceedings,” for further information.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
STOCK REPURCHASE PROGRAMS
Purchases of common stock made by us, or on our behalf during the quarter ended December 31, 2020, including shares withheld by us to satisfy our employees’ income tax obligations, are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Average Price Paid per
Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 — October 31 | 1,000 | | | $ | 188.27 | | | — | | | $ | 500,000,000 | |
| November 1 — November 30 | — | | | $ | — | | | 323,000 | | | $ | 432,000,000 | |
| December 1 — December 31 | — | | | $ | — | | | 443,000 | | | $ | 341,000,000 | |
| 1,000 | | | $ | 188.27 | | | 766,000 | | | |
_______________________
Molina Healthcare, Inc. 2020 Form 10-K | 32
(1)During the three months ended December 31, 2020, we withheld approximately 1,000 shares of common stock to settle employee income tax obligations for releases of awards granted under the Molina Healthcare, Inc. 2019 Equity Incentive Plan. For further information refer to Notes to Consolidated Financial Statements, Note 13, “Stockholders' Equity.”
(2)In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Under this program, pursuant to a Rule 10b5-1 trading plan, we purchased approximately 766,000 shares of our common stock for $159 million in November and December 2020 (average cost of $208.37 per share).
STOCK PERFORMANCE GRAPH
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the U.S. Securities and Exchange Commission (“SEC”) (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into a filing.
The following line graph compares the percentage change in the cumulative total return on our common stock against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (the “S&P 500”) and a peer group index for the five-year period from December 31, 2015 to December 31, 2020. The comparison assumes $100 was invested on December 31, 2015, in our common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
The 2020 peer group index consists of Acadia Healthcare Company, Inc. (ACHC), Anthem, Inc. (ANTM), Centene Corporation (CNC), Cigna Corporation (CI), Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA), Humana, Inc. (HUM), Laboratory Corporation of America Holdings (LH), Magellan Health, Inc. (MGLN), Quest Diagnostics Incorporated (DGX), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS).
Molina Healthcare, Inc. 2020 Form 10-K | 33
The 2019 peer group index, used in last year’s Annual Report on Form 10-K and also set forth above, consists of Centene Corporation (CNC), Cigna Corporation (CI), DaVita HealthCare Partners, Inc. (DVA), Humana Inc. (HUM), Magellan Health, Inc. (MGLN), Team Health Holdings, Inc. (TMH), Tenet Healthcare Corporation (THC), Triple-S Management Corporation (GTS), Universal American Corporation (UAM), Universal Health Services, Inc. (UHS) and WellCare Health Plans, Inc. (WCG).
STOCK TRADING SYMBOL AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of February 12, 2021, there were 12 registered holders of record of our common stock, including Cede & Co. To date we have not paid cash dividends on our common stock. We currently intend to retain any future earnings to fund our projected business operations. However, we intend to periodically evaluate our cash position to determine whether to pay a cash dividend in the future. Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the state departments of insurance in the states in which we operate or may operate, as well as requirements of the government-sponsored health programs in which we participate. Additionally, the indentures governing our outstanding senior notes and credit agreement contain various covenants that limit our ability to pay dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual and regulatory restrictions. For more information regarding restrictions on the ability of our regulated subsidiaries to pay dividends to us, please see the Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Molina Healthcare, Inc. 2020 Form 10-K | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
Management’s discussion and analysis of financial condition and results of operations as of and for the years ended December 31, 2020 and 2019, are presented in the sections that follow. Our MD&A as of and for the year ended December 31, 2018, may be found in our 2019 Annual Report on Form 10-K, which prior disclosure is incorporated by reference herein.
OVERVIEW
Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 15 states, we served approximately 4.0 million members as of December 31, 2020. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states. These health plans served approximately 4.5 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Affordable Care Act Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which isand licensed as a health maintenance organization (HMO)organizations (“HMOs”).
Our health plans’ state Medicaid contracts generally have terms of three to four years. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. The contracts are subject to risk of loss when a state issues a new request for proposal (RFP) open to competitive bidding by other health plans. If one
2020 HIGHLIGHTS
Highlights of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.2020 results included the following:
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled (ABD); and regions or service areas.•Net income per diluted share of $11.23, with net income of $673 million;
Basis for our Premium Rates
Medicaid. Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that vary by state, line of business and demographics; and we arrange, pay for and manage health care services provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated with their members’ health care. The rates we receive are subject to change by each state and, in some instances, provide for adjustments for health risk factors. CMS requires these rates to be actuarially sound. Payments to us under each of our Medicaid contracts are subject to the annual appropriation process in the applicable state.
Medicare. Under Medicare Advantage, managed care plans contract with CMS to provide benefits in exchange for a fixed PMPM premium payment that varies based on the county in which a member resides, and adjusted for demographic and health risk factors. CMS also considers inflation, changes in utilization patterns and average per capita fee-for-service Medicare costs in the calculation of the fixed PMPM premium payment. Amounts payable to us under the Medicare Advantage contracts are subject to annual revision by CMS, and we elect to participate in each Medicare service area or region on an annual basis. Medicare Advantage premiums paid to us are subject to
federal government reviews and audits which can result, and have resulted, in retroactive and prospective premium adjustments. Compared with our Medicaid plans, Medicare Advantage contracts generate higher average PMPM revenues and health care costs.
Marketplace. For our Marketplace plans, we develop premium rates during the spring of each year for policies effective in the following calendar year. Premium rates are based on our estimates of projected member utilization, medical unit costs, member risk acuity, member risk transfer, and administrative costs, with the intent of realizing a target pretax percentage profit margin. Our actuaries certify the actuarial soundness of Marketplace premiums in the rate filings submitted to the various state and federal authorities for approval.
Premiums by Program
The amount of the premiums paid to our health plans may vary substantially between states and among various government programs. The following table sets forth the ranges of premiums paid to our state health plans by program on a PMPM basis, for the year ended December 31, 2017. The “Consolidated” column represents the weighted-average amounts for our total membership by program. |
| | | | | | | | | | | |
| | PMPM Premiums |
| | Low | | High | | Consolidated |
| TANF and CHIP | $ | 110.00 |
| | $ | 290.00 |
| | $ | 180.00 |
|
| Marketplace | 180.00 |
| | 480.00 |
| | 270.00 |
|
| Medicaid Expansion | 320.00 |
| | 510.00 |
| | 390.00 |
|
| ABD | 380.00 |
| | 1,460.00 |
| | 1,050.00 |
|
| MMP – Integrated | 1,290.00 |
| | 3,230.00 |
| | 2,180.00 |
|
| Medicare | 940.00 |
| | 1,250.00 |
| | 1,140.00 |
|
Membership by Program and Health Plan
The following tables set forth our health plans’ membership as of the dates indicated: |
| | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 |
| Ending Membership by Program: | | | | | |
| TANF and CHIP | 2,457,000 |
| | 2,536,000 |
| | 2,312,000 |
|
| Marketplace | 815,000 |
| | 526,000 |
| | 205,000 |
|
| Medicaid Expansion | 668,000 |
| | 673,000 |
| | 557,000 |
|
| ABD | 412,000 |
| | 396,000 |
| | 366,000 |
|
| MMP – Integrated | 57,000 |
| | 51,000 |
| | 51,000 |
|
| Medicare | 44,000 |
| | 45,000 |
| | 42,000 |
|
| | 4,453,000 |
| | 4,227,000 |
| | 3,533,000 |
|
| | | | | | |
| Ending Membership by Health Plan: | | | | | |
| California | 746,000 |
| | 683,000 |
| | 620,000 |
|
Florida (1) | 625,000 |
| | 553,000 |
| | 440,000 |
|
| Illinois | 165,000 |
| | 195,000 |
| | 98,000 |
|
| Michigan | 398,000 |
| | 391,000 |
| | 328,000 |
|
New Mexico (2) | 253,000 |
| | 254,000 |
| | 231,000 |
|
New York (3) | 32,000 |
| | 35,000 |
| | — |
|
| Ohio | 327,000 |
| | 332,000 |
| | 327,000 |
|
| Puerto Rico | 314,000 |
| | 330,000 |
| | 348,000 |
|
| South Carolina | 116,000 |
| | 109,000 |
| | 99,000 |
|
| Texas | 430,000 |
| | 337,000 |
| | 260,000 |
|
| Utah | 152,000 |
| | 146,000 |
| | 102,000 |
|
| Washington | 777,000 |
| | 736,000 |
| | 582,000 |
|
| Wisconsin | 118,000 |
| | 126,000 |
| | 98,000 |
|
| | 4,453,000 |
| | 4,227,000 |
| | 3,533,000 |
|
_______________________ | |
(1) | On February 1, 2018, we were selected by the Florida Agency for Health Care Administration (AHCA) to negotiate for the award of a managed care contract in only one region of Florida. That region—Region 11—comprises Miami-Dade and Monroe counties, where we currently serve 59,000 Medicaid members. As of December 31, 2017, we served a total of approximately 360,000 Medicaid members in Florida. |
| |
(2) | In January 2018, our New Mexico health plan was notified by the New Mexico Human Services Department (HSD) that the health plan had not been selected for the tentative award of a Medicaid contract effective January 1, 2019. As of December 31, 2017, we served approximately 224,000 Medicaid members in New Mexico. |
| |
(3) | The New York health plan was acquired on August 1, 2016. |
FINANCIAL OVERVIEW
2017 Compared with 2016
In 2017, a 10% increase in membership, and a 5% increase in revenue PMPM, resulted in increased premium•Total revenue of 15%, or $2.4$19.4 billion, whenwhich increased 15% compared with 2016.to 2019;
The•Premium revenue of $18.3 billion, which increased 13% compared to 2019;
•Consolidated medical care ratio increased(“MCR”) of 86.5%, compared to 90.6%85.8% in 2017, from 89.8% in 2016. Medical margin (measured in absolute dollars) increased 7% in 2017 over 2016. Our 2017 medical care ratio2019;
•We estimate the net effect of 90.6% was burdenedCOVID decreased net income for the full year 2020 by substantial unfavorable out-of-period items, including:
Approximately $150 million of medical margin deterioration resulting from unfavorable prior period claims development, the related need to replenish margins for adverse development in our liability for medical claims and benefits payable,$2.30 per diluted share, and increased reserves for premiums we expectthe MCR by approximately 50 basis points;
•Results were positively impacted by certain non-recurring and other items, mainly including the proceeds from the Marketplace risk corridor judgment;
•Membership, including Magellan Complete Care, increased approximately 900,000 members to repay4.2 million at December 31, 2020. Roughly half of this increase was from our recent acquisitions of Magellan Complete Care, Passport in Kentucky and YourCare in New York, with the balance from suspension of Medicaid redeterminations noted below;
•General and administrative expense ratio (“G&A ratio”) of 7.6%, compared to 7.7% in 2019; and
•After-tax margin of 3.5%, despite the underperformance of our Marketplace business.
COVID Impacts
As noted above, the combined net effect of COVID-related impacts reduced our 2020 earnings and included:
•A decrease in medical costs due to COVID-related utilization curtailment throughout most of year of approximately $420 million, which was partially offset by direct care related to COVID patients;
•Premium refunds and related actions enacted by a number of our state Medicaid agencies; and
Approximately $90customers in response to the COVID-related utilization curtailment of approximately $564 million, of unfavorable Marketplace items, most notably the lack of CSR reimbursementincluding $401 million recognized in the fourth quarter, of 2017.mostly associated with recently-enacted risk sharing corridors;
Absent these items, our medical care ratio for 2017 would have been approximately 89.3%.
2016 Compared with 2015
In 2016, a 27% increase in membership, partially offset by a 3% decrease in revenue PMPM, resulted in increased premium revenue of 24%, or $3.2 billion, when compared with 2015.
The medical care ratio increased to 89.8% in 2016, from 88.9% in 2015. The•An increase in our medical care ratio was driven primarily by Marketplace membership. Medical margin (measuredG&A spending on activities related to COVID; and
•Membership growth due to suspension of redeterminations in absolute dollars) increased 14%Medicaid.
Growth Initiatives
We made major strides in 2016 over 2015. The medical care ratio of all of2020 related to our programs excluding Marketplace decreased by 10 basis points between 2015 and 2016, as decreasing margins in Medicaid Expansion (wheregrowth strategy. On December 31, 2020, we saw a 300 basis point increase in our medical care ratio) were offset by improved margins in other programs. Consolidated medical care costs measured on a PMPM basis decreased approximately 3% in 2016 when compared with 2015.
FINANCIAL PERFORMANCE BY PROGRAM
The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by program for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Member Months (1) | | Premium Revenue | | Medical Care Costs | | MCR (2) | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| TANF and CHIP | 30.2 |
| | $ | 5,554 |
| | $ | 183.75 |
| | $ | 5,111 |
| | $ | 169.09 |
| | 92.0 | % | | $ | 443 |
|
| Medicaid Expansion | 8.1 |
| | 3,150 |
| | 388.42 |
| | 2,674 |
| | 329.73 |
| | 84.9 |
| | 476 |
|
| ABD | 4.9 |
| | 5,135 |
| | 1,050.41 |
| | 4,863 |
| | 994.80 |
| | 94.7 |
| | 272 |
|
| Total Medicaid | 43.2 |
| | 13,839 |
| | 320.16 |
| | 12,648 |
| | 292.61 |
| | 91.4 |
| | 1,191 |
|
| MMP | 0.7 |
| | 1,446 |
| | 2,177.72 |
| | 1,317 |
| | 1,982.36 |
| | 91.0 |
| | 129 |
|
| Medicare | 0.5 |
| | 601 |
| | 1,143.63 |
| | 493 |
| | 939.67 |
| | 82.2 |
| | 108 |
|
| Total Medicare | 1.2 |
| | 2,047 |
| | 1,722.47 |
| | 1,810 |
| | 1,523.15 |
| | 88.4 |
| | 237 |
|
| Core operations | 44.4 |
| | 15,886 |
| | 357.68 |
| | 14,458 |
| | 325.53 |
| | 91.0 |
| | 1,428 |
|
| Marketplace | 10.8 |
| | 2,968 |
| | 274.47 |
| | 2,615 |
| | 241.84 |
| | 88.1 |
| | 353 |
|
| | 55.2 |
| | $ | 18,854 |
| | $ | 341.39 |
| | $ | 17,073 |
| | $ | 309.14 |
| | 90.6 | % | | $ | 1,781 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Member Months (1) | | Premium Revenue | | Medical Care Costs | | MCR (2) | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| TANF and CHIP | 30.2 |
| | $ | 5,403 |
| | $ | 179.21 |
| | $ | 4,950 |
| | $ | 164.18 |
| | 91.6 | % | | $ | 453 |
|
| Medicaid Expansion | 7.8 |
| | 2,952 |
| | 378.58 |
| | 2,475 |
| | 317.37 |
| | 83.8 |
| | 477 |
|
| ABD | 4.7 |
| | 4,666 |
| | 991.24 |
| | 4,277 |
| | 908.39 |
| | 91.6 |
| | 389 |
|
| Total Medicaid | 42.7 |
| | 13,021 |
| | 305.28 |
| | 11,702 |
| | 274.33 |
| | 89.9 |
| | 1,319 |
|
| MMP | 0.6 |
| | 1,321 |
| | 2,160.94 |
| | 1,141 |
| | 1,866.93 |
| | 86.4 |
| | 180 |
|
| Medicare | 0.5 |
| | 558 |
| | 1,063.44 |
| | 515 |
| | 981.36 |
| | 92.3 |
| | 43 |
|
| Total Medicare | 1.1 |
| | 1,879 |
| | 1,653.73 |
| | 1,656 |
| | 1,457.67 |
| | 88.1 |
| | 223 |
|
| Core operations | 43.8 |
| | 14,900 |
| | 340.28 |
| | 13,358 |
| | 305.03 |
| | 89.6 |
| | 1,542 |
|
| Marketplace | 6.7 |
| | 1,545 |
| | 231.38 |
| | 1,416 |
| | 212.17 |
| | 91.7 |
| | 129 |
|
| | 50.5 |
| | $ | 16,445 |
| | $ | 325.87 |
| | $ | 14,774 |
| | $ | 292.75 |
| | 89.8 | % | | $ | 1,671 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Member Months (1) | | Premium Revenue | | Medical Care Costs | | MCR (2) | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| TANF and CHIP | 25.5 |
| | $ | 4,483 |
| | $ | 175.64 |
| | $ | 4,122 |
| | $ | 161.50 |
| | 92.0 | % | | $ | 361 |
|
| Medicaid Expansion | 5.9 |
| | 2,389 |
| | 408.51 |
| | 1,931 |
| | 330.18 |
| | 80.8 |
| | 458 |
|
| ABD | 4.3 |
| | 4,124 |
| | 966.83 |
| | 3,784 |
| | 887.27 |
| | 91.8 |
| | 340 |
|
| Total Medicaid | 35.7 |
| | 10,996 |
| | 308.54 |
| | 9,837 |
| | 276.05 |
| | 89.5 |
| | 1,159 |
|
| MMP | 0.5 |
| | 1,066 |
| | 2,040.08 |
| | 974 |
| | 1,863.93 |
| | 91.4 |
| | 92 |
|
| Medicare | 0.5 |
| | 546 |
| | 1,069.17 |
| | 502 |
| | 982.50 |
| | 91.9 |
| | 44 |
|
| Total Medicare | 1.0 |
| | 1,612 |
| | 1,560.08 |
| | 1,476 |
| | 1,428.18 |
| | 91.5 |
| | 136 |
|
| Core operations | 36.7 |
| | 12,608 |
| | 343.80 |
| | 11,313 |
| | 308.51 |
| | 89.7 |
| | 1,295 |
|
| Marketplace | 2.6 |
| | 653 |
| | 252.58 |
| | 481 |
| | 185.85 |
| | 73.6 |
| | 172 |
|
| | 39.3 |
| | $ | 13,261 |
| | $ | 337.79 |
| | $ | 11,794 |
| | $ | 300.43 |
| | 88.9 | % | | $ | 1,467 |
|
_______________________
| |
(1) | A member month is defined as the aggregate of each month’s ending membership for the period presented. |
| |
(2) | “MCR” represents medical costs as a percentage of premium revenue. |
2017 TRENDS
Medicaid TANF, CHIP and ABD. TANF represented approximately 40% of our total Medicaid revenue in 2017, with a medical care ratio of 92.0%. Keys to the cost-effective delivery of care to TANF members include:
Effective utilization controls and care management, particularly with respect to high-risk pregnancies; and
Reducing unit costs of high-cost providers.
Our ABD program represented approximately 37% of our total Medicaid revenue in 2017, with a medical care ratio of 94.7%. Keys to the cost-effective delivery of care to ABD members include:
Improved care management and coordination of services for high acuity populations, focusingclosed on the integrationacquisition of behavioralMagellan Complete Care. In September 2020, we signed a definitive agreement to purchase the net assets of Affinity Health Plan in New York, which we expect to close as early as the second quarter of 2021. We closed on the Passport acquisition in Kentucky on September 1, 2020, and physicalwe closed on the YourCare acquisition in upstate New York on July 1, 2020. Each of these acquisitions involve financially underperforming health services;plans, but with stable membership and revenue bases. We believe they provide attractive opportunities for margin improvement, operating leverage and membership growth. Our growth initiatives continue to be anchored by our capital allocation priorities: first, organic growth; second, inorganic growth through accretive acquisitions; and third, programmatically returning excess capital to shareholders.
Targeting high risk members for care management interventionIn summary, we continue to perform well, our fundamentals remain strong, and more comprehensive documentation of medical conditions; and
Improved management of community and other long-term care services for members in this program.
Medicaid Expansion. Medicaid Expansion represented approximately 23% of our total Medicaidwe continue to grow revenue in 2017, with a medical care ratio of 84.9%. This program continues to contribute favorably to our overall profitability and was responsible for approximately 40% of our total Medicaid medical margin for 2017. While premiums and margins for Medicaid Expansion have been declining in recent years, the rating environment appears to have stabilized.
Marketplace. The Marketplace 2017 medical care ratio was 88.1%. As noted above, the Marketplace program was burdened in 2017 by a net $90 million unfavorable impact from various Marketplace CSR, risk adjustment and premium deficiency reserve items. In response to profitability challenges, effective January 1, 2018, we exited the Marketplaces entirely in Utah and Wisconsin while also limiting our presence in Washington. Also effective January 1, 2018, we increased Marketplace premium rates by an average of 58%.
2017 Compared with 2016
Medicaid TANF and CHIP. The performance of TANF and CHIPwas very consistent between 2017 and 2016, with flat enrollment, a premium revenue increase of approximately 3%; and an increase in the medical care ratio to 92.0% in 2017, from 91.6% in 2016.
Medicaid ABD. ABD enrollment grew approximately 4% in 2017 compared with 2016, while premium revenue grew by approximately 10%. The medical care ratio for our ABD membership deteriorated to 94.7% in 2017, from 91.6% in 2016. The deterioration in medical cost performance was most notable in Michigan, New Mexico and Texas.
Medicaid Expansion. Medicaid Expansion enrollment grew approximately 4% in 2017 compared with 2016, while premium revenue grew by approximately 7%. The medical care ratio for our Medicaid Expansion membership deteriorated to 84.9% in 2017 from 83.8% in 2016. Reduced premium rates in California were the primary driver of declining performance in 2017.
MMP and Medicare. MMP and Medicare enrollment and premium combined grew by approximately 9% in 2017 compared with 2016. The medical care ratio for this membership increased 30 basis points from 2016 to 2017.
Marketplace. Marketplace enrollment increased over 60% in 2017 compared with 2016, while premium revenue increased over 90%. Despite a decrease in the medical care ratio of 360 basis points in 2017 compared with 2016, our Marketplace program still failed to meet expectations in 2017.
2016 Compared with 2015
Medicaid TANF, CHIP and ABD. TANF, CHIP and ABD revenue increased in 2016 when compared with 2015, due to health plan acquisitions in late 2015 and 2016, as well as inclusion of a full year of Puerto Rico operations in 2016 (Puerto Rico began operations effective April 1, 2015). The slight decline in the medical care ratio for these programs on a consolidated basis when comparing 2016 with 2015 is not significant given normal margin fluctuations observed when performance is reviewed at this level of detail.
Medicaid Expansion. Member months increased 33% in 2016, when compared with 2015, as a result of membership growth in all states. Lower premium revenue PMPM more than offset lower medical costs PMPM, leading to an increase in the consolidatedour focus on top-line growth.
Molina Healthcare, Inc. 2020 Form 10-K | 35
FINANCIAL RESULTS SUMMARY
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| (In millions, except per-share amounts) |
| Premium revenue | $ | 18,299 | | | $ | 16,208 | |
| Less: medical care costs | 15,820 | | | 13,905 | |
| Medical margin | 2,479 | | | 2,303 | |
MCR (1) | 86.5 | % | | 85.8 | % |
| | | |
| Other revenues: | | | |
| Premium tax revenue | 649 | | | 489 | |
| Health insurer fees reimbursed | 271 | | | — | |
| Investment income and other revenue | 76 | | | 132 | |
| Marketplace risk corridor judgment | 128 | | | — | |
| | | |
| General and administrative expenses | 1,480 | | | 1,296 | |
G&A ratio (2) | 7.6 | % | | 7.7 | % |
| | | |
| Premium tax expenses | 649 | | | 489 | |
| Health insurer fees | 277 | | | — | |
| Depreciation and amortization | 88 | | | 89 | |
| Other | 31 | | | 6 | |
| Operating income | 1,078 | | | 1,044 | |
| | | |
| Interest expense | 102 | | | 87 | |
| Other expenses (income), net | 15 | | | (15) | |
| | | |
| Income before income tax expense | 961 | | | 972 | |
| Income tax expense | 288 | | | 235 | |
| Net income | $ | 673 | | | $ | 737 | |
| | | |
| Net income per diluted share | $ | 11.23 | | | $ | 11.47 | |
| | | |
| Diluted weighted average shares outstanding | 59.9 | | | 64.2 | |
| | | |
| Other Key Statistics: | | | |
Ending Membership (3) | 4.0 | | | 3.3 | |
| Effective income tax rate | 30.0 | % | | 24.2 | % |
After-tax margin (2) | 3.5 | % | | 4.4 | % |
__________________
(1)MCR represents medical care ratio for the Medicaid Expansion program. Medicaid Expansion medical care ratios increased in Illinois, Michigan, New Mexico and Ohio.
MMP and Medicare. Membership and revenue increased on a consolidated basis for the MMP and Medicare programs when comparing 2016 with 2015. The medical care ratio for these programs, in the aggregate, decreased due to higher margins for the MMP program.
Marketplace. Our Marketplace program performed poorly in 2016. The medical care ratio of our Marketplace membership increased to 91.7% in 2016, from 73.6% in 2015. This decline in profitability was the result of lower premium revenue PMPM, the recording of a $30 million premium deficiency reserve at December 31, 2016, and higher medical costs PMPM.
The poor performance of our Marketplace program in 2016 was exacerbated by the federal government’s failure to pay amounts owed to our health plans under the Marketplace risk corridor program. We believe our health plans are owed approximately $76 million in Marketplace risk corridor payments for 2016 dates of service, but have not recorded any amounts associated with this claim.
FINANCIAL PERFORMANCE BY STATE HEALTH PLAN
The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):
Health Plans Segment Financial Data — Core Operations (Medicaid and Medicare Combined)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| California | 7.4 |
| | $ | 2,392 |
| | $ | 321.46 |
| | $ | 2,117 |
| | $ | 284.53 |
| | 88.5 | % | | $ | 275 |
|
| Florida | 4.3 |
| | 1,522 |
| | 350.15 |
| | 1,461 |
| | 335.97 |
| | 96.0 |
| | 61 |
|
| Illinois | 2.1 |
| | 593 |
| | 286.69 |
| | 638 |
| | 308.41 |
| | 107.6 |
| | (45 | ) |
| Michigan | 4.6 |
| | 1,545 |
| | 334.22 |
| | 1,360 |
| | 294.15 |
| | 88.0 |
| | 185 |
|
| New Mexico | 2.9 |
| | 1,258 |
| | 439.95 |
| | 1,166 |
| | 407.94 |
| | 92.7 |
| | 92 |
|
New York (1) | 0.4 |
| | 181 |
| | 449.85 |
| | 170 |
| | 424.17 |
| | 94.3 |
| | 11 |
|
| Ohio | 3.9 |
| | 2,130 |
| | 544.98 |
| | 1,894 |
| | 484.66 |
| | 88.9 |
| | 236 |
|
Puerto Rico (1) | 3.8 |
| | 732 |
| | 190.13 |
| | 691 |
| | 179.65 |
| | 94.5 |
| | 41 |
|
| South Carolina | 1.4 |
| | 445 |
| | 328.41 |
| | 412 |
| | 304.04 |
| | 92.6 |
| | 33 |
|
| Texas | 2.8 |
| | 2,150 |
| | 769.82 |
| | 1,978 |
| | 708.20 |
| | 92.0 |
| | 172 |
|
| Utah | 1.1 |
| | 355 |
| | 316.44 |
| | 290 |
| | 258.96 |
| | 81.8 |
| | 65 |
|
| Washington | 8.9 |
| | 2,445 |
| | 275.64 |
| | 2,143 |
| | 241.55 |
| | 87.6 |
| | 302 |
|
| Wisconsin | 0.8 |
| | 131 |
| | 168.64 |
| | 107 |
| | 136.84 |
| | 81.1 |
| | 24 |
|
Other (2) | — |
| | 7 |
| | — |
| | 31 |
| | — |
| | — |
| | (24 | ) |
| | 44.4 |
| | $ | 15,886 |
| | $ | 357.68 |
| | $ | 14,458 |
| | $ | 325.53 |
| | 91.0 | % | | $ | 1,428 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | Total | | PMPM | | Total | | PMPM | | |
| California | 7.4 |
| | $ | 2,247 |
| | $ | 304.83 |
| | $ | 1,900 |
| | $ | 257.72 |
| | 84.5 | % | | $ | 347 |
|
| Florida | 4.1 |
| | 1,348 |
| | 329.58 |
| | 1,227 |
| | 299.94 |
| | 91.0 |
| | 121 |
|
| Illinois | 2.3 |
| | 603 |
| | 258.72 |
| | 568 |
| | 243.71 |
| | 94.2 |
| | 35 |
|
| Michigan | 4.7 |
| | 1,517 |
| | 324.18 |
| | 1,339 |
| | 286.00 |
| | 88.2 |
| | 178 |
|
| New Mexico | 2.8 |
| | 1,245 |
| | 440.63 |
| | 1,162 |
| | 411.30 |
| | 93.3 |
| | 83 |
|
New York (1) | 0.2 |
| | 82 |
| | 446.72 |
| | 79 |
| | 431.73 |
| | 96.6 |
| | 3 |
|
| Ohio | 3.9 |
| | 1,927 |
| | 490.71 |
| | 1,718 |
| | 437.56 |
| | 89.2 |
| | 209 |
|
Puerto Rico (1) | 4.0 |
| | 726 |
| | 180.65 |
| | 694 |
| | 172.57 |
| | 95.5 |
| | 32 |
|
| South Carolina | 1.3 |
| | 378 |
| | 296.58 |
| | 320 |
| | 250.97 |
| | 84.6 |
| | 58 |
|
| Texas | 2.9 |
| | 2,182 |
| | 744.65 |
| | 1,926 |
| | 657.38 |
| | 88.3 |
| | 256 |
|
| Utah | 1.1 |
| | 344 |
| | 297.68 |
| | 296 |
| | 256.31 |
| | 86.1 |
| | 48 |
|
| Washington | 8.1 |
| | 2,146 |
| | 263.50 |
| | 1,936 |
| | 237.66 |
| | 90.2 |
| | 210 |
|
| Wisconsin | 1.0 |
| | 142 |
| | 165.95 |
| | 106 |
| | 123.44 |
| | 74.4 |
| | 36 |
|
Other (2) | — |
| | 13 |
| | — |
| | 87 |
| | — |
| | — |
| | (74 | ) |
| | 43.8 |
| | $ | 14,900 |
| | $ | 340.28 |
| | $ | 13,358 |
| | $ | 305.03 |
| | 89.6 | % | | $ | 1,542 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | Total | | PMPM | | Total | | PMPM | | |
| California | 6.9 |
| | 2,163 |
| | $ | 314.73 |
| | $ | 1,901 |
| | $ | 276.57 |
| | 87.9 | % | | $ | 262 |
|
| Florida | 2.4 |
| | 802 |
| | 333.18 |
| | 801 |
| | 333.02 |
| | 100.0 |
| | 1 |
|
| Illinois | 1.2 |
| | 398 |
| | 329.48 |
| | 367 |
| | 303.72 |
| | 92.2 |
| | 31 |
|
| Michigan | 3.4 |
| | 1,068 |
| | 318.95 |
| | 901 |
| | 268.91 |
| | 84.3 |
| | 167 |
|
| New Mexico | 2.7 |
| | 1,226 |
| | 450.16 |
| | 1,097 |
| | 402.85 |
| | 89.5 |
| | 129 |
|
New York (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ohio | 4.0 |
| | 2,025 |
| | 500.15 |
| | 1,710 |
| | 422.43 |
| | 84.5 |
| | 315 |
|
Puerto Rico (1) | 3.2 |
| | 567 |
| | 178.31 |
| | 505 |
| | 158.80 |
| | 89.1 |
| | 62 |
|
| South Carolina | 1.3 |
| | 348 |
| | 267.25 |
| | 278 |
| | 213.30 |
| | 79.8 |
| | 70 |
|
| Texas | 3.0 |
| | 1,918 |
| | 639.47 |
| | 1,778 |
| | 592.95 |
| | 92.7 |
| | 140 |
|
| Utah | 1.1 |
| | 318 |
| | 293.42 |
| | 285 |
| | 263.18 |
| | 89.7 |
| | 33 |
|
| Washington | 6.6 |
| | 1,586 |
| | 241.84 |
| | 1,454 |
| | 221.75 |
| | 91.7 |
| | 132 |
|
| Wisconsin | 0.9 |
| | 148 |
| | 157.14 |
| | 113 |
| | 120.06 |
| | 76.4 |
| | 35 |
|
Other (2) | — |
| | 41 |
| | — |
| | 123 |
| | — |
| | — |
| | (82 | ) |
| | 36.7 |
| | $ | 12,608 |
| | $ | 343.80 |
| | $ | 11,313 |
| | $ | 308.51 |
| | 89.7 | % | | $ | 1,295 |
|
Health Plans Segment Financial Data — Marketplace
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| California | 1.7 |
| | $ | 309 |
| | $ | 185.88 |
| | $ | 231 |
| | $ | 138.61 |
| | 74.6 | % | | $ | 78 |
|
| Florida | 3.6 |
| | 1,046 |
| | 293.35 |
| | 1,009 |
| | 283.17 |
| | 96.5 |
| | 37 |
|
| Michigan | 0.3 |
| | 51 |
| | 180.26 |
| | 38 |
| | 135.64 |
| | 75.2 |
| | 13 |
|
| New Mexico | 0.3 |
| | 110 |
| | 349.50 |
| | 84 |
| | 264.14 |
| | 75.6 |
| | 26 |
|
| Ohio | 0.2 |
| | 86 |
| | 363.24 |
| | 81 |
| | 340.44 |
| | 93.7 |
| | 5 |
|
| Texas | 2.6 |
| | 663 |
| | 250.08 |
| | 517 |
| | 195.20 |
| | 78.1 |
| | 146 |
|
| Utah | 0.9 |
| | 180 |
| | 215.93 |
| | 178 |
| | 213.33 |
| | 98.8 |
| | 2 |
|
| Washington | 0.5 |
| | 163 |
| | 317.39 |
| | 156 |
| | 304.74 |
| | 96.0 |
| | 7 |
|
| Wisconsin | 0.7 |
| | 360 |
| | 477.53 |
| | 327 |
| | 433.98 |
| | 90.9 |
| | 33 |
|
Other (2) | — |
| | — |
| | — |
| | (6 | ) | | — |
| | — |
| | 6 |
|
| | 10.8 |
| | $ | 2,968 |
| | $ | 274.47 |
| | $ | 2,615 |
| | $ | 241.84 |
| | 88.1 | % | | $ | 353 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | Total | | PMPM | | Total | | PMPM | | |
| California | 0.8 |
| | $ | 131 |
| | $ | 166.01 |
| | $ | 129 |
| | $ | 164.35 |
| | 99.0 | % | | $ | 2 |
|
| Florida | 2.6 |
| | 590 |
| | 228.65 |
| | 538 |
| | 208.53 |
| | 91.2 |
| | 52 |
|
| Michigan | — |
| | 10 |
| | 232.88 |
| | 6 |
| | 154.32 |
| | 66.3 |
| | 4 |
|
| New Mexico | 0.2 |
| | 60 |
| | 287.37 |
| | 47 |
| | 223.85 |
| | 77.9 |
| | 13 |
|
| Ohio | 0.1 |
| | 40 |
| | 348.06 |
| | 29 |
| | 254.78 |
| | 73.2 |
| | 11 |
|
| Texas | 1.4 |
| | 279 |
| | 208.48 |
| | 184 |
| | 137.13 |
| | 65.8 |
| | 95 |
|
| Utah | 0.7 |
| | 103 |
| | 166.21 |
| | 127 |
| | 204.14 |
| | 122.8 |
| | (24 | ) |
| Washington | 0.3 |
| | 76 |
| | 272.48 |
| | 79 |
| | 284.87 |
| | 104.5 |
| | (3 | ) |
| Wisconsin | 0.6 |
| | 256 |
| | 363.54 |
| | 282 |
| | 399.51 |
| | 109.9 |
| | (26 | ) |
Other (2) | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | 5 |
|
| | 6.7 |
| | $ | 1,545 |
| | $ | 231.38 |
| | $ | 1,416 |
| | $ | 212.17 |
| | 91.7 | % | | $ | 129 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | Total | | PMPM | | Total | | PMPM | | |
| California | 0.2 |
| | $ | 37 |
| | $ | 179.77 |
| | $ | 25 |
| | $ | 124.68 |
| | 69.4 | % | | $ | 12 |
|
| Florida | 1.7 |
| | 397 |
| | 229.85 |
| | 280 |
| | 162.04 |
| | 70.5 |
| | 117 |
|
| Michigan | — |
| | 4 |
| | 212.70 |
| | 2 |
| | 124.35 |
| | 58.5 |
| | 2 |
|
| New Mexico | 0.1 |
| | 11 |
| | 242.42 |
| | 9 |
| | 185.13 |
| | 76.4 |
| | 2 |
|
| Ohio | 0.1 |
| | 10 |
| | 399.81 |
| | 8 |
| | 290.81 |
| | 72.7 |
| | 2 |
|
| Texas | 0.1 |
| | 45 |
| | 286.78 |
| | 31 |
| | 197.41 |
| | 68.8 |
| | 14 |
|
| Utah | 0.1 |
| | 16 |
| | 221.00 |
| | 15 |
| | 202.41 |
| | 91.6 |
| | 1 |
|
| Washington | — |
| | 19 |
| | 369.59 |
| | 16 |
| | 301.94 |
| | 81.7 |
| | 3 |
|
| Wisconsin | 0.3 |
| | 114 |
| | 403.08 |
| | 102 |
| | 362.28 |
| | 89.9 |
| | 12 |
|
Other (2) | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | 7 |
|
| | 2.6 |
| | $ | 653 |
| | $ | 252.58 |
| | $ | 481 |
| | $ | 185.85 |
| | 73.6 | % | | $ | 172 |
|
Health Plans Segment Financial Data — Total
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| California | 9.1 |
| | $ | 2,701 |
| | $ | 296.68 |
| | $ | 2,348 |
| | $ | 257.86 |
| | 86.9 | % | | $ | 353 |
|
| Florida | 7.9 |
| | 2,568 |
| | 324.56 |
| | 2,470 |
| | 312.18 |
| | 96.2 |
| | 98 |
|
| Illinois | 2.1 |
| | 593 |
| | 286.69 |
| | 638 |
| | 308.41 |
| | 107.6 |
| | (45 | ) |
| Michigan | 4.9 |
| | 1,596 |
| | 325.43 |
| | 1,398 |
| | 285.11 |
| | 87.6 |
| | 198 |
|
| New Mexico | 3.2 |
| | 1,368 |
| | 430.97 |
| | 1,250 |
| | 393.67 |
| | 91.3 |
| | 118 |
|
New York (1) | 0.4 |
| | 181 |
| | 449.85 |
| | 170 |
| | 424.17 |
| | 94.3 |
| | 11 |
|
| Ohio | 4.1 |
| | 2,216 |
| | 534.56 |
| | 1,975 |
| | 476.39 |
| | 89.1 |
| | 241 |
|
Puerto Rico (1) | 3.8 |
| | 732 |
| | 190.13 |
| | 691 |
| | 179.65 |
| | 94.5 |
| | 41 |
|
| South Carolina | 1.4 |
| | 445 |
| | 328.41 |
| | 412 |
| | 304.04 |
| | 92.6 |
| | 33 |
|
| Texas | 5.4 |
| | 2,813 |
| | 516.84 |
| | 2,495 |
| | 458.50 |
| | 88.7 |
| | 318 |
|
| Utah | 2.0 |
| | 535 |
| | 273.55 |
| | 468 |
| | 239.49 |
| | 87.5 |
| | 67 |
|
| Washington | 9.4 |
| | 2,608 |
| | 277.93 |
| | 2,299 |
| | 245.01 |
| | 88.2 |
| | 309 |
|
| Wisconsin | 1.5 |
| | 491 |
| | 320.71 |
| | 434 |
| | 283.14 |
| | 88.3 |
| | 57 |
|
Other (2) | — |
| | 7 |
| | — |
| | 25 |
| | — |
| | — |
| | (18 | ) |
| | 55.2 |
| | $ | 18,854 |
| | $ | 341.39 |
| | $ | 17,073 |
| | $ | 309.14 |
| | 90.6 | % | | $ | 1,781 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| California | 8.2 |
| | $ | 2,378 |
| | $ | 291.41 |
| | $ | 2,029 |
| | $ | 248.70 |
| | 85.3 | % | | $ | 349 |
|
| Florida | 6.7 |
| | 1,938 |
| | 290.56 |
| | 1,765 |
| | 264.60 |
| | 91.1 |
| | 173 |
|
| Illinois | 2.3 |
| | 603 |
| | 258.72 |
| | 568 |
| | 243.71 |
| | 94.2 |
| | 35 |
|
| Michigan | 4.7 |
| | 1,527 |
| | 323.36 |
| | 1,345 |
| | 284.82 |
| | 88.1 |
| | 182 |
|
| New Mexico | 3.0 |
| | 1,305 |
| | 430.15 |
| | 1,209 |
| | 398.49 |
| | 92.6 |
| | 96 |
|
New York (1) | 0.2 |
| | 82 |
| | 446.72 |
| | 79 |
| | 431.73 |
| | 96.6 |
| | 3 |
|
| Ohio | 4.0 |
| | 1,967 |
| | 486.66 |
| | 1,747 |
| | 432.36 |
| | 88.8 |
| | 220 |
|
Puerto Rico (1) | 4.0 |
| | 726 |
| | 180.65 |
| | 694 |
| | 172.57 |
| | 95.5 |
| | 32 |
|
| South Carolina | 1.3 |
| | 378 |
| | 296.58 |
| | 320 |
| | 250.97 |
| | 84.6 |
| | 58 |
|
| Texas | 4.3 |
| | 2,461 |
| | 576.69 |
| | 2,110 |
| | 494.41 |
| | 85.7 |
| | 351 |
|
| Utah | 1.8 |
| | 447 |
| | 251.63 |
| | 423 |
| | 238.03 |
| | 94.6 |
| | 24 |
|
| Washington | 8.4 |
| | 2,222 |
| | 263.80 |
| | 2,015 |
| | 239.21 |
| | 90.7 |
| | 207 |
|
| Wisconsin | 1.6 |
| | 398 |
| | 255.30 |
| | 388 |
| | 248.28 |
| | 97.2 |
| | 10 |
|
Other (2) | — |
| | 13 |
| | — |
| | 82 |
| | — |
| | — |
| | (69 | ) |
| | 50.5 |
| | $ | 16,445 |
| | $ | 325.87 |
| | $ | 14,774 |
| | $ | 292.75 |
| | 89.8 | % | | $ | 1,671 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Member Months | | Premium Revenue | | Medical Care Costs | | MCR | | Medical Margin |
| | | Total | | PMPM | | Total | | PMPM | | |
| California | 7.1 |
| | $ | 2,200 |
| | $ | 310.86 |
| | $ | 1,926 |
| | $ | 272.22 |
| | 87.6 | % | | $ | 274 |
|
| Florida | 4.1 |
| | 1,199 |
| | 289.95 |
| | 1,081 |
| | 261.49 |
| | 90.2 |
| | 118 |
|
| Illinois | 1.2 |
| | 398 |
| | 329.48 |
| | 367 |
| | 303.72 |
| | 92.2 |
| | 31 |
|
| Michigan | 3.4 |
| | 1,072 |
| | 318.47 |
| | 903 |
| | 268.27 |
| | 84.2 |
| | 169 |
|
| New Mexico | 2.8 |
| | 1,237 |
| | 446.47 |
| | 1,106 |
| | 398.98 |
| | 89.4 |
| | 131 |
|
New York (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ohio | 4.1 |
| | 2,035 |
| | 499.52 |
| | 1,718 |
| | 421.61 |
| | 84.4 |
| | 317 |
|
Puerto Rico (1) | 3.2 |
| | 567 |
| | 178.31 |
| | 505 |
| | 158.80 |
| | 89.1 |
| | 62 |
|
| South Carolina | 1.3 |
| | 348 |
| | 267.25 |
| | 278 |
| | 213.30 |
| | 79.8 |
| | 70 |
|
| Texas | 3.1 |
| | 1,963 |
| | 621.97 |
| | 1,809 |
| | 573.32 |
| | 92.2 |
| | 154 |
|
| Utah | 1.2 |
| | 334 |
| | 288.83 |
| | 300 |
| | 259.32 |
| | 89.8 |
| | 34 |
|
| Washington | 6.6 |
| | 1,605 |
| | 242.82 |
| | 1,470 |
| | 222.36 |
| | 91.6 |
| | 135 |
|
| Wisconsin | 1.2 |
| | 262 |
| | 213.95 |
| | 215 |
| | 176.01 |
| | 82.3 |
| | 47 |
|
Other (2) | — |
| | 41 |
| | — |
| | 116 |
| | — |
| | — |
| | (75 | ) |
| | 39.3 |
| | $ | 13,261 |
| | $ | 337.79 |
| | $ | 11,794 |
| | $ | 300.43 |
| | 88.9 | % | | $ | 1,467 |
|
| |
(1) | The New York health plan was acquired on August 1, 2016. Our Puerto Rico health plan began serving members on April 1, 2015. |
| |
(2) | “Other” medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs. |
MEDICAL CARE COSTS BY TYPE
Our medical care costs include amounts that have been paid by us through the reporting date as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. The following table provides the details of consolidated medical care costs by type for the periods indicated (dollars in millions except PMPM amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | PMPM | | % of Total | | Amount | | PMPM | | % of Total | | Amount | | PMPM | | % of Total |
| Fee for service | $ | 12,682 |
| | $ | 229.63 |
| | 74.3 | % | | $ | 10,993 |
| | $ | 217.84 |
| | 74.4 | % | | $ | 8,572 |
| | $ | 218.35 |
| | 72.7 | % |
| Pharmacy | 2,563 |
| | 46.40 |
| | 15.0 |
| | 2,213 |
| | 43.84 |
| | 15.0 |
| | 1,610 |
| | 41.01 |
| | 13.7 |
|
| Capitation | 1,360 |
| | 24.63 |
| | 8.0 |
| | 1,218 |
| | 24.13 |
| | 8.2 |
| | 982 |
| | 25.02 |
| | 8.3 |
|
| Direct delivery | 73 |
| | 1.33 |
| | 0.4 |
| | 78 |
| | 1.55 |
| | 0.5 |
| | 128 |
| | 3.26 |
| | 1.1 |
|
| Other | 395 |
| | 7.15 |
| | 2.3 |
| | 272 |
| | 5.39 |
| | 1.9 |
| | 502 |
| | 12.79 |
| | 4.2 |
|
| | $ | 17,073 |
| | $ | 309.14 |
| | 100.0 | % | | $ | 14,774 |
| | $ | 292.75 |
| | 100.0 | % | | $ | 11,794 |
| | $ | 300.43 |
| | 100.0 | % |
PREMIUM TAXES
The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was 2.3% in 2017, 2.8% in 2016,revenue.
(2)G&A ratio represents general and 2.9% in 2015. The decreases in the premium tax ratio were primarily due to the significant revenue growth at our Florida health plan in 2017 and 2016, which operates in a state with no premium tax, and growth in MMP revenue. The Medicare portion of MMP revenue is not subject to premium tax.
HEALTH INSURER FEES (HIF)
The Consolidated Appropriations Act of 2016 provided for a HIF moratorium in 2017. Therefore, there were no health insurer fees reimbursed, nor health insurer fees incurred, in 2017.
HIF reimbursed,administrative expenses as a percentage of premium revenue,total revenue. After-tax margin represents net income as a percentage of total revenue.
(3)Does not include approximately 200,000 Magellan Complete Care members from the acquisition closed on December 31, 2020.
Molina Healthcare, Inc. 2020 Form 10-K | 36
CONSOLIDATED RESULTS
NET INCOME AND OPERATING INCOME
Net income amounted to $673 million, or $11.23 per diluted share in 2020, compared with net income of $737 million, or $11.47 per diluted share, in 2019. Our after-tax margin decreased to 3.5% for 2020, compared to 4.4% for 2019.
Operating income was consistent at 1.8%$1,078 million in 20162020, compared with $1,044 million in 2019. We estimate that the net effect of COVID-19 decreased pretax income in 2020 by approximately $180 million, or $2.30 per diluted share. Operating income increased in 2020, despite the net effect of COVID-19, due to growth in membership and 2015.
IMPAIRMENT LOSSES
In 2017, we incurred $269premiums, and a $128 million of impairment losseslegal judgment for Marketplace risk corridor claims related to prior years, partially offset by a year-over-year decline in the underlying performance of our Health Plans segment, primarilyMarketplace business.
Net income per share in connection with our Florida, New Mexico, and Illinois health plans. The impairments at Florida and New Mexico were2020 was favorably impacted by the reduction in common shares outstanding as a result of our recent Medicaid contract losses. The Illinois impairment was the result of management’s determination,share repurchase programs in the course of its annual impairment assessment of the goodwill of the Illinois health plan, that the plan’s future cash flow projections were insufficient to produce an estimated fair value2020. See further discussion and information in excess of its carrying amount. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago.
MOLINA MEDICAID SOLUTIONS
BUSINESS OVERVIEW
| |
▪ | 1.0% of total revenue in 2017 |
| |
▪ | 1.1% of total revenue in 2016 |
| |
▪ | Employees: approximately 1,200 |
Programs“Liquidity and Services
The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development,Financial Condition,” below, and administrative services. Molina Medicaid Solutions is under contract with Medicaid agencies in six states, and the U.S. Virgin Islands. Our existing state Medicaid management information system (MMIS) contracts have terms that currently extend to 2018 through 2025, before renewal options.
Competition and Regulation
Molina Medicaid Solutions competes with large MMIS vendors, such as DXC Technology Company, Conduent, Inc. and CNSI. Molina Medicaid Solutions’ contracts with state government customers may include unique and specialized performance requirements. In particular, contracts with state government customers are subject to various procurement regulations, contract provisions, and other requirements relating to their formation, administration, and performance.
FINANCIAL OVERVIEW
2017 Compared with 2016
The year over year change in service margin was insignificant to our consolidated results of operations.
As discussed further in the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,3, “Net Income Per Share.”
PREMIUM REVENUE
Premium revenue increased $2,091 million, or 13%, in 2017 we recorded goodwill impairment losses of $28 million.
2016 Compared with 2015
Service margin declined $34 million in 20162020, when compared with 2015,2019.
The higher premium revenues reflect increased membership, primarily in Medicaid, and include the impact from the YourCare and Passport acquisitions. In 2020, we added 337,000 members from our acquisition of the Kentucky Passport business on September 1, 2020, and 47,000 members from our acquisition of the New York YourCare business on July 1, 2020. Suspension of redeterminations in Medicaid was also a driver for membership growth in 2020.
The increase in premium revenues from these acquisitions was slightly offset by the decline in membership associated with our exit of operations in Puerto Rico in 2020. The increase in premium revenue was net of approximately $564 million recognized for COVID-related premium refunds and related actions that were enacted in several states in response to lower utilization of medical services resulting from COVID-19.
MEDICAL CARE RATIO
The consolidated MCR in 2020 increased to 86.5%, compared to 85.8% in 2019, primarily due to the unfavorable net effect of COVID-19 impacts in all our lines of business. We estimate that the net effect of COVID-19 increased service costs associated with legacy state contracts that were re-procured.our consolidated MCR in 2020 by approximately 50 basis points.
Prior year reserve development in 2020 was not material. The year ended December 31, 2019, was positively impacted by 80 basis points of favorable reserve development, primarily in the Medicaid program.
OTHER
BUSINESS OVERVIEW
| |
▪ | 1.7% of total revenue in 2017 |
| |
▪ | 2.0% of total revenue in 2016 |
| |
▪ | Employees: Corporate – approximately 7,100; Pathways – approximately 6,000 |
Programs and ServicesPREMIUM TAX REVENUE AND EXPENSES
The Other segment includes primarilypremium tax ratio increased to 3.4% in 2020, compared with 2.9% in 2019. The current year ratio increase was mainly due to the state of Illinois’ implementation of a managed care organization provider assessment in the third quarter of 2019. Additionally, the state of California implemented a new managed care organization assessment, effective January 1, 2020, after the prior assessment mechanism expired on June 30, 2019.
HEALTH INSURER FEES (“HIF”)
In 2020, HIF expense amounted to $277 million and HIF reimbursements amounted to $271 million. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. Due to the reinstatement of the HIF in 2020, our Pathways behavioral healtheffective tax rate was higher in 2020 compared with 2019.
The Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020.
INVESTMENT INCOME AND OTHER REVENUE
Investment income and social services provider, and corporate amounts not allocatedother revenue decreased to other reportable segments.
We acquired the outstanding ownership interests in Pathways Health and Community Support, LLC (Pathways), formerly known as Providence Human Services, LLC, in late 2015. Substantially all of Pathways’ revenue is derived from contracts with state or local government agencies and government intermediaries, the majority of which are negotiated fee-for-service arrangements.
FINANCIAL OVERVIEW
2017 Compared with 2016
Service margin declined $20$76 million in 20172020, compared with $132 million in 2019. The year-over-year decrease was consistent with our expectation and was due to the low interest rate environment.
MARKETPLACE RISK CORRIDOR JUDGMENT
In June 2020, the U.S. Court of Federal Claims granted us judgment in the amount of $128 million for 2014, 2015, and 2016 due primarily to reduced revenues asMarketplace risk corridor claims, following a resultfavorable U.S. Supreme Court decision in April 2020 which
Molina Healthcare, Inc. 2020 Form 10-K | 37
held §1342 of the terminationAffordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute. We received the judgment in October 2020 and, consistent with the timing of operationsthe cash receipt, the gain was recognized in selected markets, and increased professional labor benefit expenses.
As discussed further in the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,” in 2017 we recorded impairment losses primarily relating to our Pathways subsidiary, of $162 million for goodwill and $11 million for intangible assets.
2016 Compared with 2015
Service margin was $33 million in 2016 and insignificant in 2015. The service margin in 2015 was insignificant because our acquisition of Pathways was not completed until the fourth quarter 2020 financial results and reported in “Marketplace risk corridor judgment” in our consolidated statements of 2015.
OTHER CONSOLIDATED INFORMATIONincome. The judgment did not create additional Minimum MLR rebates.
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
GeneralThe G&A expense ratio decreased slightly to 7.6% in 2020 compared with 7.7% in 2019, due to increased revenues, partially offset by increased costs associated with the COVID-19 pandemic, due to added operational protocols, technology implementations, and administrative expenses as a percentage of total revenue (the “generalbenefits for our employees, and administrative expense ratio”) was 8.0% in 2017, 7.8% in 2016, and 8.1% in 2015. Our general and administrative ratio has been relatively constant since the phase-in of the ACA Medicaid Expansion and Marketplace programs beginning in 2014.also from increased costs associated with acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to 0.9%, 1.0% and 0.8% of total revenue for the years ended December 31, 2017, 2016 and 2015, respectively.
RESTRUCTURING AND SEPARATION COSTS
For a comprehensive discussion of our 2017 Restructuring Plan, refer to “Liquidity and Financial Condition—Future Sources and Uses of Liquidity,” in this MD&A, and Notes to Consolidated Financial Statements, Note 15, “Restructuring and Separation Costs.”
INTEREST EXPENSE
Interest expense increased to $118$102 million in 2020, compared with $87 million in 2019. Additional interest expense relating to the 4.375% Notes issued in June 2020, and the 3.875% Notes issued in November 2020, was partially offset by the decrease in interest expense resulting from the settlement of the convertible senior notes in January 2020. As further described below in “Liquidity,” a portion of the net proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the term loan facility of our prior credit agreement. Additionally, a portion of the net proceeds from the 3.875% Notes offering was used to repay the $330 million principal amount outstanding under the 4.875% Notes.
OTHER EXPENSES (INCOME), NET
In 2020, we recognized losses on debt repayment of $15 million in connection with repayment of our term loan facility and other financing transactions. In 2019, we recognized a gain on debt repayment of $15 million, in connection with convertible senior notes repayment transactions.
INCOME TAXES
Income tax expense amounted to $288 million in 2020, or 30.0% of pretax income, compared with income tax expense of $235 million in 2019, or 24.2% of the pretax income. The effective tax rate was higher in 2020 due to higher nondeductible expenses in 2020, primarily related to the nondeductible HIF. As discussed above, the HIF was not applicable in 2019 and has been repealed for years after 2020.
REPORTABLE SEGMENTS
As of December 31, 2020, we had two reportable segments: the Health Plans segment, and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.
The key metrics used to assess the performance of our Health Plans segment are premium revenue, margin and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Margin for our Health Plans segment is also referred to as “Medical Margin.” Medical Margin amounted to $2.5 billion and $2.3 billion in 2020 and 2019, respectively for the Health Plans segment. Management’s discussion and analysis of the changes in Medical Margin is discussed below under “Financial Performance.”
See Notes to Consolidated Financial Statements, Note 16, “Segments,” for more information.
Molina Healthcare, Inc. 2020 Form 10-K | 38
HEALTH PLANS
As of December 31, 2020, the Health Plans segment consisted of health plans operating in 15 states, and served approximately 4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states.
The Health Plans reportable segment includes our regulated health plan operating segments, along with the recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on December 31, 2020, Magellan Complete Care’s operating results were insignificant to our consolidated results of operations for the year ended December 31, 2017, compared with $101 million2020.
TRENDS AND UNCERTAINTIES
For a discussion of the Health Plans segment’s trends, uncertainties and other developments, refer to “Item 1. Business—Our Business,” “—COVID-19 Pandemic,” and “—Legislative and Political Environment.”
FINANCIAL PERFORMANCE
The tables below summarize premium revenue, Medical Margin, and MCR by state health plan and by government program for the periods indicated (dollars in millions):
HEALTH PLANS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| California | $ | 2,109 | | | $ | 259 | | | 87.7 | % | | $ | 2,266 | | | $ | 429 | | | 81.0 | % |
| Florida | 643 | | | 109 | | | 83.0 | | | 734 | | | 144 | | | 80.4 | |
| Illinois | 1,328 | | | 155 | | | 88.3 | | | 1,002 | | | 130 | | | 87.0 | |
| Kentucky | 654 | | | 64 | | | 90.2 | | | — | | | — | | | — | |
| Michigan | 1,587 | | | 249 | | | 84.4 | | | 1,624 | | | 293 | | | 82.0 | |
| Ohio | 2,962 | | | 349 | | | 88.2 | | | 2,553 | | | 267 | | | 89.6 | |
| | | | | | | | | | | |
| Texas | 3,085 | | | 391 | | | 87.3 | | | 2,991 | | | 377 | | | 87.4 | |
| Washington | 3,169 | | | 474 | | | 85.1 | | | 2,695 | | | 305 | | | 88.7 | |
Other (1) | 2,762 | | | 429 | | | 84.5 | | | 2,343 | | | 358 | | | 84.7 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
______________________
(1)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health plans, whose results are not individually significant to our consolidated operating results.
As discussed above, the combination of all the COVID-19 pandemic-related impacts decreased pretax income in 2020 and increased our consolidated MCR in 2020 by approximately 50 basis points. Some of these items increased earnings, such as lower than expected medical costs from the curtailment of utilization that benefited all our state health plans, and a meaningful increase in Medicaid membership, while others served to decrease earnings, such as the temporary, retroactive Medicaid premium refunds and related actions enacted by certain states.
Comments relating to the performance of our health plans in California, Ohio, Texas and Washington, which represent our largest health plans from a premium revenue standpoint, follow:
California. For the year ended December 31, 2016. The increase was due primarily to our issuance2020, Medical Margin declined when compared with 2019, as the lower medical care costs from the curtailment of $330 million aggregate principal amount of senior notes (the 4.875% Notes) due June 15, 2025,utilization were more than offset by retroactive Medicaid premium refunds and $300 million borrowed under our
Credit Facilityunderperformance in the third quarter of 2017. For further details regarding debt financing transactions, please refer to the Notes to Consolidated Financial Statements, Note 11, “Debt.”Marketplace program.
Interest expense increased to $101 million forOhio. For the year ended December 31, 2016,2020, Medical Margin was higher when compared with $66 million for2019, due to higher premiums and improved operating performance in Medicaid. Premium revenues were higher year-over-year, mainly due to increased membership, program changes and rate increases in Medicaid established before COVID-19. The
Molina Healthcare, Inc. 2020 Form 10-K | 39
net effects of COVID-19 had an unfavorable impact on Medical Margins in all programs in 2020, as the retroactive premium refunds exceeded the benefit from lower medical costs due to the curtailment of utilization.
Texas. For the year ended December 31, 2015.2020, premium revenues and Medical Margin were both slightly higher when compared with 2019. Medical Margin increased due to higher premium revenues and a lower MCR in Medicaid, mostly driven by curtailment of utilization related to COVID-19 premiums, partially offset by underperformance in Marketplace. The increase was due primarily to our issuance of $700 million aggregate principal amount of senior notes (the 5.375% Notes) due November 15, 2022,decline in the fourth quarter of 2015.
Interest expense includes non-cash interest expense relating to the amortization of the discount on our long-term debt obligations, which amounted to $32 million, $31 millionMarketplace resulted mainly from lower premiums and $30 millionhigher acuity mix for the yearsnew members we served.
Washington. For the year ended December 31, 2017, 2016, and 2015, respectively.
INCOME TAXES
The revaluation of deferred tax assets2020, Medical Margin was higher when compared with 2019, mainly due to improved results in connection with the Tax Cuts and Jobs Act of 2017 resulted in $54 million additional income tax expenseMedicaid. Medicaid premium revenues increased in the year ended December 31, 2017 ($0.95 per diluted share).2020, due to membership growth. In addition, results in the effective tax benefit for 2017 is less than the statutory tax benefityear ended December 31, 2020, benefited modestly from lower medical costs due to the relatively large amountcurtailment of reported expenses that are not deductible for tax purposes, primarily relatingutilization driven by COVID-19, which was partially offset by COVID-related provider payments mandated by the state in the second quarter of 2020.
PROGRAMS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| Medicaid | $ | 14,265 | | | $ | 1,804 | | | 87.4 | % | | $ | 12,466 | | | $ | 1,497 | | | 88.0 | % |
| Medicare | 2,512 | | | 351 | | | 86.0 | | | 2,243 | | | 330 | | | 85.3 | |
| Marketplace | 1,522 | | | 324 | | | 78.7 | | | 1,499 | | | 476 | | | 68.2 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
Medicaid
Medicaid premium revenue increased $1,799 million in 2020, when compared with 2019, mainly due to goodwill impairment lossesmembership growth and separation costs.premium increases in several states, and the impact from suspension of redeterminations due to COVID-19. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations. These premium increases were partially offset by premium refunds and related actions enacted in several states in response to the lower utilization of medical services stemming from COVID-19.
The Medical Margin of our Medicaid program increased $307 million, or 21%, in 2020 when compared with 2019. The increase was driven by increased premium revenues and margin associated with the membership growth discussed above, and from a reduction in the MCR.
The Medicaid MCR decreased to 87.4% in 2020, from 88.0% in 2019, or 60 basis points. The decrease in income before taxesthe Medicaid MCR in 20162020 was due to improvements across all programs. The MCR benefited from operational improvements and premium increases in several states, but was partially offset by unfavorable effects of COVID-19, including the impact of the premium refunds and related actions, net of lower medical costs due to the curtailment of utilization.
In the third quarter of 2020, we recognized a $10 million premium deficiency reserve (“PDR”) associated with the Puerto Rico Medicaid business. We exited this business on October 31, 2020. The PDR represents the estimated remaining claims and administrative costs that exceed the estimated remaining premiums associated with the contract.
These improvements were partially offset by unfavorable year-over-year changes in prior year reserve development. Prior year reserve development in 2020 was not material; however, 2019 was positively impacted by 100 basis points of favorable reserve development.
Medicare
Medicare premium revenue increased $269 million in 2020, when compared with 2015,2019, primarily due to increases in premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population and increases in quality incentive premium revenues. These increases were partially offset by premium refunds, mainly in MMP, enacted in response to the lower utilization of medical services stemming from COVID-19.
Molina Healthcare, Inc. 2020 Form 10-K | 40
The Medical Margin for Medicare increased $21 million, or 6%, in 2020 when compared with 2019, primarily due to the increase in premium revenue discussed above, partially offset by increases in medical costs PMPM.
The Medicare MCR increased from 85.3% in 2019 to 86.0% in 2020, or 70 basis points. The increase was primarily driven by an increase in medical care costs PMPM, which was mainly attributed to unfavorable changes in member mix, including higher acuity populations. The medical cost PMPM also reflected modestly lower utilization of medical services stemming from COVID-19. The impact of increased medical costs on the MCR was partially offset by the increase in the premium revenue PMPM discussed above.
Marketplace
Marketplace premium revenue increased $23 million in 2020, when compared with 2019, mainly due to increased membership, partially offset by a decrease in premium revenue PMPM. The decrease in premium revenue PMPM was mainly driven by lower pricing, in an effort to be more competitive and generate membership growth, and the impact of more health plans being subject to minimum medical loss ratio rebates when compared with the prior year. The factors decreasing premium revenue PMPM were partially offset by the impact of higher risk adjustment premiums, resulting from higher acuity of our membership.
The Marketplace Medical Margin decreased $152 million in 2020, despite the increase in premium revenues, due to an increase in the MCR compared to 2019.
The Marketplace MCR increased to 78.7% in 2020, compared to 68.2% in 2019. The increase in MCR was driven by the impact of the decrease in premium revenue PMPM discussed above, combined with the relatively large amount of reported expenses that are not deductible for tax purposes, resultedan increase in an effective tax rate in excess of 70% for the full year 2016,medical cost PMPM when compared with 55.5%2019. The higher medical cost PMPM was primarily due to a higher member acuity mix and increased medical costs related to COVID-19. The rebound in utilization for 2015.Marketplace, following the curtailment from COVID-19, has been much more pronounced than our Medicaid and Medicare programs. Additionally, our risk scores, though increased compared to 2019, continue to lag the acuity of our membership.
OTHER
The Other segment includes certain corporate amounts not allocated to the Health Plans segment. In 2020 and 2019, such amounts were immaterial to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION
INTRODUCTIONLIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated health plan subsidiaries generate significant cash flows from premium revenue.revenue and net income. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related health carehealthcare services. AThe majority of the assets held by our regulated health plan subsidiaries areis in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $635 million in 2020, and $1,373 million in 2019, respectively. The parent company contributed capital of $107 million and $43 million in 2020 and 2019, respectively, to our regulated health plan subsidiaries to satisfy statutory capital and surplus requirements.
Cash, cash equivalents and investments at the parent company amounted to $644 million and $997 million as of December 31, 2020, and 2019, respectively. The decrease in 2020 was mainly due to cash used for Magellan Complete Care and other acquisitions, and common stock repurchases. These outflows were partially offset by inflows from net debt financing transactions, and dividends received from regulated health plan subsidiaries, net of contributions, as described above. See further discussion below, in “Investing Activities,” and “Financing Activities.”
Molina Healthcare, Inc. 2020 Form 10-K | 41
Investments
After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board approvedboard-approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or
less (excluding variable rate securities,than 10 years average life for which interest rates are periodically reset) and that the average maturity be three years or less.structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.
We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our non-currentinvestment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets.
Our restricted investments are invested principally in certificates of depositcash, cash equivalents, and U.S. treasuryTreasury securities; we have the ability to hold our non-currentsuch restricted investments until maturity. We also maintain certain funds from the issuance of our 4.875% Notes in a segregated deposit account, a current asset reported as “Restricted investments” in the accompanying consolidated balance sheets. Such investments, while restricted as to their use and held in a segregated deposit account, are classified as available-for-sale based upon our contractual liquidity requirements.
All of our unrestricted investments are classified as current assets and are presented in the table below.assets.
Investment income increased in 2017 compared with 2016, and in 2016 compared with 2015, primarily due to the increase in invested assets in each of 2017 and 2016. See further discussion below in “Liquidity.”
MARKET RISKCash Flow Activities
Our earnings and financial position are exposed to financial market risk relating changes in interest rates, and the resulting impact on investment income and interest expense.
Substantially all of our investments and restricted investments are subject to interest rate risk and will decrease in value if market interest rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates at December 31, 2017, the fair value of our fixed income investments would decrease by approximately $24 million. Declines in interest rates over time will reduce our investment income.
For further information on fair value measurements and our investment portfolio, please refer to the Notes to Consolidated Financial Statements, Note 4, “Fair Value Measurements,” Note 5, “Investments,” and Note 9, “Restricted Investments, Non-current.”
Borrowings under our Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. As of December 31, 2017, $300 million was outstanding under the Credit Facility.
In January 2018, we entered into a bridge credit agreement (Bridge Credit Agreement) with several banks. Under the Bridge Credit Agreement, the banks agreed to lend us up to $550 million to be used to: (i) satisfy conversions of
our 1.125% Convertible Notes; (ii) satisfy and/or refinance indebtedness incurred to satisfy conversion of the 1.125% Convertible Notes; (iii) repay or refinance our Credit Facility; (iv) pay fees and expenses in connection with the foregoing; and, subject to the satisfaction of specified conditions, for general corporate purposes. Borrowings under the Bridge Credit Agreement will bear interest based, at our election, at a base rate or an adjusted LIBOR rate, plus in each case the applicable margin. No amounts are currently outstanding under the Bridge Credit Agreement.
LIQUIDITY
A condensed schedule of cash flows to facilitate our discussion of liquidityare summarized as follows: | | | | Year Ended December 31, | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2016 to 2017 Change | | 2015 to 2016 Change | | 2020 | | 2019 | | Change |
| | (In millions) | | (In millions) |
| Net cash provided by operating activities | $ | 804 |
| | $ | 673 |
| | $ | 1,125 |
| | $ | 131 |
| | $ | (452 | ) | Net cash provided by operating activities | $ | 1,890 | | | $ | 427 | | | $ | 1,463 | |
| Net cash used in investing activities | (1,073 | ) | | (202 | ) | | (1,420 | ) | | (871 | ) | | 1,218 |
| Net cash used in investing activities | (400) | | | (293) | | | (107) | |
| Net cash provided by financing activities | 636 |
| | 19 |
| | 1,085 |
| | 617 |
| | (1,066 | ) | |
| Net increase in cash and cash equivalents | $ | 367 |
| | $ | 490 |
| | $ | 790 |
| | $ | (123 | ) | | $ | (300 | ) | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 225 | | | (552) | | | 777 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | | Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | $ | 1,715 | | | $ | (418) | | | $ | 2,133 | |
Operating Activities
2017 Compared with 2016
Net cash provided by operating activities was $804 million in 2017 compared with $673 million in 2016, an increase of $131 million, due to the following factors:
The combined effect of our 2017 net loss and adjustments to cash provided by operating activities, which included non-cash impairment losses of $470 million and non-cash restructuring charges of $60 million, resulted in a $114 million use of cash.
Receivables and deferred revenue. Cash flows from operations in each year were impacted by the timing of payments we receive from our states. In general, states may delay our premium payments, which we record as a receivable, or they may prepay the following month’s premium payment, which we record as deferred revenue. We typically receive capitation payments monthly;monthly, in advance of payments for medical claims; however, the states in which we operategovernment payors may decide to adjust their payment schedules, which could positively or negatively impactimpacting our reported cash flows from operating activities in any given period. In the current year, the net effect of the timing of premiums received at our California, Florida, Illinois, and Washington health plans positively impacted our cash flows from operating activities in the amount of $325 million.
Amounts dueFor example, government agencies. While amounts due government agencies increased $340 million in 2017, this increase was less than the increase experienced in 2016, resulting in a decrease to cash flows from operations of $132 million. This decrease was due primarily to a decline in the amounts accrued for Health Plans segment programs that mandate medical cost floors or medical cost corridors, under which a portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs. This decrease was partially offset by increased Marketplace risk adjustment accruals.
2016 Compared with 2015
Net cash provided by operating activities was $673 million in 2016, compared with $1,125 million in 2015, a decrease of $452 million. This decrease was due primarily to a $91 million decrease in net income, and the following factors:
Receivables and deferred revenue. Cash flows from operations in each year were impacted by the timing of payments we receive from our states. In general, statespayors may delay our premium payments, which we record as a receivable, or they may prepay the following month’s premium payment, which we record as deferred revenue. We typically receive capitation payments monthly; however,payment.
Net cash provided by operations was $1,890 million in 2020, compared with $427 million of net cash provided in 2019. The $1,463 million increase in year-over-year cash flow was due to cash flow timing benefits from the statesgrowth in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activitiesmembership in any given period. In the current year,2020, and the net effectimpact of the timing of premiums received at our Californiadifferences in governmental receivables and Illinois health plans negatively impacted our cash flows from operating activities.payables.
Medical claims and benefits payable. In 2016, the change in medical claims and benefits payable reduced cash flows from operations by $256 million, primarily because membership and related medical costs grew at a higher rate in 2015 than in 2016, resulting in a lower year-over-year change in 2016.
Amounts due government agencies. In 2016, the change in amounts due government agencies, when compared with the change in 2015, increased cash flows from operations by $271 million, due primarily to increased accruals for Marketplace risk adjustments.
Investing Activities
2017 Compared with 2016
Net cash used in investing activities was $1,073$400 million in 2017,2020, compared with $202$293 million in 2016, an increase of $871 million. Morenet cash was used in investing activities2019, a decrease in 2017 primarily dueyear-over-year cash flow of $107 million. The decrease was mainly attributable to $789 million of increasednet cash paid in the YourCare, Passport and Magellan Complete Care acquisitions, partially offset by decreased purchases of investments as a result of the 2017 financing transactions described below, and $195 million decreased proceeds from sales and maturities of investments.
2016 Compared with 2015
Net cash used in investing activities was $202 million in 2016, compared with $1,420 million in 2015, a decrease of $1,218 million. Less cash was used in investing activities in 2016 primarily due to $840 million increased proceeds from sales and maturities of investments, and a reduction in cash paid in business combinations of $402 million in 2016, compared with 2015.2020.
Financing Activities
2017 Compared with 2016
CashNet cash provided by financing activities was $636$225 million in 2017,2020, compared with $19$552 million of net cash used in 2016.2019, an increase in year-over-year cash flow of $777 million. In 2017,2020, cash inflows included $325$1,429 million from the issuance of the 4.375% and 3.875% Notes and $380 million borrowed under the term loan facility. Cash outflows included the $600 million repayment of the term loan facility, common stock purchases of $606 million, which included $7 million to settle shares purchased in late December 2019, and net cash paid for the net proceeds from our issuance of 4.875% Notes, and borrowings of $300 million under our Credit Facility, with no comparable activity in 2016.
2016 Compared with 2015
Cash provided by financing activities was $19 million in 2016, compared with $1,085 million in 2015. In 2015, we received net proceeds from our fiscal 2015 offerings of the 5.375% Notesaggregate convertible senior notes‑related transactions amounting to $689$42 million. In 2019, cash outflows included net cash paid for the aggregate convertible senior notes-related transactions of $754 million, and $47 million paid for common stock amounting to $373purchases, partially offset by proceeds of $220 million with no comparable activity in 2016.borrowed under the term loan facility.
Molina Healthcare, Inc. 2020 Form 10-K | 42
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.
On a consolidated basis, atas of December 31, 2017,2020, our working capital was $1,954$2,911 million compared with $1,418$2,698 million atas of December 31, 2016.2019. At December 31, 2017,2020, our cash and investments amounted to $6,000$6,165 million, compared with $4,689$4,477 million of cash and investments at December 31, 2016.2019.
Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity”discussion presented above.
Regulatory Capital and Dividend Restrictions
Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these subsidiaries (not including the Magellan Complete Care subsidiaries) was estimated to be approximately $1,310 million at December 31, 2020, compared with $1,110 million at December 31, 2019. We estimate the Magellan Complete Care subsidiaries’ minimum capital and surplus requirement amounted to approximately $230 million at December 31, 2020. The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates.
Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as of December 31, 2020, was approximately $60 million in the aggregate. The subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.
Based on our cash and investments balances as of December 31, 2020, management believes that its regulated wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.
Debt Ratings. Our 5.375% Notes and 4.875% Notes are
Each of our high-yield senior notes is rated “BB-” by Standard & Poor’s, and “B3”“Ba3” by Moody’s Investor Service, Inc. A significant downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants. OurCovenants
The Credit FacilityAgreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios presented below, are computed as defined by the terms of the Credit Facility.
|
| | | |
Credit Facility Financial Covenants | Required Per Agreement | | As of December 31, 2017 |
| | | |
Net leverage ratio | <4.0x | | 3.1x |
Interest coverage ratio | >3.5x | | 6.7x |
Agreement.In addition, the termsindentures governing each of our 4.875% Notes, 5.375% Notes and each of the 1.125% and 1.625% Convertible Notesoutstanding high-yield senior notes contain cross-default provisions with the Credit Facility that are triggered upon an eventdefault by us or any of default underour subsidiaries on any indebtedness in excess of the Credit Facility, and when borrowings under the Credit Facility equal or exceed certain amounts as definedamount specified in the related indentures.applicable indenture. As of December 31, 2017,2020, we were in compliance with all financial and non-financial covenants under the Credit Facility.Agreement and other long-term debt.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Parent CashOur Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and Cash Equivalents. Cash, cash equivalents and investments held by the parent company—our profitability, could have a negative impact on our liquidity.
Molina Healthcare, Inc.—amounted 2020 Form 10-K | 43
Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to $696 millionreport on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations.
It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally has fallen to 6.3% as of December 31, 2017.January 2021, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period to April 2021, with a potential extension from the Biden administration for the public health emergency to remain in place for all of 2021, will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to both serve new members, and ably partner with our state customers for increases in membership.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. We received $245 million, $100 million, and $125 million in dividends fromAs a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries in 2017, 2016,to pay dividends to the parent company, which could reduce the liquidity of the parent company. For more information on our regulatory capital requirements and 2015, respectively. We received $41 million, $1 million and $17 million in dividends from our unregulated subsidiaries during 2017, 2016 and 2015, respectively. See further discussion in thedividend restrictions, refer to Notes to Consolidated Financial Statements, Note 19,15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 22,17, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”
Credit Agreement Borrowing Capacity and Debt Financing. We haveCapacity. As of December 31, 2020, we had available borrowing capacity of $550 million$1 billion under the revolving credit facility of our BridgeCredit Agreement. In addition, the Credit Agreement (which amount is subjectprovides for a $15 million swingline sub-facility and a $100 million letter of credit sub-facility, as well as incremental term loans available to the use of proceeds restrictions set forth in its terms), and $194finance certain acquisitions up to $500 million, under our Credit Facility. On June 6, 2017, we completed the private offering of $330 million aggregate principalplus an unlimited amount of the 4.875% Notes. Assuch term loans as long as we maintain a result of the proceeds from this transaction, we have adequate cash held in a restricted account available to repay the $161 million principal balance outstanding under our 1.625% Convertible Notes, if noteholders exercise their conversion or put rights in 2018.minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt,“Debt.”
Future Uses
Common Stock Purchases. In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Following the purchases completed under a Rule 10b5-1 trading plan from November 2020 through February 11, 2021, there is approximately $219 million remaining available to purchase our common stock through December 31, 2021. See further information in the Notes to Consolidated Financial Statements, Note 13, “Stockholders’ Equity.”
Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated Financial Statements, Note 4, “Business Combinations.”
In September 2020, we entered into a definitive agreement to acquire substantially all the assets of Affinity Health Plan, Inc. The net purchase price for further information.the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.
2017 Restructuring Plan. As previously disclosed,In September 2020, we estimate that our 2017 Restructuringcompleted the acquisition of certain assets of Passport Health Plan, will reduce annualized run-rate expenses byInc. The purchase consideration included estimated contingent consideration of approximately $300$46 million to $400 million when completed by the end of 2018. Asas of December 31, 2017, we achieved $235 million2020. Half this amount is payable later in 2021, with the remainder payable in early 2022, subject to review and agreement among us and the seller. The second half payment is contingent upon the outcome of these run-rate reductionscertain legal challenges.
Molina Healthcare, Inc. 2020 Form 10-K | 44
Outcome of ACA Litigation. As described above in “Health Plans Segment—Trends and Uncertainties,” the U.S. Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision regarding the constitutionality and severability of the individual mandate. The ACA remains in effect pending the issuance of the Supreme Court’s opinion. A decision by the eliminationSupreme Court that the entirety of administrative costs (somethe ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Potential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. In 2020, utilization was curtailed, but could rebound to more normal levels in 2021. Increased demand for medical services, which we are classified aspresently unable to predict the timing or magnitude, could result in a significant increase in medical care costs) on an annualized basis. Ascosts and related provider claims payments.
Also, as described above in “Item 1. Business—COVID-19 Pandemic,” we have been subject to premium refunds and related actions as a result of December 31, 2017 we had also achieved an undetermined amount ofthe pandemic. In 2020, various states enacted temporary premium refunds and related actions in response to the reduced demand for medical care cost savings on an annualized basis through the re-negotiation of various medical provider contracts and the restructuringservices stemming from COVID-19, which resulted in a reduction of our direct delivery operations. We expectmedical margin. In some cases, these premium actions were retroactive to have more visibility intoearlier periods in 2020, or as early as the actual value of these medical care cost savings later in 2018. We incurred substantially allbeginning of the costs associated withstates’ fiscal years in 2019. Beginning in the 2017 Restructuring Plansecond quarter of 2020, we have recognized retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. We recognized $564 million related to these retroactive premium actions, in 2017. The following table illustratesthe aggregate, in 2020.
It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the ultimate outcomes could differ materially from our current estimates as a result of run-rate savings associated with the 2017 Restructuring Plan:changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
|
| | | | | | |
Estimated Savings Expected to be Realized by Reportable Segment | | Health Plans | | Other | | Total |
| | (In millions) |
General and administrative expenses | | $65 | | $92 to $152 | | $157 to $217 |
Medical care costs | | $126 to $166 | | $17 | | $143 to $183 |
| | $191 to $231 | | $109 to $169 | | $300 to $400 |
Shelf Registration Statement.Regulatory Capital Requirements and Dividend Restrictions. We have a shelf registration statement on file with the Securitiesability, and Exchange Commissionhave committed to register an unlimited amountprovide, additional capital to each of any combination of debt or equity securities in one or more offerings. Specific information regarding the terms and securities being offered will be provided at the time of an offering. Proceeds from future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, investments in or extensions of credit to our subsidiaries and the financing of possible acquisitions or business expansion.
Uses
Regulatory Capital Requirements. In 2017, 2016, and 2015, we contributed capital of $370 million, $338 million, and $320 million, respectively, to our health plans subsidiariesas necessary to satisfyensure compliance with minimum statutory net worthcapital requirements.
The Molina Healthcare Charitable Foundation. In August 2020, we announced our commitment of $150 million to fund The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable foundation. We contributed $15 million to the Foundation in the fourth quarter of 2020.
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity, include the following:
•Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information.
•Contractual provisions that may adjust or limit revenue or profit. For a comprehensivediscussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
•Quality incentives. For a discussion of this topic, refer to the Notes to Consolidated Financial Statements, Note 19, “Commitments2, “Significant Accounting Policies.”
•Business Combinations, and Contingencies—Regulatory Capital RequirementsGoodwill and Dividend Restrictions.intangible assets, net. At December 31, 2020, goodwill and intangible assets, net, represented approximately 10% of total assets and 45% of total stockholders’ equity, compared with 3% and 9%, respectively, at December 31, 2019.For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” Note 4, “Business Combinations,” and Note 9, “Goodwill and Intangible Assets, Net.”
Convertible Senior Notes.Molina Healthcare, Inc. 2020 Form 10-K | 45
MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.
The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
For claims incurred more than three months before the financial statement date, we mainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.
For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our ultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be affected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.
Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the
Molina Healthcare, Inc. 2020 Form 10-K | 46
magnitude or severity of claims, uncertainties related to our entry into new geographical markets or provision of services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior period development that is reported as part of “Components of medical care costs related to: “Prior years” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current year” in the table presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.
Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable variability and uncertainty inherent in such estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that would result if we change our completion factors for the fourth through the twelfth months preceding December 31, 2020, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. The following tables do not include amounts relating to our recent acquisitions of Magellan Complete Care and Passport. Dollar amounts are in millions.
| | | | | |
| Increase (Decrease) in Estimated Completion Factors | Increase
(Decrease)
in Medical Claims
and
Benefits Payable |
| (6)% | $ | 491 | |
| (4)% | 327 | |
| (2)% | 164 | |
| 2% | (164) | |
| 4% | (327) | |
| 6% | (491) | |
The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that would result if we alter our assumed medical care cost trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
| | | | | |
| (Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease)
Increase
in Medical Claims
and
Benefits Payable |
| (6)% | $ | (179) | |
| (4)% | (120) | |
| (2)% | (60) | |
| 2% | 60 | |
| 4% | 120 | |
| 6% | 179 | |
There are many related factors working in conjunction with one another that determine the accuracy of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Notes to Consolidated Financial Statements, Note 11, “Debt,2, “Significant Accounting Policies,” for a detailed discussion of our Convertible Senior Notes. Both our 1.625% Convertible Notes and our 1.125% Convertible Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger.recent accounting pronouncements that affect us.
Molina Healthcare, Inc. 2020 Form 10-K | 47
The stock price trigger for the 1.625% Notes is $75.51 per share. The 1.625% Convertible Notes did not meet this trigger in the quarter ended December 31, 2017. However, on contractually specified dates beginning in 2018, holders of the 1.625% Convertible Notes may require us to repurchase some or all of such notes. In addition, beginning May 15, 2018 until August 19, 2018, holders may convert some or all of the 1.625% Convertible Notes. Because of these put and conversion features, the 1.625% Convertible Notes are reported in current portion of long-term debt as of December 31, 2017. As described above, we have adequate cash held in a restricted account available to repay the 1.625% Convertible Notes, if noteholders exercise their conversion or put rights in 2018.
The stock price trigger for the 1.125% Notes is $53.00 per share. The 1.125% Convertible Notes met this trigger in the quarter ended December 31, 2017, and are convertible to cash through at least March 31, 2018. Because the 1.125% Convertible Notes may be converted into cash within 12 months, the $550 million carrying amount is reported in current portion of long-term debt as of December 31, 2017. For economic reasons related to the trading market for our 1.125% Convertible Notes, we believe that the amount of the notes that may be converted over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Convertible Notes becomes closed or restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Notes, which normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that marginal premium, holders of our 1.125% Convertible Notes may elect to convert the notes to cash. If conversion requests are received, the settlement of the notes must be paid in cash pursuant to the terms of the relevant indentures. We have sufficient available cash, combined with borrowing capacity available under our Credit Facility and Bridge Credit Agreement, to fund conversions should they occur.
Exchange Offers. We may from time to time seek to retire or purchase material amounts of our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. For example, on December 7, 2017, we announced that on December 6, 2017 we priced a synthetic exchange transaction with a limited number of holders of our 1.625% Convertible Notes pursuant to which we agreed to repurchase from such noteholders an aggregate of $141 million principal amount of our 1.625% Convertible Notes and simultaneously issue to such noteholders an aggregate of 2.6 million shares of our common stock registered under the shelf registration statement described above. Future repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
CONTRACTUAL OBLIGATIONS
In the table below, we present our contractual obligations as of December 31, 2017. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table.
Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we believe these other agreements do not contain material non-cancelable commitments.
|
| | | | | | | | | | | | | | | | | | | |
| | Total (1) | | 2018 | | 2019-2020 | | 2021-2022 | | 2023 and after |
| | (In millions) |
| Medical claims and benefits payable | $ | 2,192 |
| | $ | 2,192 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Principal amount of debt (2) | 2,041 |
| | — |
| | 550 |
| | 1,000 |
| | 491 |
|
| Amounts due government agencies | 1,542 |
| | 1,542 |
| | — |
| | — |
| | — |
|
| Lease financing obligations | 410 |
| | 17 |
| | 37 |
| | 39 |
| | 317 |
|
| Interest on long-term debt | 428 |
| | 73 |
| | 140 |
| | 119 |
| | 96 |
|
| Operating leases | 262 |
| | 67 |
| | 109 |
| | 52 |
| | 34 |
|
| Purchase commitments | 11 |
| | 6 |
| | 5 |
| | — |
| | — |
|
| | $ | 6,886 |
| | $ | 3,897 |
| | $ | 841 |
| | $ | 1,210 |
| | $ | 938 |
|
| |
(1) | As of December 31, 2017, we have recorded approximately $13 million of unrecognized tax benefits. The table does not contain this amount because we cannot reasonably estimate when or if such amount may be settled. For further information, refer to Notes to Consolidated Financial Statements, Note 13, “Income Taxes.” |
| |
(2) | Represents the principal amounts due on our 5.375% Notes due 2022, 1.125% Convertible Notes due 2020, 4.875% Notes due 2025, Credit Facility due 2022, and our 1.625% Convertible Notes due 2044. The amounts in the table reflect the 1.625% Convertible Notes’ contractual maturity date in 2044; however, on specified dates beginning in 2018, holders of the 1.625% Convertible Notes may convert, or may require us to repurchase some or all of the 1.625% Convertible Notes, as described in the Notes to Consolidated Financial Statements, Note 11, “Debt.” |
Commitments and Contingencies. We are not a party to off-balance sheet financing arrangements, except for operating leases which are disclosed in the Notes to Consolidated Financial Statements, Note 19, “Commitments and Contingencies.”
INFLATIONPROPERTIES
We use various strategiesown and lease certain real properties to mitigatesupport the negative effects of health care cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of health care services. Through these contracted providers, our health plans emphasize preventive health care and appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product introductions, demands from health care providers and customers, applicable regulations, or other factors may affect our ability to control health care costs.
COMPLIANCE COSTS
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates. Our most significant accounting estimates relate to:
Health Plans segment medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Note 10, “Medical Claims and Benefits Payable.”
Health Plans segment contractual provisions that may adjust or limit revenue or profit. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
Health Plans segment quality incentives. For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
Goodwill and intangible assets, net. See discussion below, and refer to the Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net.”
MEDICAL CLAIMS AND BENEFITS PAYABLE - HEALTH PLANS SEGMENT
“Other” medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of operations. As of December 31, 2017 and 2016, we recorded non-risk provider payables relating to such intermediary arrangements of approximately $122 million and $225 million, respectively.
The determinationbusiness operations of our liability for medical claims and benefits payable is particularly important to the determination of our financial position and results of operations in any given period. Such determination of our liability requires the application of a significant degree of judgment by our management.
As a result, the determination of our liability for medical claims and benefits payable is subject to an inherent degree of uncertainty. Our medical care costs include amounts that have been paid by us through the reporting date, as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. Such medical care cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.
The most important element in estimating our medical care costs is our estimate for fee-for-service claims which have been incurred but not yet paid by us. These fee-for-service costs that have been incurred but have not been paid at the reporting date are collectively referred to as medical costs that are incurred but not paid (IBNP). Our IBNP, as reported on our balance sheet, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors. As indicated in the graph above, our estimated IBNP liability represented $1,717 million of our total medical claims and benefits payable of $2,192 million as of December 31, 2017.
The factors we consider when estimating our IBNP include, without limitation:
claims receipt and payment experience (and variations in that experience),
changes in membership,
provider billing practices,
health care service utilization trends,
cost trends,
product mix,
seasonality,
prior authorization of medical services,
benefit changes,
known outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes,
changes to Medicaid fee schedules, and
the incidence of high dollar or catastrophic claims.
Our assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring point through the calculation of a base estimate of IBNP, a further provision for adverse claims development, and an estimate of the administrative costs of settling all claims incurred through the reporting date. The base estimate of IBNP is derived through application of claims payment completion factors and trended PMPM cost estimates.
For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to measure the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting date, based on historical payment patterns.
The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2017 that would have resulted had we changed our completion factors for the fifth through the twelfth months preceding December 31, 2017, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | |
| Increase (Decrease) in Estimated Completion Factors | Increase
(Decrease)
in Medical Claims
and
Benefits Payable |
| (6)% | $ | 527 |
|
| (4)% | 351 |
|
| (2)% | 176 |
|
| 2% | (176 | ) |
| 4% | (351 | ) |
| 6% | (527 | ) |
For the four months of service immediately prior to the reporting date, actual claims paid are not a reliable measure of our ultimate liability, given the inherent delay between the patient/physician encounter and the actual submission of a claim for payment. For these months of service, we estimate our claims liability based on trended PMPM cost estimates. These estimates are designed to reflect recent trends in payments and expense, utilization patterns, authorized services, and other relevant factors. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2017 that would have resulted had we altered our trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
| | | |
| (Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease) Increase in Medical Claims and Benefits Payable |
| (6)% | $ | (263 | ) |
| (4)% | (176 | ) |
| (2)% | (88 | ) |
| 2% | 88 |
|
| 4% | 176 |
|
| 6% | 263 |
|
The following per-share amounts are based on a combined federal and state statutory tax rate of 37%, and 56 million diluted shares outstanding for the year ended December 31, 2017. Assuming a hypothetical 1% change in completion factors from those used in our calculation of IBNP at December 31, 2017, net income for the year ended December 31, 2017 would increase or decrease by approximately $55 million, or $0.98 per diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at December 31, 2017, net income for the year ended December 31, 2017 would increase or decrease by approximately $28 million, or $0.49 per diluted share. The corresponding figures for a 5% change in completion factors and PMPM cost estimates would be $276 million, or $4.90 per diluted share, and $138 million, or $2.45 per diluted share, respectively.
It is important to note that any change in the estimate of either completion factors or trended PMPM costs would usually be accompanied by a change in the estimate of the other component, and that a change in one component would almost always compound rather than offset the resulting distortion to net income. When completion factors are overestimated, trended PMPM costs tend to be underestimated. Both circumstances will create an overstatement of net income. Likewise, when completion factors are underestimated, trended PMPM costs tend to be overestimated, creating an understatement of net income. In other words, changes in estimates involving both completion factors and trended PMPM costs will usually act to drive estimates of claims liabilities and medical care costs in the same direction. If completion factors were overestimated by 1%, resulting in an overstatement of net income by approximately $55 million, it is likely that trended PMPM costs would be underestimated, resulting in an additional overstatement of net income.
After we have established our base IBNP reserve through the application of completion factors and trended PMPM cost estimates, we then compute an additional liability, once again using actuarial techniques, to account for adverse development in our claims payments for which the base actuarial model is not intended to and does not account. We refer to this additional liability as the provision for adverse claims development. The provision for adverse claims development is a component of our overall determination of the adequacy of our IBNP. It is intended to capture the potential inadequacy of our IBNP estimate as a result of our inability to adequately assess the impact of factors such as changes in the speed of claims receipt and payment, the relative magnitude or severity of claims, known outbreaks of disease such as influenza, our entry into new geographical markets, our provision of services to new populations such as the aged, blind or disabled, changes to state-controlled fee schedules upon which a large proportion of our provider payments are based, modifications and upgrades to our claims processing systems and practices, and increasing medical costs. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNP after considering the base actuarial model reserves and the provision for adverse claims development.
We also include in our IBNP liability an estimate of the administrative costs of settling all claims incurred through the reporting date.
The development of IBNP is a continuous process that we monitor and refine on a monthly basis as additional claims payment information becomes available. As additional information becomes known to us, we adjust our actuarial model accordingly.
On a monthly basis, we review and update our estimated IBNP and the methods used to determine that liability. Any adjustments, if appropriate, are reflected in the period known.reportable segments. While we believe our current estimatesand anticipated facilities are adequate we haveto meet our operational needs in the past been requirednear term, we continually evaluate the adequacy of our properties for our anticipated future needs.
LEGAL PROCEEDINGS
Kentucky RFP. On September 4, 2020, Anthem Kentucky Managed Care Plan, Inc. brought an action in Franklin County Circuit Court against the Kentucky Finance and Administration Cabinet, the Kentucky Cabinet for Health and Family Services and all of the winning bidder health plans, including Molina Healthcare of Kentucky, Inc., Civil Action No. 20-CI-00719. In its action, Anthem requested that the court disqualify Molina Healthcare of Kentucky, find that the Kentucky RFP scoring was erroneous and violated procedures or was arbitrary and capricious, set aside the contract awards and conduct a new RFP evaluation process, and award injunctive relief, including stopping the implementation of the contracts awarded under the RFP. On September 28, 2020, the court issued a temporary restraining order preserving the status quo, and on October 23, 2020, the court issued a temporary injunction directing that the RFP readiness review and open enrollment proceed with six health plans, including both Anthem and Molina Healthcare.
On December 22, 2020, the court granted a motion by UnitedHealthcare of Kentucky LTD. to increase significantly our claims reservesassert a cross-claim against the Kentucky Cabinet for periods previously reported,Health and mayFamily Services, which sought in part a disqualification of Anthem or Molina Healthcare and a declaratory judgment that the Kentucky Medicaid program proceed with only five health plans. On December 23, 2020, Humana Health Plan, Inc. brought a separate action against the Commonwealth of Kentucky and the winning bidder health plans, including Molina Healthcare of Kentucky, Civil Action 20-CI-00987. On January 11, 2021, both actions were consolidated before the Franklin County Circuit Court. Humana requests a declaratory judgment finding that the Commonwealth violated the Medicaid contract by allocating Passport members to Molina Healthcare for 2021 so that Passport members would instead be requiredallocated to do so againHumana and other winning health plans, or, in the future. Any significant increasesalternative, monetary damages from the Commonwealth.
Molina Healthcare believes it has meritorious defenses to prior periodthe claims reserves would materially decrease reported earningsof Anthem, United, and Humana, and intends to vigorously defend its position, including its twice being a winning bidder of the Kentucky Medicaid RFP, and its protection of the continuity of care for the period in which the adjustment is made.
In our judgment, the estimates for completion factors will likely prove to be more accurate than trended PMPM cost estimates because estimated completion factors arePassport Medicaid members. This matter remains subject to fewer variables in their determination. Specifically, completion factors are developed over long periodssignificant additional legal proceedings, and no assurances can be given regarding the ultimate outcome. Under the court’s temporary injunction, Molina Healthcare of time,Kentucky continues to operate under its contract and are most likelyprovide care to be affected by changes in claims receipt and payment experience and by provider billing practices. Trended PMPM cost estimates, while affected by the same factors, will also be influenced by health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, outbreaks of disease or increased incidence of illness, provider contract changes, changes toKentucky Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. As discussed above, however, changes in estimates involving trended PMPM costs will almost always be accompanied by changes in estimates involving completion factors, and vice versa. In such circumstances, changes in estimation involving both completion factors and trended PMPM costs will act to drive estimates of claims liabilities (and therefore medical care costs) in the same direction.
members.
Refer to the Notes to Consolidated Financial Statements, Note 10, “Medical Claims15, “Commitments and Benefits Payable,” for additional information regarding the specific factors used to determine our changes in estimates of IBNP, as well as a table presenting the components of the change in our medical claims and benefits payable, for all periods presented in the accompanying consolidated financial statements.
GOODWILL AND INTANGIBLE ASSETS, NET
At December 31, 2017, goodwill and intangible assets, net, represented approximately 3% of total assets and 19% of total stockholders’ equity, compared with 10% and 46%, respectively, at December 31, 2016.
In the year ended December 31, 2017, we recorded impairment losses relating to goodwill and intangible assets, net, of $470 million. These losses included $269 million primarily in connection with our Florida, New Mexico, and Illinois health plans. The impairments at Florida and New Mexico were the result of our recent Medicaid contract losses. The Illinois impairment was the result of management’s determination, in the course of its annual impairment assessment of the goodwill of the Illinois health plan, that the plan’s future cash flow projections were insufficient to produce an estimated fair value in excess of its carrying amount. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago. Also during 2017, we recorded impairment losses of $28 million for our Molina Medicaid Solutions segment because management determined that Molina Medicaid Solutions will provide fewer future benefits for its support of the Health Plans segment. In addition, we recorded impairment losses of $173 million for our Other segment, primarily relating to our Pathways business, because management determined that Pathways will not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized, but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Such events or circumstances may include experienced or expected operating cash-flow deterioration or losses, significant loss of membership, loss of state funding, loss of state contracts, and other factors.
We conduct our required annual impairment testing of goodwill during the fourth quarter of each year for each of our reporting units that have recorded goodwill. Our reporting units comprise our health plan subsidiaries, and our Molina Medicaid Solutions and Pathways subsidiaries. When testing goodwill for impairment, we may first assess qualitative factors, such as industry and market factors, cost factors, and changes in overall performance, to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. If our qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, we perform the quantitative assessment. We may also elect to bypass the qualitative assessment and proceed directly to the quantitative assessment. We believe that the dynamic economic and political environments in which we operate often necessitate the performance of the quantitative test to prove that goodwill is not impaired on an annual basis. As of December 31, 2017, we performed qualitative impairment tests for our Michigan, Washington and Wisconsin health plans; based on these tests, we do not believe that it is more likely than not that the carrying value of these reporting units would exceed their estimated fair values.
As of December 31, 2017, we performed quantitative impairment tests for our Florida, Illinois, New Mexico, New York and South Carolina health plans, and our Molina Medicaid Solutions subsidiary.
We estimated the fair values of our reporting units using the higher of the income approach using discounted cash flows, or the asset liquidation method. For the annual impairment test, the base year in the reporting units’ discounted cash flows is derived from the most recent annual financial budgeting cycle, for which the planning process commences in the fourth quarter of the year. When computing discounted cash flows, we make assumptions about a wide variety of internal and external factors, and consider what the reporting unit’s selling price would be in an orderly transaction between market participants at the measurement date. Significant assumptions include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods, and discount rates. When determining the discount rate, we consider the overall level of inherent risk of the reporting unit, and the expected rate an outside investor would expect to earn. The asset liquidation method is computed as total assets minus total liabilities, excluding intangible assets and liabilities.
Key assumptions in our cash flow projections, including changes in membership, premium rates, health care and operating cost trends, and contract renewals and the procurement of new contracts, are consistent with those used in our long-range business plan and annual planning process. If these assumptions differ from actual results, the outcome of our goodwill impairment tests could be adversely affected.
Goodwill is impaired if the carrying amount of the reporting unit exceeds its estimated fair value. This excess is recorded as an impairment loss, and adjusted if necessary for the impact of tax deductible goodwill. The loss recognized may not exceed the total goodwill allocated to the reporting unit.
For our South Carolina health plan and our Molina Medicaid Solutions subsidiary, whose goodwill was not impaired as of December 31, 2017, their estimated fair values exceeded their carrying amounts by 46% and 9%, respectively. The Molina Medicaid Solutions’ reporting unit recorded a goodwill impairment loss as of September 30, 2017; therefore its estimated fair value did not substantially exceed its carrying amount as of December 31, 2017.
Refer to Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,Contingencies—Legal Proceedings,” for further details on the goodwill impairment losses recorded in 2017.information.
No goodwill impairment charges were recorded in the years ended December 31, 2016, or 2015.
Intangible Assets
Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of potential impairment indicators, including the ability of our health plan subsidiaries to obtain the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed.
Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the greater of the undiscounted cash flows that are expected to result from the use of the asset or related group of assets, or its value under the asset liquidation method. If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment.
Refer to Notes to Consolidated Financial Statements, Note 8, “Goodwill and Intangible Assets, Net,” for further details on the intangible impairment losses recorded in 2017.
No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in the years ended December 31, 2016, or 2015.
SUPPLEMENTAL INFORMATION
FINANCIAL MEASURES THAT SUPPLEMENT U.S. GAAP (NON-GAAP FINANCIAL MEASURES)
We use these non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance to the performance of other public companies in the health care industry.
EBITDA*
We believe that EBITDA* is particularly helpful in assessing our ability to meet the cash demands of our operating units. The following table reconciles net (loss) income, which we believe to be the most comparable GAAP measure, to EBITDA*.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions) |
| Net (loss) income | $ | (512 | ) | | $ | 52 |
| | $ | 143 |
|
| Adjustments: | | | | | |
| Depreciation, and amortization of intangible assets and capitalized software | 165 |
| | 161 |
| | 120 |
|
| Interest expense | 118 |
| | 101 |
| | 66 |
|
| Income tax (benefit) expense | (100 | ) | | 153 |
| | 179 |
|
| EBITDA* | $ | (329 | ) | | $ | 467 |
| | $ | 508 |
|
ADJUSTED NET (LOSS) INCOME*MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ADJUSTED NET (LOSS) INCOME PER SHARE*ISSUER PURCHASES OF EQUITY SECURITIES
We believe that adjusted net (loss) income* and adjusted net (loss) income per diluted share* are very helpful in assessing our financial performance exclusive of the non-cash impact of the amortization of purchased intangibles. The following table reconciles net (loss) income, which we believe to be the most comparable GAAP measure, to adjusted net (loss) income*.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In millions, except diluted per-share amounts) |
| | Amount | | Per share | | Amount | | Per share | | Amount | | Per share |
| Net (loss) income | $ | (512 | ) | | $ | (9.07 | ) | | $ | 52 |
| | $ | 0.92 |
| | $ | 143 |
| | $ | 2.58 |
|
| Adjustment: | | | | | | | | | | | |
| Amortization of intangible assets | 30 |
| | 0.55 |
| | 32 |
| | 0.57 |
| | 18 |
| | 0.32 |
|
Income tax effect (1) | (11 | ) | | (0.20 | ) | | (12 | ) | | (0.21 | ) | | (7 | ) | | (0.12 | ) |
| Amortization of intangible assets, net of tax effect | 19 |
| | 0.35 |
| | 20 |
| | 0.36 |
| | 11 |
| | 0.20 |
|
| Adjusted net (loss) income* | $ | (493 | ) | | $ | (8.72 | ) | | $ | 72 |
| | $ | 1.28 |
| | $ | 154 |
| | $ | 2.78 |
|
________________________
| |
(1) | Income tax effect of adjustments calculated at the blended federal and state statutory tax rate of 37%. |
OTHER FINANCIAL DATA
SELECTED FINANCIAL DATA
(In millions, except per-share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statements of Operations Data: | | | | | | | | | |
| Revenue: | | | | | | | | | |
Premium revenue (1) | $ | 18,854 |
| | $ | 16,445 |
| | $ | 13,261 |
| | $ | 9,035 |
| | $ | 6,179 |
|
Service revenue (2) | 521 |
| | 539 |
| | 253 |
| | 210 |
| | 205 |
|
| Premium tax revenue | 438 |
| | 468 |
| | 397 |
| | 294 |
| | 172 |
|
Health insurer fees reimbursed (1) | — |
| | 292 |
| | 244 |
| | 108 |
| | — |
|
| Investment income and other revenue | 70 |
| | 38 |
| | 23 |
| | 20 |
| | 33 |
|
| Total revenue | 19,883 |
| | 17,782 |
| | 14,178 |
| | 9,667 |
| | 6,589 |
|
| Operating expenses: | | | | | | | | | |
| Medical care costs | 17,073 |
| | 14,774 |
| | 11,794 |
| | 8,076 |
| | 5,380 |
|
Cost of service revenue (2) | 492 |
| | 485 |
| | 193 |
| | 157 |
| | 161 |
|
| General and administrative expenses | 1,594 |
| | 1,393 |
| | 1,146 |
| | 765 |
| | 666 |
|
| Premium tax expenses | 438 |
| | 468 |
| | 397 |
| | 294 |
| | 172 |
|
| Health insurer fee | — |
| | 217 |
| | 157 |
| | 89 |
| | — |
|
| Depreciation and amortization | 137 |
| | 139 |
| | 104 |
| | 93 |
| | 73 |
|
| Impairment losses | 470 |
| | — |
| | — |
| | — |
| | — |
|
| Restructuring and separation costs | 234 |
| | — |
| | — |
| | — |
| | — |
|
| Total operating expenses | 20,438 |
| | 17,476 |
| | 13,791 |
| | 9,474 |
| | 6,452 |
|
| Operating (loss) income | (555 | ) | | 306 |
| | 387 |
| | 193 |
| | 137 |
|
| Other expenses, net: | | | | | | | | | |
| Interest expense | 118 |
| | 101 |
| | 66 |
| | 57 |
| | 52 |
|
| Other (income) expense, net | (61 | ) | | — |
| | (1 | ) | | 1 |
| | 4 |
|
| Total other expenses, net | 57 |
| | 101 |
| | 65 |
| | 58 |
| | 56 |
|
| (Loss) income from continuing operations before income taxes | (612 | ) | | 205 |
| | 322 |
| | 135 |
| | 81 |
|
| Income tax (benefit) expense | (100 | ) | | 153 |
| | 179 |
| | 73 |
| | 36 |
|
| (Loss) income from continuing operations | (512 | ) | | 52 |
| | 143 |
| | 62 |
| | 45 |
|
Income from discontinued operations, net of tax benefit (3) | — |
| | — |
| | — |
| | — |
| | 8 |
|
| Net (loss) income | $ | (512 | ) | | $ | 52 |
| | $ | 143 |
| | $ | 62 |
| | $ | 53 |
|
Basic net (loss) income per share: (4) | | | | | | | | | |
| (Loss) income from continuing operations | $ | (9.07 | ) | | $ | 0.93 |
| | $ | 2.75 |
| | $ | 1.34 |
| | $ | 0.98 |
|
| (Loss) income from discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) | | 0.18 |
|
| Basic net (loss) income per share | $ | (9.07 | ) | | $ | 0.93 |
| | $ | 2.75 |
| | $ | 1.33 |
| | $ | 1.16 |
|
Diluted net (loss) income per share: (4) | | | | | | | | | |
| (Loss) income from continuing operations | $ | (9.07 | ) | | $ | 0.92 |
| | $ | 2.58 |
| | $ | 1.30 |
| | $ | 0.96 |
|
| (Loss) income from discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) | | 0.17 |
|
| Diluted net (loss) income per share | $ | (9.07 | ) | | $ | 0.92 |
| | $ | 2.58 |
| | $ | 1.29 |
| | $ | 1.13 |
|
| Weighted average shares outstanding: | | | | | | | | | |
| Basic | 56 |
| | 55 |
| | 52 |
| | 47 |
| | 46 |
|
| Diluted | 56 |
| | 56 |
| | 56 |
| | 48 |
| | 47 |
|
| |
(1) | The Centers for Medicare and Medicaid Services (CMS) incorporates the Health Insurer Fee (HIF) in our Medicare and |
Marketplace premium rates. We have therefore reclassified such amounts in our consolidated statements of operations to premium revenue, from health insurer fees reimbursed, for all applicable periods presented. The amounts reclassified from health insurer fees reimbursed to premium revenue for years ended December 31, 2016, 2015, and 2014, amounted to $53 million, $20 million and $12 million, respectively.
| |
(2) | Service revenue and cost of service revenue include revenue and costs generated by our Pathways subsidiary, which was acquired on November 1, 2015. |
| |
(3) | Income from discontinued operations is presented net of income tax benefit, which was insignificant in 2017, 2016, 2015 and 2014 and $10, in 2013, respectively. |
| |
(4) | Source data for calculations in thousands. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 3,186 |
| | $ | 2,819 |
| | $ | 2,329 |
| | $ | 1,539 |
| | $ | 936 |
|
| Total assets | 8,471 |
| | 7,449 |
| | 6,576 |
| | 4,435 |
| | 2,988 |
|
Long-term debt, including current portion (1) | 2,169 |
| | 1,645 |
| | 1,609 |
| | 887 |
| | 770 |
|
| Total liabilities | 7,134 |
| | 5,800 |
| | 5,019 |
| | 3,425 |
| | 2,095 |
|
| Stockholders’ equity | 1,337 |
| | 1,649 |
| | 1,557 |
| | 1,010 |
| | 893 |
|
| |
(1) | Includes long-term debt and lease financing obligations. |
STOCK REPURCHASE PROGRAMS
Purchases of common stock made by us, or on our behalf during the quarter ended December 31, 2017,2020, including shares withheld by us to satisfy our employees’ income tax obligations, are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Average Price Paid per
Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 — October 31 | 1,000 | | | $ | 188.27 | | | — | | | $ | 500,000,000 | |
| November 1 — November 30 | — | | | $ | — | | | 323,000 | | | $ | 432,000,000 | |
| December 1 — December 31 | — | | | $ | — | | | 443,000 | | | $ | 341,000,000 | |
| 1,000 | | | $ | 188.27 | | | 766,000 | | | |
_______________________
Molina Healthcare, Inc. 2020 Form 10-K | 32
|
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | | Average Price Paid per
Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares Authorized to Be Purchased Under the Plans or Programs |
| October 1 — October 31 | 163 |
| | $ | 68.76 |
| | — |
| | $ | — |
|
| November 1 — November 30 | — |
| | $ | — |
| | — |
| | $ | — |
|
| December 1 — December 31 | 12,699 |
| | $ | 73.83 |
| | — |
| | $ | — |
|
| | 12,862 |
| | $ | 73.77 |
| | — |
| | |
| |
(1) | During the quarter ended December 31, 2017, we withheld 12,862 shares of common stock under our 2011 Equity Incentive Plan to settle our employees’ income tax obligations. |
(2)In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Under this program, pursuant to a Rule 10b5-1 trading plan, we purchased approximately 766,000 shares of our common stock for $159 million in November and December 2020 (average cost of $208.37 per share).
STOCK PERFORMANCE GRAPH
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the U.S. Securities and Exchange Commission (SEC)(“SEC”) (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into a filing.
The following line graph compares the percentage change in the cumulative total return on our common stock against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (S(the “S&P 500)500”) and a peer group index for the five-year period from December 31, 20122015 to December 31, 2017.2020. The comparison assumes $100 was invested on December 31, 2012,2015, in our common stock and in each of the foregoing indices and
assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
The 2020 peer group index consists of Acadia Healthcare Company, Inc. (ACHC), Anthem, Inc. (ANTM), Centene Corporation (CNC), Cigna Corporation (CI), Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA), Humana, Inc. (HUM), Laboratory Corporation of America Holdings (LH), Magellan Health, Inc. (MGLN), Quest Diagnostics Incorporated (DGX), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS).
Molina Healthcare, Inc. 2020 Form 10-K | 33
The 2019 peer group index, used in last year’s Annual Report on Form 10-K and also set forth above, consists of Centene Corporation (CNC), Cigna Corporation (CI), DaVita HealthCare Partners, Inc. (DVA), Humana Inc. (HUM), Magellan Health, Inc. (MGLN), Team Health Holdings, Inc. (TMH), Tenet Healthcare Corporation (THC), Triple-S Management Corporation (GTS), Universal American Corporation (UAM), Universal Health Services, Inc. (UHS) and WellCare Health Plans, Inc. (WCG).
STOCK PRICE RANGETRADING SYMBOL AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of February 23, 2018,12, 2021, there were 3412 registered holders of record of our common stock.
stock, including Cede & Co. To date we have not paid cash dividends on our common stock. We currently intend to retain any future earnings to fund our projected business operations. However, we intend to periodically evaluate our cash position to determine whether to pay a cash dividend in the future.
Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the state departments of insurance in the states in which we operate or may operate, as well as requirements of the government-sponsored health programs in which we participate. Additionally, the indentures governing our outstanding senior notes and the credit agreement governing the revolving credit facility contain various covenants that limit our ability to pay dividends on our common stock.
Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual and regulatory restrictions. For more information regarding restrictions on the ability of our regulated subsidiaries to pay dividends to us, please see the Notes to Consolidated Financial Statements, Note 19,15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Molina Healthcare, Inc. 2020 Form 10-K | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
Management’s discussion and analysis of financial condition and results of operations as of and for the years ended December 31, 2020 and 2019, are presented in the sections that follow. Our MD&A as of and for the year ended December 31, 2018, may be found in our 2019 Annual Report on Form 10-K, which prior disclosure is incorporated by reference herein.
OVERVIEW
Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 15 states, we served approximately 4.0 million members as of December 31, 2020. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states. These health plans are generally operated by our respective wholly owned subsidiaries in those states, and licensed as health maintenance organizations (“HMOs”).
2020 HIGHLIGHTS
Highlights of our 2020 results included the following:
•Net income per diluted share of $11.23, with net income of $673 million;
•Total revenue of $19.4 billion, which increased 15% compared to 2019;
•Premium revenue of $18.3 billion, which increased 13% compared to 2019;
•Consolidated medical care ratio (“MCR”) of 86.5%, compared to 85.8% in 2019;
•We estimate the net effect of COVID decreased net income for the full year 2020 by $2.30 per diluted share, and increased the MCR by approximately 50 basis points;
•Results were positively impacted by certain non-recurring and other items, mainly including the proceeds from the Marketplace risk corridor judgment;
•Membership, including Magellan Complete Care, increased approximately 900,000 members to 4.2 million at December 31, 2020. Roughly half of this increase was from our recent acquisitions of Magellan Complete Care, Passport in Kentucky and YourCare in New York, with the balance from suspension of Medicaid redeterminations noted below;
•General and administrative expense ratio (“G&A ratio”) of 7.6%, compared to 7.7% in 2019; and
•After-tax margin of 3.5%, despite the underperformance of our Marketplace business.
COVID Impacts
As noted above, the combined net effect of COVID-related impacts reduced our 2020 earnings and included:
•A decrease in medical costs due to COVID-related utilization curtailment throughout most of year of approximately $420 million, which was partially offset by direct care related to COVID patients;
•Premium refunds and related actions enacted by a number of our state customers in response to the COVID-related utilization curtailment of approximately $564 million, including $401 million recognized in the fourth quarter, mostly associated with recently-enacted risk sharing corridors;
•An increase in our G&A spending on activities related to COVID; and
•Membership growth due to suspension of redeterminations in Medicaid.
Growth Initiatives
We made major strides in 2020 related to our growth strategy. On December 31, 2020, we closed on the acquisition of Magellan Complete Care. In September 2020, we signed a definitive agreement to purchase the net assets of Affinity Health Plan in New York, which we expect to close as early as the second quarter of 2021. We closed on the Passport acquisition in Kentucky on September 1, 2020, and we closed on the YourCare acquisition in upstate New York on July 1, 2020. Each of these acquisitions involve financially underperforming health plans, but with stable membership and revenue bases. We believe they provide attractive opportunities for margin improvement, operating leverage and membership growth. Our growth initiatives continue to be anchored by our capital allocation priorities: first, organic growth; second, inorganic growth through accretive acquisitions; and third, programmatically returning excess capital to shareholders.
In summary, we continue to perform well, our fundamentals remain strong, and we continue to grow revenue as a result of our focus on top-line growth.
Molina Healthcare, Inc. 2020 Form 10-K | 35
FINANCIAL RESULTS SUMMARY
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| (In millions, except per-share amounts) |
| Premium revenue | $ | 18,299 | | | $ | 16,208 | |
| Less: medical care costs | 15,820 | | | 13,905 | |
| Medical margin | 2,479 | | | 2,303 | |
MCR (1) | 86.5 | % | | 85.8 | % |
| | | |
| Other revenues: | | | |
| Premium tax revenue | 649 | | | 489 | |
| Health insurer fees reimbursed | 271 | | | — | |
| Investment income and other revenue | 76 | | | 132 | |
| Marketplace risk corridor judgment | 128 | | | — | |
| | | |
| General and administrative expenses | 1,480 | | | 1,296 | |
G&A ratio (2) | 7.6 | % | | 7.7 | % |
| | | |
| Premium tax expenses | 649 | | | 489 | |
| Health insurer fees | 277 | | | — | |
| Depreciation and amortization | 88 | | | 89 | |
| Other | 31 | | | 6 | |
| Operating income | 1,078 | | | 1,044 | |
| | | |
| Interest expense | 102 | | | 87 | |
| Other expenses (income), net | 15 | | | (15) | |
| | | |
| Income before income tax expense | 961 | | | 972 | |
| Income tax expense | 288 | | | 235 | |
| Net income | $ | 673 | | | $ | 737 | |
| | | |
| Net income per diluted share | $ | 11.23 | | | $ | 11.47 | |
| | | |
| Diluted weighted average shares outstanding | 59.9 | | | 64.2 | |
| | | |
| Other Key Statistics: | | | |
Ending Membership (3) | 4.0 | | | 3.3 | |
| Effective income tax rate | 30.0 | % | | 24.2 | % |
After-tax margin (2) | 3.5 | % | | 4.4 | % |
__________________
(1)MCR represents medical care costs as a percentage of premium revenue.
(2)G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income as a percentage of total revenue.
(3)Does not include approximately 200,000 Magellan Complete Care members from the acquisition closed on December 31, 2020.
Molina Healthcare, Inc. 2020 Form 10-K | 36
CONSOLIDATED RESULTS
NET INCOME AND OPERATING INCOME
Net income amounted to $673 million, or $11.23 per diluted share in 2020, compared with net income of $737 million, or $11.47 per diluted share, in 2019. Our after-tax margin decreased to 3.5% for 2020, compared to 4.4% for 2019.
Operating income was $1,078 million in 2020, compared with $1,044 million in 2019. We estimate that the net effect of COVID-19 decreased pretax income in 2020 by approximately $180 million, or $2.30 per diluted share. Operating income increased in 2020, despite the net effect of COVID-19, due to growth in membership and premiums, and a $128 million legal judgment for Marketplace risk corridor claims related to prior years, partially offset by a year-over-year decline in the underlying performance of our Marketplace business.
Net income per share in 2020 was favorably impacted by the reduction in common shares outstanding as a result of our share repurchase programs in 2020. See further discussion and information in “Liquidity and Financial Condition,” below, and in the Notes to Consolidated Financial Statements, Note 3, “Net Income Per Share.”
PREMIUM REVENUE
Premium revenue increased $2,091 million, or 13%, in 2020, when compared with 2019.
The higher premium revenues reflect increased membership, primarily in Medicaid, and include the impact from the YourCare and Passport acquisitions. In 2020, we added 337,000 members from our acquisition of the Kentucky Passport business on September 1, 2020, and 47,000 members from our acquisition of the New York YourCare business on July 1, 2020. Suspension of redeterminations in Medicaid was also a driver for membership growth in 2020.
The increase in premium revenues from these acquisitions was slightly offset by the decline in membership associated with our exit of operations in Puerto Rico in 2020. The increase in premium revenue was net of approximately $564 million recognized for COVID-related premium refunds and related actions that were enacted in several states in response to lower utilization of medical services resulting from COVID-19.
MEDICAL CARE RATIO
The consolidated MCR in 2020 increased to 86.5%, compared to 85.8% in 2019, primarily due to the unfavorable net effect of COVID-19 impacts in all our lines of business. We estimate that the net effect of COVID-19 increased our consolidated MCR in 2020 by approximately 50 basis points.
Prior year reserve development in 2020 was not material. The year ended December 31, 2019, was positively impacted by 80 basis points of favorable reserve development, primarily in the Medicaid program.
PREMIUM TAX REVENUE AND EXPENSES
The premium tax ratio increased to 3.4% in 2020, compared with 2.9% in 2019. The current year ratio increase was mainly due to the state of Illinois’ implementation of a managed care organization provider assessment in the third quarter of 2019. Additionally, the state of California implemented a new managed care organization assessment, effective January 1, 2020, after the prior assessment mechanism expired on June 30, 2019.
HEALTH INSURER FEES (“HIF”)
In 2020, HIF expense amounted to $277 million and HIF reimbursements amounted to $271 million. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. Due to the reinstatement of the HIF in 2020, our effective tax rate was higher in 2020 compared with 2019.
The Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020.
INVESTMENT INCOME AND OTHER REVENUE
Investment income and other revenue decreased to $76 million in 2020, compared with $132 million in 2019. The year-over-year decrease was consistent with our expectation and was due to the low interest rate environment.
MARKETPLACE RISK CORRIDOR JUDGMENT
In June 2020, the U.S. Court of Federal Claims granted us judgment in the amount of $128 million for 2014, 2015, and 2016 Marketplace risk corridor claims, following a favorable U.S. Supreme Court decision in April 2020 which
Molina Healthcare, Inc. 2020 Form 10-K | 37
held §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute. We received the judgment in October 2020 and, consistent with the timing of the cash receipt, the gain was recognized in our fourth quarter 2020 financial results and reported in “Marketplace risk corridor judgment” in our consolidated statements of income. The judgment did not create additional Minimum MLR rebates.
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
The G&A expense ratio decreased slightly to 7.6% in 2020 compared with 7.7% in 2019, due to increased revenues, partially offset by increased costs associated with the COVID-19 pandemic, due to added operational protocols, technology implementations, and benefits for our employees, and also from increased costs associated with acquisitions.
INTEREST EXPENSE
Interest expense increased to $102 million in 2020, compared with $87 million in 2019. Additional interest expense relating to the 4.375% Notes issued in June 2020, and the 3.875% Notes issued in November 2020, was partially offset by the decrease in interest expense resulting from the settlement of the convertible senior notes in January 2020. As further described below in “Liquidity,” a portion of the net proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the term loan facility of our prior credit agreement. Additionally, a portion of the net proceeds from the 3.875% Notes offering was used to repay the $330 million principal amount outstanding under the 4.875% Notes.
OTHER EXPENSES (INCOME), NET
In 2020, we recognized losses on debt repayment of $15 million in connection with repayment of our term loan facility and other financing transactions. In 2019, we recognized a gain on debt repayment of $15 million, in connection with convertible senior notes repayment transactions.
INCOME TAXES
Income tax expense amounted to $288 million in 2020, or 30.0% of pretax income, compared with income tax expense of $235 million in 2019, or 24.2% of the pretax income. The effective tax rate was higher in 2020 due to higher nondeductible expenses in 2020, primarily related to the nondeductible HIF. As discussed above, the HIF was not applicable in 2019 and has been repealed for years after 2020.
REPORTABLE SEGMENTS
As of December 31, 2020, we had two reportable segments: the Health Plans segment, and the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.
The key metrics used to assess the performance of our Health Plans segment are premium revenue, margin and MCR. MCR represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Margin for our Health Plans segment is also referred to as “Medical Margin.” Medical Margin amounted to $2.5 billion and $2.3 billion in 2020 and 2019, respectively for the Health Plans segment. Management’s discussion and analysis of the changes in Medical Margin is discussed below under “Financial Performance.”
See Notes to Consolidated Financial Statements, Note 16, “Segments,” for more information.
Molina Healthcare, Inc. 2020 Form 10-K | 38
HEALTH PLANS
As of December 31, 2020, the Health Plans segment consisted of health plans operating in 15 states, and served approximately 4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states.
The Health Plans reportable segment includes our regulated health plan operating segments, along with the recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on December 31, 2020, Magellan Complete Care’s operating results were insignificant to our consolidated results of operations for the year ended December 31, 2020.
TRENDS AND UNCERTAINTIES
For a discussion of the Health Plans segment’s trends, uncertainties and other developments, refer to “Item 1. Business—Our Business,” “—COVID-19 Pandemic,” and “—Legislative and Political Environment.”
FINANCIAL PERFORMANCE
The tables below summarize premium revenue, Medical Margin, and MCR by state health plan and by government program for the periods indicated (dollars in millions):
HEALTH PLANS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| California | $ | 2,109 | | | $ | 259 | | | 87.7 | % | | $ | 2,266 | | | $ | 429 | | | 81.0 | % |
| Florida | 643 | | | 109 | | | 83.0 | | | 734 | | | 144 | | | 80.4 | |
| Illinois | 1,328 | | | 155 | | | 88.3 | | | 1,002 | | | 130 | | | 87.0 | |
| Kentucky | 654 | | | 64 | | | 90.2 | | | — | | | — | | | — | |
| Michigan | 1,587 | | | 249 | | | 84.4 | | | 1,624 | | | 293 | | | 82.0 | |
| Ohio | 2,962 | | | 349 | | | 88.2 | | | 2,553 | | | 267 | | | 89.6 | |
| | | | | | | | | | | |
| Texas | 3,085 | | | 391 | | | 87.3 | | | 2,991 | | | 377 | | | 87.4 | |
| Washington | 3,169 | | | 474 | | | 85.1 | | | 2,695 | | | 305 | | | 88.7 | |
Other (1) | 2,762 | | | 429 | | | 84.5 | | | 2,343 | | | 358 | | | 84.7 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
______________________
(1)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health plans, whose results are not individually significant to our consolidated operating results.
As discussed above, the combination of all the COVID-19 pandemic-related impacts decreased pretax income in 2020 and increased our consolidated MCR in 2020 by approximately 50 basis points. Some of these items increased earnings, such as lower than expected medical costs from the curtailment of utilization that benefited all our state health plans, and a meaningful increase in Medicaid membership, while others served to decrease earnings, such as the temporary, retroactive Medicaid premium refunds and related actions enacted by certain states.
Comments relating to the performance of our health plans in California, Ohio, Texas and Washington, which represent our largest health plans from a premium revenue standpoint, follow:
California. For the year ended December 31, 2020, Medical Margin declined when compared with 2019, as the lower medical care costs from the curtailment of utilization were more than offset by retroactive Medicaid premium refunds and underperformance in the Marketplace program.
Ohio. For the year ended December 31, 2020, Medical Margin was higher when compared with 2019, due to higher premiums and improved operating performance in Medicaid. Premium revenues were higher year-over-year, mainly due to increased membership, program changes and rate increases in Medicaid established before COVID-19. The
Molina Healthcare, Inc. 2020 Form 10-K | 39
net effects of COVID-19 had an unfavorable impact on Medical Margins in all programs in 2020, as the retroactive premium refunds exceeded the benefit from lower medical costs due to the curtailment of utilization.
Texas. For the year ended December 31, 2020, premium revenues and Medical Margin were both slightly higher when compared with 2019. Medical Margin increased due to higher premium revenues and a lower MCR in Medicaid, mostly driven by curtailment of utilization related to COVID-19 premiums, partially offset by underperformance in Marketplace. The decline in Marketplace resulted mainly from lower premiums and higher acuity mix for the new members we served.
Washington. For the year ended December 31, 2020, Medical Margin was higher when compared with 2019, mainly due to improved results in Medicaid. Medicaid premium revenues increased in the year ended December 31, 2020, due to membership growth. In addition, results in the year ended December 31, 2020, benefited modestly from lower medical costs due to the curtailment of utilization driven by COVID-19, which was partially offset by COVID-related provider payments mandated by the state in the second quarter of 2020.
PROGRAMS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| Medicaid | $ | 14,265 | | | $ | 1,804 | | | 87.4 | % | | $ | 12,466 | | | $ | 1,497 | | | 88.0 | % |
| Medicare | 2,512 | | | 351 | | | 86.0 | | | 2,243 | | | 330 | | | 85.3 | |
| Marketplace | 1,522 | | | 324 | | | 78.7 | | | 1,499 | | | 476 | | | 68.2 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
Medicaid
Medicaid premium revenue increased $1,799 million in 2020, when compared with 2019, mainly due to membership growth and premium increases in several states, and the impact from suspension of redeterminations due to COVID-19. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations. These premium increases were partially offset by premium refunds and related actions enacted in several states in response to the lower utilization of medical services stemming from COVID-19.
The Medical Margin of our Medicaid program increased $307 million, or 21%, in 2020 when compared with 2019. The increase was driven by increased premium revenues and margin associated with the membership growth discussed above, and from a reduction in the MCR.
The Medicaid MCR decreased to 87.4% in 2020, from 88.0% in 2019, or 60 basis points. The decrease in the Medicaid MCR in 2020 was due to improvements across all programs. The MCR benefited from operational improvements and premium increases in several states, but was partially offset by unfavorable effects of COVID-19, including the impact of the premium refunds and related actions, net of lower medical costs due to the curtailment of utilization.
In the third quarter of 2020, we recognized a $10 million premium deficiency reserve (“PDR”) associated with the Puerto Rico Medicaid business. We exited this business on October 31, 2020. The PDR represents the estimated remaining claims and administrative costs that exceed the estimated remaining premiums associated with the contract.
These improvements were partially offset by unfavorable year-over-year changes in prior year reserve development. Prior year reserve development in 2020 was not material; however, 2019 was positively impacted by 100 basis points of favorable reserve development.
Medicare
Medicare premium revenue increased $269 million in 2020, when compared with 2019, primarily due to increases in premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population and increases in quality incentive premium revenues. These increases were partially offset by premium refunds, mainly in MMP, enacted in response to the lower utilization of medical services stemming from COVID-19.
Molina Healthcare, Inc. 2020 Form 10-K | 40
The Medical Margin for Medicare increased $21 million, or 6%, in 2020 when compared with 2019, primarily due to the increase in premium revenue discussed above, partially offset by increases in medical costs PMPM.
The Medicare MCR increased from 85.3% in 2019 to 86.0% in 2020, or 70 basis points. The increase was primarily driven by an increase in medical care costs PMPM, which was mainly attributed to unfavorable changes in member mix, including higher acuity populations. The medical cost PMPM also reflected modestly lower utilization of medical services stemming from COVID-19. The impact of increased medical costs on the MCR was partially offset by the increase in the premium revenue PMPM discussed above.
Marketplace
Marketplace premium revenue increased $23 million in 2020, when compared with 2019, mainly due to increased membership, partially offset by a decrease in premium revenue PMPM. The decrease in premium revenue PMPM was mainly driven by lower pricing, in an effort to be more competitive and generate membership growth, and the impact of more health plans being subject to minimum medical loss ratio rebates when compared with the prior year. The factors decreasing premium revenue PMPM were partially offset by the impact of higher risk adjustment premiums, resulting from higher acuity of our membership.
The Marketplace Medical Margin decreased $152 million in 2020, despite the increase in premium revenues, due to an increase in the MCR compared to 2019.
The Marketplace MCR increased to 78.7% in 2020, compared to 68.2% in 2019. The increase in MCR was driven by the impact of the decrease in premium revenue PMPM discussed above, combined with an increase in medical cost PMPM when compared with 2019. The higher medical cost PMPM was primarily due to a higher member acuity mix and increased medical costs related to COVID-19. The rebound in utilization for Marketplace, following the curtailment from COVID-19, has been much more pronounced than our Medicaid and Medicare programs. Additionally, our risk scores, though increased compared to 2019, continue to lag the acuity of our membership.
OTHER
The Other segment includes certain corporate amounts not allocated to the Health Plans segment. In 2020 and 2019, such amounts were immaterial to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated health plan subsidiaries generate significant cash flows from premium revenue and net income. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related healthcare services. The majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $635 million in 2020, and $1,373 million in 2019, respectively. The parent company contributed capital of $107 million and $43 million in 2020 and 2019, respectively, to our regulated health plan subsidiaries to satisfy statutory capital and surplus requirements.
Cash, cash equivalents and investments at the parent company amounted to $644 million and $997 million as of December 31, 2020, and 2019, respectively. The decrease in 2020 was mainly due to cash used for Magellan Complete Care and other acquisitions, and common stock repurchases. These outflows were partially offset by inflows from net debt financing transactions, and dividends received from regulated health plan subsidiaries, net of contributions, as described above. See further discussion below, in “Investing Activities,” and “Financing Activities.”
Molina Healthcare, Inc. 2020 Form 10-K | 41
Investments
After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.
We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets.
Our restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets.
Cash Flow Activities
Our cash flows are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | Change |
| (In millions) |
| Net cash provided by operating activities | $ | 1,890 | | | $ | 427 | | | $ | 1,463 | |
| Net cash used in investing activities | (400) | | | (293) | | | (107) | |
| Net cash provided by (used in) financing activities | 225 | | | (552) | | | 777 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | $ | 1,715 | | | $ | (418) | | | $ | 2,133 | |
Operating Activities
We typically receive capitation payments monthly, in advance of payments for medical claims; however, government payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government payors may delay our premium payments, or they may prepay the following month’s premium payment.
Net cash provided by operations was $1,890 million in 2020, compared with $427 million of net cash provided in 2019. The $1,463 million increase in year-over-year cash flow was due to cash flow timing benefits from the growth in membership in 2020, and the net impact of timing differences in governmental receivables and payables.
Investing Activities
Net cash used in investing activities was $400 million in 2020, compared with $293 million of net cash used in 2019, a decrease in year-over-year cash flow of $107 million. The decrease was mainly attributable to net cash paid in the YourCare, Passport and Magellan Complete Care acquisitions, partially offset by decreased purchases of investments in 2020.
Financing Activities
Net cash provided by financing activities was $225 million in 2020, compared with $552 million of net cash used in 2019, an increase in year-over-year cash flow of $777 million. In 2020, cash inflows included $1,429 million from the issuance of the 4.375% and 3.875% Notes and $380 million borrowed under the term loan facility. Cash outflows included the $600 million repayment of the term loan facility, common stock purchases of $606 million, which included $7 million to settle shares purchased in late December 2019, and net cash paid for the aggregate convertible senior notes‑related transactions amounting to $42 million. In 2019, cash outflows included net cash paid for the aggregate convertible senior notes-related transactions of $754 million, and $47 million paid for common stock purchases, partially offset by proceeds of $220 million borrowed under the term loan facility.
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FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.
On a consolidated basis, as of December 31, 2020, our working capital was $2,911 million compared with $2,698 million as of December 31, 2019. At December 31, 2020, our cash and investments amounted to $6,165 million, compared with $4,477 million of cash and investments at December 31, 2019.
Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity”discussion presented above.
Regulatory Capital and Dividend Restrictions
Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these subsidiaries (not including the Magellan Complete Care subsidiaries) was estimated to be approximately $1,310 million at December 31, 2020, compared with $1,110 million at December 31, 2019. We estimate the Magellan Complete Care subsidiaries’ minimum capital and surplus requirement amounted to approximately $230 million at December 31, 2020. The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates.
Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as of December 31, 2020, was approximately $60 million in the aggregate. The subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities.
Based on our cash and investments balances as of December 31, 2020, management believes that its regulated wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.
Debt Ratings
Each of our high-yield senior notes is rated “BB-” by Standard & Poor’s, and “Ba3” by Moody’s Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios are computed as defined by the terms of the Credit Agreement.
In addition, the indentures governing each of our outstanding high-yield senior notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As of December 31, 2020, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity.
Molina Healthcare, Inc. 2020 Form 10-K | 43
Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations.
It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally has fallen to 6.3% as of January 2021, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period to April 2021, with a potential extension from the Biden administration for the public health emergency to remain in place for all of 2021, will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to both serve new members, and ably partner with our state customers for increases in membership.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. As a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which could reduce the liquidity of the parent company. For more information on our regulatory capital requirements and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 17, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”
Credit Agreement Borrowing Capacity. As of December 31, 2020, we had available borrowing capacity of $1 billion under the revolving credit facility of our Credit Agreement. In addition, the Credit Agreement provides for a $15 million swingline sub-facility and a $100 million letter of credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to $500 million, plus an unlimited amount of such term loans as long as we maintain a minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”
Future Uses
Common Stock Purchases. In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Following the purchases completed under a Rule 10b5-1 trading plan from November 2020 through February 11, 2021, there is approximately $219 million remaining available to purchase our common stock through December 31, 2021. See further information in the Notes to Consolidated Financial Statements, Note 13, “Stockholders’ Equity.”
Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated Financial Statements, Note 4, “Business Combinations.”
In September 2020, we entered into a definitive agreement to acquire substantially all the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.
In September 2020, we completed the acquisition of certain assets of Passport Health Plan, Inc. The purchase consideration included estimated contingent consideration of approximately $46 million as of December 31, 2020. Half this amount is payable later in 2021, with the remainder payable in early 2022, subject to review and agreement among us and the seller. The second half payment is contingent upon the outcome of certain legal challenges.
Molina Healthcare, Inc. 2020 Form 10-K | 44
Outcome of ACA Litigation. As described above in “Health Plans Segment—Trends and Uncertainties,” the U.S. Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision regarding the constitutionality and severability of the individual mandate. The ACA remains in effect pending the issuance of the Supreme Court’s opinion. A decision by the Supreme Court that the entirety of the ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Potential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. In 2020, utilization was curtailed, but could rebound to more normal levels in 2021. Increased demand for medical services, which we are presently unable to predict the timing or magnitude, could result in a significant increase in medical care costs and related provider claims payments.
Also, as described above in “Item 1. Business—COVID-19 Pandemic,” we have been subject to premium refunds and related actions as a result of the pandemic. In 2020, various states enacted temporary premium refunds and related actions in response to the reduced demand for medical services stemming from COVID-19, which resulted in a reduction of our medical margin. In some cases, these premium actions were retroactive to earlier periods in 2020, or as early as the beginning of the states’ fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized retroactive premium actions that we believe to be probable, and where the ultimate premium amount is reasonably estimable. We recognized $564 million related to these retroactive premium actions, in the aggregate, in 2020.
It is possible that certain states could increase the level of existing premium refunds, and it is also possible that other states could implement some form of retroactive premium refund in the future. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Regulatory Capital Requirements and Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital requirements.
The Molina Healthcare Charitable Foundation. In August 2020, we announced our commitment of $150 million to fund The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable foundation. We contributed $15 million to the Foundation in the fourth quarter of 2020.
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity, include the following:
•Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information.
•Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
•Quality incentives. For a discussion of this topic, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
•Business Combinations, and Goodwill and intangible assets, net. At December 31, 2020, goodwill and intangible assets, net, represented approximately 10% of total assets and 45% of total stockholders’ equity, compared with 3% and 9%, respectively, at December 31, 2019.For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” Note 4, “Business Combinations,” and Note 9, “Goodwill and Intangible Assets, Net.”
Molina Healthcare, Inc. 2020 Form 10-K | 45
MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, and various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or ancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or other incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we assume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have been reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.
The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
For claims incurred more than three months before the financial statement date, we mainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and the claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.
For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our ultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and assumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be affected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.
Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the
Molina Healthcare, Inc. 2020 Form 10-K | 46
magnitude or severity of claims, uncertainties related to our entry into new geographical markets or provision of services to new populations, changes in state-controlled fee schedules, and modifications or upgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior period development that is reported as part of “Components of medical care costs related to: “Prior years” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current year” in the table presented in Note 10. Assuming stability in the size of our membership, the use of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.
Because of the significant degree of judgment involved in estimation of our IBNP liability, there is considerable variability and uncertainty inherent in such estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that would result if we change our completion factors for the fourth through the twelfth months preceding December 31, 2020, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. The following tables do not include amounts relating to our recent acquisitions of Magellan Complete Care and Passport. Dollar amounts are in millions.
| | | | | |
| Increase (Decrease) in Estimated Completion Factors | Increase
(Decrease)
in Medical Claims
and
Benefits Payable |
| (6)% | $ | 491 | |
| (4)% | 327 | |
| (2)% | 164 | |
| 2% | (164) | |
| 4% | (327) | |
| 6% | (491) | |
The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that would result if we alter our assumed medical care cost trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
| | | | | |
| (Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease)
Increase
in Medical Claims
and
Benefits Payable |
| (6)% | $ | (179) | |
| (4)% | (120) | |
| (2)% | (60) | |
| 2% | 60 | |
| 4% | 120 | |
| 6% | 179 | |
There are many related factors working in conjunction with one another that determine the accuracy of our estimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on a change in estimate. Given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” for a discussion of recent accounting pronouncements that affect us.
Molina Healthcare, Inc. 2020 Form 10-K | 47
PROPERTIES
As of December 31, 2017, the Health Plans segment leased a total of 71 facilities, the Molina Medicaid Solutions segment leased a total of 13 facilities and the Other segment leased a total of 260 facilities. We own a 186,000 square-foot office building in Troy, Michigan and a 24,000 square-foot mixed use (office and clinic) facility in Pomona, California underlease certain real properties to support the business operations of our Health Plans segment. We own a 26,700 square foot data center in Albuquerque, New Mexico and 42 properties in Pennsylvania, which are primarily residential housing facilities, under our Other segment.reportable segments. While we believe our current and anticipated facilities will beare adequate to meet our operational needs in the near term, we continually evaluate the adequacy of our properties for our anticipated future needs.
LEGAL PROCEEDINGS
Kentucky RFP. On September 4, 2020, Anthem Kentucky Managed Care Plan, Inc. brought an action in Franklin County Circuit Court against the Kentucky Finance and Administration Cabinet, the Kentucky Cabinet for Health and Family Services and all of the winning bidder health plans, including Molina Healthcare of Kentucky, Inc., Civil Action No. 20-CI-00719. In its action, Anthem requested that the court disqualify Molina Healthcare of Kentucky, find that the Kentucky RFP scoring was erroneous and violated procedures or was arbitrary and capricious, set aside the contract awards and conduct a new RFP evaluation process, and award injunctive relief, including stopping the implementation of the contracts awarded under the RFP. On September 28, 2020, the court issued a temporary restraining order preserving the status quo, and on October 23, 2020, the court issued a temporary injunction directing that the RFP readiness review and open enrollment proceed with six health plans, including both Anthem and Molina Healthcare.
On December 22, 2020, the court granted a motion by UnitedHealthcare of Kentucky LTD. to assert a cross-claim against the Kentucky Cabinet for Health and Family Services, which sought in part a disqualification of Anthem or Molina Healthcare and a declaratory judgment that the Kentucky Medicaid program proceed with only five health plans. On December 23, 2020, Humana Health Plan, Inc. brought a separate action against the Commonwealth of Kentucky and the winning bidder health plans, including Molina Healthcare of Kentucky, Civil Action 20-CI-00987. On January 11, 2021, both actions were consolidated before the Franklin County Circuit Court. Humana requests a declaratory judgment finding that the Commonwealth violated the Medicaid contract by allocating Passport members to Molina Healthcare for 2021 so that Passport members would instead be allocated to Humana and other winning health plans, or, in the alternative, monetary damages from the Commonwealth.
Molina Healthcare believes it has meritorious defenses to the claims of Anthem, United, and Humana, and intends to vigorously defend its position, including its twice being a winning bidder of the Kentucky Medicaid RFP, and its protection of the continuity of care for Passport Medicaid members. This matter remains subject to significant additional legal proceedings, and no assurances can be given regarding the ultimate outcome. Under the court’s temporary injunction, Molina Healthcare of Kentucky continues to operate under its contract and provide care to Kentucky Medicaid members.
Refer to the Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Legal Proceedings,” for further information.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
STOCK REPURCHASE PROGRAMS
Purchases of common stock made by us, or on our behalf during the quarter ended December 31, 2020, including shares withheld by us to satisfy our employees’ income tax obligations, are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Average Price Paid per
Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 — October 31 | 1,000 | | | $ | 188.27 | | | — | | | $ | 500,000,000 | |
| November 1 — November 30 | — | | | $ | — | | | 323,000 | | | $ | 432,000,000 | |
| December 1 — December 31 | — | | | $ | — | | | 443,000 | | | $ | 341,000,000 | |
| 1,000 | | | $ | 188.27 | | | 766,000 | | | |
_______________________
Molina Healthcare, Inc. 2020 Form 10-K | 32
(1)During the three months ended December 31, 2020, we withheld approximately 1,000 shares of common stock to settle employee income tax obligations for releases of awards granted under the Molina Healthcare, Inc. 2019 Equity Incentive Plan. For further information refer to Notes to Consolidated Financial Statements, Note 13, “Stockholders' Equity.”
(2)In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Under this program, pursuant to a Rule 10b5-1 trading plan, we purchased approximately 766,000 shares of our common stock for $159 million in November and December 2020 (average cost of $208.37 per share).
STOCK PERFORMANCE GRAPH
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the U.S. Securities and Exchange Commission (“SEC”) (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into a filing.
The following line graph compares the percentage change in the cumulative total return on our common stock against the cumulative total return of the Standard & Poor’s Corporation Composite 500 Index (the “S&P 500”) and a peer group index for the foreseeablefive-year period from December 31, 2015 to December 31, 2020. The comparison assumes $100 was invested on December 31, 2015, in our common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
The 2020 peer group index consists of Acadia Healthcare Company, Inc. (ACHC), Anthem, Inc. (ANTM), Centene Corporation (CNC), Cigna Corporation (CI), Community Health Systems, Inc. (CYH), HCA Healthcare, Inc. (HCA), Humana, Inc. (HUM), Laboratory Corporation of America Holdings (LH), Magellan Health, Inc. (MGLN), Quest Diagnostics Incorporated (DGX), Tenet Healthcare Corporation (THC) and Universal Health Services, Inc. (UHS).
Molina Healthcare, Inc. 2020 Form 10-K | 33
The 2019 peer group index, used in last year’s Annual Report on Form 10-K and also set forth above, consists of Centene Corporation (CNC), Cigna Corporation (CI), DaVita HealthCare Partners, Inc. (DVA), Humana Inc. (HUM), Magellan Health, Inc. (MGLN), Team Health Holdings, Inc. (TMH), Tenet Healthcare Corporation (THC), Triple-S Management Corporation (GTS), Universal American Corporation (UAM), Universal Health Services, Inc. (UHS) and WellCare Health Plans, Inc. (WCG).
STOCK TRADING SYMBOL AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of February 12, 2021, there were 12 registered holders of record of our common stock, including Cede & Co. To date we are continuinghave not paid cash dividends on our common stock. We currently intend to retain any future earnings to fund our projected business operations. However, we intend to periodically evaluate our employee and operational growth prospectscash position to determine ifwhether to pay a cash dividend in the future. Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the state departments of insurance in the states in which we operate or may operate, as well as requirements of the government-sponsored health programs in which we participate. Additionally, the indentures governing our outstanding senior notes and credit agreement contain various covenants that limit our ability to pay dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual and regulatory restrictions. For more information regarding restrictions on the ability of our regulated subsidiaries to pay dividends to us, please see the Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions.”
Molina Healthcare, Inc. 2020 Form 10-K | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
Management’s discussion and analysis of financial condition and results of operations as of and for the years ended December 31, 2020 and 2019, are presented in the sections that follow. Our MD&A as of and for the year ended December 31, 2018, may be found in our 2019 Annual Report on Form 10-K, which prior disclosure is incorporated by reference herein.
OVERVIEW
Molina Healthcare, Inc., a FORTUNE 500 company, provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 15 states, we served approximately 4.0 million members as of December 31, 2020. In addition, in connection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states. These health plans are generally operated by our respective wholly owned subsidiaries in those states, and licensed as health maintenance organizations (“HMOs”).
2020 HIGHLIGHTS
Highlights of our 2020 results included the following:
•Net income per diluted share of $11.23, with net income of $673 million;
•Total revenue of $19.4 billion, which increased 15% compared to 2019;
•Premium revenue of $18.3 billion, which increased 13% compared to 2019;
•Consolidated medical care ratio (“MCR”) of 86.5%, compared to 85.8% in 2019;
•We estimate the net effect of COVID decreased net income for the full year 2020 by $2.30 per diluted share, and increased the MCR by approximately 50 basis points;
•Results were positively impacted by certain non-recurring and other items, mainly including the proceeds from the Marketplace risk corridor judgment;
•Membership, including Magellan Complete Care, increased approximately 900,000 members to 4.2 million at December 31, 2020. Roughly half of this increase was from our recent acquisitions of Magellan Complete Care, Passport in Kentucky and YourCare in New York, with the balance from suspension of Medicaid redeterminations noted below;
•General and administrative expense ratio (“G&A ratio”) of 7.6%, compared to 7.7% in 2019; and
•After-tax margin of 3.5%, despite the underperformance of our Marketplace business.
COVID Impacts
As noted above, the combined net effect of COVID-related impacts reduced our 2020 earnings and included:
•A decrease in medical costs due to COVID-related utilization curtailment throughout most of year of approximately $420 million, which was partially offset by direct care related to COVID patients;
•Premium refunds and related actions enacted by a number of our state customers in response to the COVID-related utilization curtailment of approximately $564 million, including $401 million recognized in the fourth quarter, mostly associated with recently-enacted risk sharing corridors;
•An increase in our G&A spending on activities related to COVID; and
•Membership growth due to suspension of redeterminations in Medicaid.
Growth Initiatives
We made major strides in 2020 related to our growth strategy. On December 31, 2020, we closed on the acquisition of Magellan Complete Care. In September 2020, we signed a definitive agreement to purchase the net assets of Affinity Health Plan in New York, which we expect to close as early as the second quarter of 2021. We closed on the Passport acquisition in Kentucky on September 1, 2020, and we closed on the YourCare acquisition in upstate New York on July 1, 2020. Each of these acquisitions involve financially underperforming health plans, but with stable membership and revenue bases. We believe they provide attractive opportunities for margin improvement, operating leverage and membership growth. Our growth initiatives continue to be anchored by our capital allocation priorities: first, organic growth; second, inorganic growth through accretive acquisitions; and third, programmatically returning excess capital to shareholders.
In summary, we continue to perform well, our fundamentals remain strong, and we continue to grow revenue as a result of our focus on top-line growth.
Molina Healthcare, Inc. 2020 Form 10-K | 35
FINANCIAL RESULTS SUMMARY
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| (In millions, except per-share amounts) |
| Premium revenue | $ | 18,299 | | | $ | 16,208 | |
| Less: medical care costs | 15,820 | | | 13,905 | |
| Medical margin | 2,479 | | | 2,303 | |
MCR (1) | 86.5 | % | | 85.8 | % |
| | | |
| Other revenues: | | | |
| Premium tax revenue | 649 | | | 489 | |
| Health insurer fees reimbursed | 271 | | | — | |
| Investment income and other revenue | 76 | | | 132 | |
| Marketplace risk corridor judgment | 128 | | | — | |
| | | |
| General and administrative expenses | 1,480 | | | 1,296 | |
G&A ratio (2) | 7.6 | % | | 7.7 | % |
| | | |
| Premium tax expenses | 649 | | | 489 | |
| Health insurer fees | 277 | | | — | |
| Depreciation and amortization | 88 | | | 89 | |
| Other | 31 | | | 6 | |
| Operating income | 1,078 | | | 1,044 | |
| | | |
| Interest expense | 102 | | | 87 | |
| Other expenses (income), net | 15 | | | (15) | |
| | | |
| Income before income tax expense | 961 | | | 972 | |
| Income tax expense | 288 | | | 235 | |
| Net income | $ | 673 | | | $ | 737 | |
| | | |
| Net income per diluted share | $ | 11.23 | | | $ | 11.47 | |
| | | |
| Diluted weighted average shares outstanding | 59.9 | | | 64.2 | |
| | | |
| Other Key Statistics: | | | |
Ending Membership (3) | 4.0 | | | 3.3 | |
| Effective income tax rate | 30.0 | % | | 24.2 | % |
After-tax margin (2) | 3.5 | % | | 4.4 | % |
__________________
(1)MCR represents medical care costs as a percentage of premium revenue.
(2)G&A ratio represents general and administrative expenses as a percentage of total revenue. After-tax margin represents net income as a percentage of total revenue.
(3)Does not include approximately 200,000 Magellan Complete Care members from the acquisition closed on December 31, 2020.
Molina Healthcare, Inc. 2020 Form 10-K | 36
CONSOLIDATED RESULTS
NET INCOME AND OPERATING INCOME
Net income amounted to $673 million, or $11.23 per diluted share in 2020, compared with net income of $737 million, or $11.47 per diluted share, in 2019. Our after-tax margin decreased to 3.5% for 2020, compared to 4.4% for 2019.
Operating income was $1,078 million in 2020, compared with $1,044 million in 2019. We estimate that the net effect of COVID-19 decreased pretax income in 2020 by approximately $180 million, or $2.30 per diluted share. Operating income increased in 2020, despite the net effect of COVID-19, due to growth in membership and premiums, and a $128 million legal judgment for Marketplace risk corridor claims related to prior years, partially offset by a year-over-year decline in the underlying performance of our Marketplace business.
Net income per share in 2020 was favorably impacted by the reduction in common shares outstanding as a result of our share repurchase programs in 2020. See further discussion and information in “Liquidity and Financial Condition,” below, and in the Notes to Consolidated Financial Statements, Note 3, “Net Income Per Share.”
PREMIUM REVENUE
Premium revenue increased $2,091 million, or 13%, in 2020, when compared with 2019.
The higher premium revenues reflect increased membership, primarily in Medicaid, and include the impact from the YourCare and Passport acquisitions. In 2020, we added 337,000 members from our acquisition of the Kentucky Passport business on September 1, 2020, and 47,000 members from our acquisition of the New York YourCare business on July 1, 2020. Suspension of redeterminations in Medicaid was also a driver for membership growth in 2020.
The increase in premium revenues from these acquisitions was slightly offset by the decline in membership associated with our exit of operations in Puerto Rico in 2020. The increase in premium revenue was net of approximately $564 million recognized for COVID-related premium refunds and related actions that were enacted in several states in response to lower utilization of medical services resulting from COVID-19.
MEDICAL CARE RATIO
The consolidated MCR in 2020 increased to 86.5%, compared to 85.8% in 2019, primarily due to the unfavorable net effect of COVID-19 impacts in all our lines of business. We estimate that the net effect of COVID-19 increased our consolidated MCR in 2020 by approximately 50 basis points.
Prior year reserve development in 2020 was not material. The year ended December 31, 2019, was positively impacted by 80 basis points of favorable reserve development, primarily in the Medicaid program.
PREMIUM TAX REVENUE AND EXPENSES
The premium tax ratio increased to 3.4% in 2020, compared with 2.9% in 2019. The current year ratio increase was mainly due to the state of Illinois’ implementation of a managed care organization provider assessment in the third quarter of 2019. Additionally, the state of California implemented a new managed care organization assessment, effective January 1, 2020, after the prior assessment mechanism expired on June 30, 2019.
HEALTH INSURER FEES (“HIF”)
In 2020, HIF expense amounted to $277 million and HIF reimbursements amounted to $271 million. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. Due to the reinstatement of the HIF in 2020, our effective tax rate was higher in 2020 compared with 2019.
The Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020.
INVESTMENT INCOME AND OTHER REVENUE
Investment income and other revenue decreased to $76 million in 2020, compared with $132 million in 2019. The year-over-year decrease was consistent with our expectation and was due to the low interest rate environment.
MARKETPLACE RISK CORRIDOR JUDGMENT
In June 2020, the U.S. Court of Federal Claims granted us judgment in the amount of $128 million for 2014, 2015, and 2016 Marketplace risk corridor claims, following a favorable U.S. Supreme Court decision in April 2020 which
Molina Healthcare, Inc. 2020 Form 10-K | 37
held §1342 of the Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute. We received the judgment in October 2020 and, consistent with the timing of the cash receipt, the gain was recognized in our fourth quarter 2020 financial results and reported in “Marketplace risk corridor judgment” in our consolidated statements of income. The judgment did not create additional space is required,Minimum MLR rebates.
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
The G&A expense ratio decreased slightly to 7.6% in 2020 compared with 7.7% in 2019, due to increased revenues, partially offset by increased costs associated with the COVID-19 pandemic, due to added operational protocols, technology implementations, and where it would be best located.benefits for our employees, and also from increased costs associated with acquisitions.
EMPLOYEESINTEREST EXPENSE
Interest expense increased to $102 million in 2020, compared with $87 million in 2019. Additional interest expense relating to the 4.375% Notes issued in June 2020, and the 3.875% Notes issued in November 2020, was partially offset by the decrease in interest expense resulting from the settlement of the convertible senior notes in January 2020. As further described below in “Liquidity,” a portion of the net proceeds from the 4.375% Notes offering was used to repay $600 million principal amount outstanding under the term loan facility of our prior credit agreement. Additionally, a portion of the net proceeds from the 3.875% Notes offering was used to repay the $330 million principal amount outstanding under the 4.875% Notes.
OTHER EXPENSES (INCOME), NET
In 2020, we recognized losses on debt repayment of $15 million in connection with repayment of our term loan facility and other financing transactions. In 2019, we recognized a gain on debt repayment of $15 million, in connection with convertible senior notes repayment transactions.
INCOME TAXES
Income tax expense amounted to $288 million in 2020, or 30.0% of pretax income, compared with income tax expense of $235 million in 2019, or 24.2% of the pretax income. The effective tax rate was higher in 2020 due to higher nondeductible expenses in 2020, primarily related to the nondeductible HIF. As discussed above, the HIF was not applicable in 2019 and has been repealed for years after 2020.
REPORTABLE SEGMENTS
As of December 31, 2017,2020, we had approximately 20,000 employees.two reportable segments: the Health Plans segment, and the Other segment. Our employee base is multiculturalreportable segments are consistent with how we currently manage the business and reflectsview the diverse membershipmarkets we serve.
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary customers are state Medicaid agencies and the federal government.
AVAILABLE INFORMATION
Dr. C. David Molina foundedThe key metrics used to assess the performance of our Company in 1980Health Plans segment are premium revenue, margin and MCR. MCR represents the amount of medical care costs as a provider organization servingpercentage of premium revenue. Therefore, the underlying margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Margin for our Health Plans segment is also referred to as “Medical Margin.” Medical Margin amounted to $2.5 billion and $2.3 billion in 2020 and 2019, respectively for the Health Plans segment. Management’s discussion and analysis of the changes in Medical Margin is discussed below under “Financial Performance.”
See Notes to Consolidated Financial Statements, Note 16, “Segments,” for more information.
Molina Healthcare, Inc. 2020 Form 10-K | 38
HEALTH PLANS
As of December 31, 2020, the Health Plans segment consisted of health plans operating in 15 states, and served approximately 4.0 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies. In addition, in Southern California. Weconnection with our acquisition of Magellan Complete Care on December 31, 2020, we added approximately 200,000 members, and now operate health plans in 18 states.
The Health Plans reportable segment includes our regulated health plan operating segments, along with the recently acquired Magellan Complete Care health plans operating segment. Because this acquisition closed on December 31, 2020, Magellan Complete Care’s operating results were originally organized in California asinsignificant to our consolidated results of operations for the year ended December 31, 2020.
TRENDS AND UNCERTAINTIES
For a holding company for our initialdiscussion of the Health Plans segment’s trends, uncertainties and other developments, refer to “Item 1. Business—Our Business,” “—COVID-19 Pandemic,” and “—Legislative and Political Environment.”
FINANCIAL PERFORMANCE
The tables below summarize premium revenue, Medical Margin, and MCR by state health plan and reincorporatedby government program for the periods indicated (dollars in Delawaremillions):
HEALTH PLANS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| California | $ | 2,109 | | | $ | 259 | | | 87.7 | % | | $ | 2,266 | | | $ | 429 | | | 81.0 | % |
| Florida | 643 | | | 109 | | | 83.0 | | | 734 | | | 144 | | | 80.4 | |
| Illinois | 1,328 | | | 155 | | | 88.3 | | | 1,002 | | | 130 | | | 87.0 | |
| Kentucky | 654 | | | 64 | | | 90.2 | | | — | | | — | | | — | |
| Michigan | 1,587 | | | 249 | | | 84.4 | | | 1,624 | | | 293 | | | 82.0 | |
| Ohio | 2,962 | | | 349 | | | 88.2 | | | 2,553 | | | 267 | | | 89.6 | |
| | | | | | | | | | | |
| Texas | 3,085 | | | 391 | | | 87.3 | | | 2,991 | | | 377 | | | 87.4 | |
| Washington | 3,169 | | | 474 | | | 85.1 | | | 2,695 | | | 305 | | | 88.7 | |
Other (1) | 2,762 | | | 429 | | | 84.5 | | | 2,343 | | | 358 | | | 84.7 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
______________________
(1)“Other” includes the Idaho, Mississippi, New Mexico, New York, Puerto Rico, South Carolina, Utah, and Wisconsin health plans, whose results are not individually significant to our consolidated operating results.
As discussed above, the combination of all the COVID-19 pandemic-related impacts decreased pretax income in 2002. Our principal executive offices are located at 200 Oceangate, Suite 100, Long Beach, California 90802,2020 and increased our telephone number is (562) 435-3666.consolidated MCR in 2020 by approximately 50 basis points. Some of these items increased earnings, such as lower than expected medical costs from the curtailment of utilization that benefited all our state health plans, and a meaningful increase in Medicaid membership, while others served to decrease earnings, such as the temporary, retroactive Medicaid premium refunds and related actions enacted by certain states.
You can access our website at www.molinahealthcare.com to learn more about our Company. From that site, you can download and print copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, along with amendments to those reports. You can also download our Corporate Governance Guidelines, Board of Directors committee charters, and Code of Business Conduct and Ethics. We make periodic reports and amendments available, free of charge, as soon as reasonably practicable after we file or furnish these reportsComments relating to the SEC. We will also provide a copy of any of our corporate governance policies published on our website free of charge, upon request. To request a copy of any of these documents, please submit your request to: Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, California 90802, Attn: Investor Relations. Information on or linked to our website is neither part of nor incorporated by reference into this Form 10-K or any other SEC filings.
RISK FACTORS
You should carefully consider the risks described below and all of the other information set forth in this Form 10-K, including our consolidated financial statements and accompanying notes. These risks and other factors may affect our forward-looking statements, including those we make in this annual report or elsewhere, such as in press releases, presentations to securities analysts or investors, or other communications made by or with the approval of one of our executive officers. The risks described below are not the only risks facing our Company. Additional risks that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, among other effects, the trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
If the responsive bidsperformance of our health plans for new or renewed Medicaid contracts are not successful, or ifin California, Ohio, Texas and Washington, which represent our government contracts are terminated or are not renewed on favorable terms or at all, our premium revenues could be materially reduced and our operating results could be negatively impacted.
We currently derive our premium revenues from 13 statelargest health plans and our health plan in the Commonwealth of Puerto Rico. Measured by ending membership by health plan as of December 31, 2017, our top four health plans were in Washington, California, Florida, and Texas, with an aggregate of 2,578,000 members, or approximately 58% of total membership. If we are unable to continue to operate in any of our existing jurisdictions, or if our current operations in any portion of those jurisdictions are significantly curtailed or terminated entirely, our revenues could decrease materially.from a premium revenue standpoint, follow:
Many of our government contracts for the provision of managed care programs to people receiving government assistance are effective only for a fixed period of time and may be extended for an additional period of time if the contracting entity or its agent elects to do so. When such contracts expire, they may be opened for bidding by competing healthcare providers, and there is no guarantee that the contracts will be renewed or extended. For example, our current Medicaid contract with the Florida Agency for Health Care Administration (“AHCA”) expires on December 31, 2018. As of December 31, 2017, our Florida health plan served approximately 360,000 Medicaid members. On February 1, 2018, AHCA notified our Florida health plan that it was only granted the opportunity to bid on a post-December 31, 2018 managed care contract for a single region in Florida (which consisted of approximately 59,000 Medicaid members as of December 31, 2017), as opposed to the eight regions covered by our existing contract. As yet another example, our New Mexico health plan’s current Medicaid contract with the New Mexico Human Services Department (“HSD”) will also expire on December 31, 2018. On January 8, 2018, HSD notified our New Mexico health plan that it had not been selected to bid on a post December 31, 2018 managed care contract. Our New Mexico health plan served approximately 224,000 Medicaid members as of December 31, 2017. We have filed a protest with regard to HSD’s decision, and as appropriate we will pursue all protest rights and rights of appeal with regard to AHCA’s decision. However, there can be no assurances that any
protest filing in either New Mexico or Florida will be successful, and as a result we may lose the applicable Medicaid membership as of the end of 2018.
In any bidding process, our health plans may face competition from numerous other health plans, many with greater financial resources and greater name recognition than we have. For example, the following three health plans have upcoming requests for proposal, or RFPs:
The Texas Health and Human Service Commission (HHSC) currently contracts with five STAR+PLUS (ABD) plans: Anthem, Cigna, Centene, United Healthcare and Molina. Our Texas health plan served a total of approximately 430,000 members as of December 31, 2017. The Texas STAR+PLUS RFP was issued on December 4, 2017, proposals are due March 6, 2018, and the new contracts that are awarded will be effective January 1, 2020 through August 31, 2022. If the RFP responsive bid of our Texas health plan is not successful, or if our Texas health plan’s contract with HHSC is not renewed, or if it is renewed but coverage is reduced, our revenues would be materially and adversely impacted.
The Washington State Health Care Authority (HCA) currently contracts with five Apple Health plans: Anthem, Community Health Plan of Washington, Centene, United Healthcare and Molina. Our Washington health plan served a total of approximately 777,000 members as of December 31, 2017. The Washington Fully Integrated Managed Care RFP issued on February 16, 2018, is the third of three re-procurement RFPs for all Medicaid lives in Washington state. Proposals for the third and final RFP are due April 12, 2018, and five of the seven largest regions contracts that are awarded will be effective January 1, 2019. The remaining two will be effective on January 1, 2020. The HCA has indicated that fewer than five MCOs will be awarded re-procurement contracts in three of the seven remaining regions. If the RFP responsive bid of our Washington health plan is not successful, or if our Washington health plan’s contract with HCA is not renewed, or if it is renewed but coverage is reduced, our revenues would be materially and adversely impacted.
The Puerto Rico Health Insurance Administration (ASES) currently contracts with five Government Health plans: First Medical, MMM and its subsidiary PMC, Triple-S, and Molina. Our Puerto Rico health plan had approximately 314,000 members as of December 31, 2017. The Puerto Rico Government Health Plan RFP was issued on February 9, 2018, proposals are due May 25, 2018, and the new contracts that are awarded will be effective October 1, 2018 through June 30, 2021, with a one-year option to June 30, 2022. If the RFP responsive bid of our Puerto Rico health plan is not successful, or if our Puerto Rico health plan’s contract with ASES is not renewed, or if it is renewed but coverage is reduced, our revenues would be materially and adversely impacted.
Even if our responsive bids are successful, the bids may be based upon assumptions regarding enrollment, utilization, medical costs, or other factors which could result in the Medicaid contract being less profitable than we had expected or, in extreme cases, could result in a net loss. Furthermore, our government contracts contain certain provisions regarding, among other things, eligibility, enrollment and dis-enrollment processes for covered services, eligible providers, periodic financial and information reporting, quality assurance and timeliness of claims payment, and are subject to cancellation if we fail to perform in accordance with the standards set by regulatory agencies.
If any of our governmental contracts are terminated, not renewed, renewed on less favorable terms, or not renewed on a timely basis, our business and reputation may be adversely impacted, and our financial position, results of operations or cash flows could be materially and adversely affected. In addition, we may be unable to support the carrying amount of goodwill we have recorded for the applicable business, because its fair value estimated future cash flows.
If our attempts to retain our contracts in Florida and/or New Mexico are not successful, of if we lose other contracts that constitute a significant amount of our revenue, we will lose the administrative cost efficiencies that are inherent in a large revenue base. In such circumstances, we may not be able to reduce fixed costs proportionally with our lower revenue, and the financial impact of lost contracts may exceed the net income ascribed to those contracts.
We are currently able to spread the cost of centralized services over a large revenue base. Many of our administrative costs are fixed in nature, and will be incurred at the same level regardless of the size of our revenue base. If our attempts to retain our contracts in Florida and /or New Mexico are not successful, or if we lose other contracts that constitute a significant amount of our revenue, we may not be able to reduce the expense of centralized services in a manner that is proportional to that loss of revenue. In such circumstances, not only will our total dollar margins decline, but our percentage margins, measured as a percentage of revenue, will also decline. This loss of cost efficiency, and the resulting stranded administrative costs, could have a material and adverse impact on our business, cash flows, financial position, or results of operations.
If, in the interests of maintaining or improving longer term profitability, we decide to exit voluntarily certain state contractual arrangements, make changes to our provider networks, or make changes to our administrative infrastructure, we may incur short- to medium-term disruptions to our business that could materially reduce our premium revenues and our net income.
Decisions that we make with regard to retaining or exiting our portfolio of state and Federal contracts, and changes to the manner in which we serve the members attached to those contracts, could generate substantial expenses associated with the run out of existing operations and the restructuring of those of operations that remain. Such expense could include, but would not be limited to, goodwill and intangible asset impairment charges, restructuring costs, additional medical costs incurred due to the inability to leverage long-term relationships with medical providers, and costs incurred to finish the run out of businesses that have ceased to generate revenue.
If we are unable to successfully execute our profit maintenance and improvement initiatives and our restructuring plans, or if we fail to realize the anticipated benefits of those initiatives and plans, our business, cash flows, financial position, or results of operations could be materially and adversely affected.
In August 2017, we announced the implementation of a comprehensive restructuring and profitability improvement plan. The restructuring plan includes the streamlining of our organizational structure, the re-design of certain core operating processes, the remediation of high cost provider contracts, the restructuring of our direct delivery operations, and the review of our vendor base in an attempt to insure that we are partnering with the lowest cost, most effective, vendors. As part of the restructuring plan, we reduced our corporate and health plans workforce by approximately 16%. California. For the year ended December 31, 2017, we reported restructuring and separation costs of $234 million.
In addition, in2020, Medical Margin declined when compared with 2019, as the second half of 2017, we launched several profit maintenance and improvement initiatives. We anticipate pursuing additional profit maintenance and improvement initiatives throughout 2018.
Our restructuring plan and profit improvement initiatives create numerous uncertainties, including the effect of the initiatives and plan on our business, operations, revenues, and profitability, potential disruptions to our business as a result of management’s attention to the initiatives and plan, uncertainty regarding the potential amount and timing of future cost savings associated with the initiatives and plan, and the potential negative impact of the initiatives and plan on employee morale. The success of the initiatives and plan will depend, in part, on factors that are beyond our control. Accordingly, we can provide no assurance that the goals of the initiatives and plan will be fully achieved. Failure in this regard could have a material and adverse impact on our business, cash flows, financial position, or results of operations.
A failure to accurately estimate incurred but not reportedlower medical care costs may negatively impact our resultsfrom the curtailment of operations.
Because of the time lag between when medical services are actually renderedutilization were more than offset by our providersretroactive Medicaid premium refunds and when we receive, process, and pay a claim for those medical services, we must continually estimate our medical claims liability at particular points in time, and establish claims reserves related to such estimates. Our estimated reserves for such IBNP medical care costs are based on numerous assumptions. We estimate our medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our ability to accurately estimate claims for our newer lines of business or populations, is negatively impacted by the more limited experience we have had with those populations.
The IBNP estimation methods we use and the resulting reserves that we establish are reviewed and updated, and adjustments, if deemed necessary, are reflectedunderperformance in the current period. Given the numerous uncertainties inherent in such estimates, our actual claims liabilities for a particular quarter or other period could differ significantly from the amounts estimated and reserved for that quarter or period. Our actual claims liabilities have varied and will continue to vary from our estimates, particularly in times of significant changes in utilization, medical cost trends, and populations and markets served.Marketplace program.
If our actual liability for claims payments is higher than estimated, our earnings in any particular quarter or annual period could be negatively affected. Our estimates of IBNP may be inadequate in the future, which would negatively affect our results of operations for the relevant time period. Furthermore, if we are unable to accurately estimate IBNP, our ability to take timely corrective actions may be limited, further exacerbating the extent of the negative impact on our results.
We are subject to retroactive adjustment to our Medicaid premium revenue as a result of retroactive risk adjustment; retroactive changes to contract terms and the resolution of differing interpretations of those terms; the difficulty of estimating performance-based premium; and retroactive adjustments to “blended” premium rates to reflect the actual mix of members captured in those blended rates.
The complexity of some of our Medicaid contract provisions; imprecise language in those contracts, the desire of state Medicaid agencies in some circumstances to retroactively adjust for the acuity of the medical needs of our members; and state delays in processing rate changes can create uncertainty around the amount of revenue we should recognize.
Ohio. For example, in February 2017, the New Mexico Human Services Department (HSD) notified us that it had disallowed certain medically related administrative expenses and other items in the computation of its Medicaid Expansion risk corridor; this corridor was effective January 1, 2014, through December 31, 2016. As a result of this action, income before taxes at the New Mexico health plan was reduced by $45 million for the year ended December 31, 2016. Of2020, Medical Margin was higher when compared with 2019, due to higher premiums and improved operating performance in Medicaid. Premium revenues were higher year-over-year, mainly due to increased membership, program changes and rate increases in Medicaid established before COVID-19. The
Molina Healthcare, Inc. 2020 Form 10-K | 39
net effects of COVID-19 had an unfavorable impact on Medical Margins in all programs in 2020, as the retroactive premium refunds exceeded the benefit from lower medical costs due to the curtailment of utilization.
Texas. For the year ended December 31, 2020, premium revenues and Medical Margin were both slightly higher when compared with 2019. Medical Margin increased due to higher premium revenues and a lower MCR in Medicaid, mostly driven by curtailment of utilization related to COVID-19 premiums, partially offset by underperformance in Marketplace. The decline in Marketplace resulted mainly from lower premiums and higher acuity mix for the new members we served.
Washington. For the year ended December 31, 2020, Medical Margin was higher when compared with 2019, mainly due to improved results in Medicaid. Medicaid premium revenues increased in the year ended December 31, 2020, due to membership growth. In addition, results in the year ended December 31, 2020, benefited modestly from lower medical costs due to the curtailment of utilization driven by COVID-19, which was partially offset by COVID-related provider payments mandated by the state in the second quarter of 2020.
PROGRAMS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Premium Revenue | | Medical Margin | | MCR | | Premium Revenue | | Medical Margin | | MCR |
| | | | | |
| Medicaid | $ | 14,265 | | | $ | 1,804 | | | 87.4 | % | | $ | 12,466 | | | $ | 1,497 | | | 88.0 | % |
| Medicare | 2,512 | | | 351 | | | 86.0 | | | 2,243 | | | 330 | | | 85.3 | |
| Marketplace | 1,522 | | | 324 | | | 78.7 | | | 1,499 | | | 476 | | | 68.2 | |
| Total | $ | 18,299 | | | $ | 2,479 | | | 86.5 | % | | $ | 16,208 | | | $ | 2,303 | | | 85.8 | % |
Medicaid
Medicaid premium revenue increased $1,799 million in 2020, when compared with 2019, mainly due to membership growth and premium increases in several states, and the impact from suspension of redeterminations due to COVID-19. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations. These premium increases were partially offset by premium refunds and related actions enacted in several states in response to the lower utilization of medical services stemming from COVID-19.
The Medical Margin of our Medicaid program increased $307 million, or 21%, in 2020 when compared with 2019. The increase was driven by increased premium revenues and margin associated with the membership growth discussed above, and from a reduction in the MCR.
The Medicaid MCR decreased to 87.4% in 2020, from 88.0% in 2019, or 60 basis points. The decrease in the Medicaid MCR in 2020 was due to improvements across all programs. The MCR benefited from operational improvements and premium increases in several states, but was partially offset by unfavorable effects of COVID-19, including the impact of the premium refunds and related actions, net of lower medical costs due to the curtailment of utilization.
In the third quarter of 2020, we recognized a $10 million premium deficiency reserve (“PDR”) associated with the Puerto Rico Medicaid business. We exited this business on October 31, 2020. The PDR represents the estimated remaining claims and administrative costs that exceed the estimated remaining premiums associated with the contract.
These improvements were partially offset by unfavorable year-over-year changes in prior year reserve development. Prior year reserve development in 2020 was not material; however, 2019 was positively impacted by 100 basis points of favorable reserve development.
Medicare
Medicare premium revenue increased $269 million in 2020, when compared with 2019, primarily due to increases in premium revenue PMPM and member months. PMPMs improved due to increased revenue resulting from risk scores that are more commensurate with the acuity of our population and increases in quality incentive premium revenues. These increases were partially offset by premium refunds, mainly in MMP, enacted in response to the lower utilization of medical services stemming from COVID-19.
Molina Healthcare, Inc. 2020 Form 10-K | 40
The Medical Margin for Medicare increased $21 million, or 6%, in 2020 when compared with 2019, primarily due to the increase in premium revenue discussed above, partially offset by increases in medical costs PMPM.
The Medicare MCR increased from 85.3% in 2019 to 86.0% in 2020, or 70 basis points. The increase was primarily driven by an increase in medical care costs PMPM, which was mainly attributed to unfavorable changes in member mix, including higher acuity populations. The medical cost PMPM also reflected modestly lower utilization of medical services stemming from COVID-19. The impact of increased medical costs on the MCR was partially offset by the increase in the premium revenue PMPM discussed above.
Marketplace
Marketplace premium revenue increased $23 million in 2020, when compared with 2019, mainly due to increased membership, partially offset by a decrease in premium revenue PMPM. The decrease in premium revenue PMPM was mainly driven by lower pricing, in an effort to be more competitive and generate membership growth, and the impact of more health plans being subject to minimum medical loss ratio rebates when compared with the prior year. The factors decreasing premium revenue PMPM were partially offset by the impact of higher risk adjustment premiums, resulting from higher acuity of our membership.
The Marketplace Medical Margin decreased $152 million in 2020, despite the increase in premium revenues, due to an increase in the MCR compared to 2019.
The Marketplace MCR increased to 78.7% in 2020, compared to 68.2% in 2019. The increase in MCR was driven by the impact of the decrease in premium revenue PMPM discussed above, combined with an increase in medical cost PMPM when compared with 2019. The higher medical cost PMPM was primarily due to a higher member acuity mix and increased medical costs related to COVID-19. The rebound in utilization for Marketplace, following the curtailment from COVID-19, has been much more pronounced than our Medicaid and Medicare programs. Additionally, our risk scores, though increased compared to 2019, continue to lag the acuity of our membership.
OTHER
The Other segment includes certain corporate amounts not allocated to the Health Plans segment. In 2020 and 2019, such amounts were immaterial to our consolidated results of operations.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated health plan subsidiaries generate significant cash flows from premium revenue and net income. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related healthcare services. The majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments.
When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. The regulated health plan subsidiaries paid dividends to the parent company amounting to $635 million in 2020, and $1,373 million in 2019, respectively. The parent company contributed capital of $107 million and $43 million in 2020 and 2019, respectively, to our regulated health plan subsidiaries to satisfy statutory capital and surplus requirements.
Cash, cash equivalents and investments at the parent company amounted to $644 million and $997 million as of December 31, 2020, and 2019, respectively. The decrease in 2020 was mainly due to cash used for Magellan Complete Care and other acquisitions, and common stock repurchases. These outflows were partially offset by inflows from net debt financing transactions, and dividends received from regulated health plan subsidiaries, net of contributions, as described above. See further discussion below, in “Investing Activities,” and “Financing Activities.”
Molina Healthcare, Inc. 2020 Form 10-K | 41
Investments
After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels.
We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets.
Our restricted investments are invested principally in cash, cash equivalents, and U.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets.
Cash Flow Activities
Our cash flows are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | Change |
| (In millions) |
| Net cash provided by operating activities | $ | 1,890 | | | $ | 427 | | | $ | 1,463 | |
| Net cash used in investing activities | (400) | | | (293) | | | (107) | |
| Net cash provided by (used in) financing activities | 225 | | | (552) | | | 777 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | $ | 1,715 | | | $ | (418) | | | $ | 2,133 | |
Operating Activities
We typically receive capitation payments monthly, in advance of payments for medical claims; however, government payors may adjust their payment schedules, positively or negatively impacting our reported cash flows from operating activities in any given period. For example, government payors may delay our premium payments, or they may prepay the following month’s premium payment.
Net cash provided by operations was $1,890 million in 2020, compared with $427 million of net cash provided in 2019. The $1,463 million increase in year-over-year cash flow was due to cash flow timing benefits from the growth in membership in 2020, and the net impact of timing differences in governmental receivables and payables.
Investing Activities
Net cash used in investing activities was $400 million in 2020, compared with $293 million of net cash used in 2019, a decrease in year-over-year cash flow of $107 million. The decrease was mainly attributable to net cash paid in the YourCare, Passport and Magellan Complete Care acquisitions, partially offset by decreased purchases of investments in 2020.
Financing Activities
Net cash provided by financing activities was $225 million in 2020, compared with $552 million of net cash used in 2019, an increase in year-over-year cash flow of $777 million. In 2020, cash inflows included $1,429 million from the issuance of the 4.375% and 3.875% Notes and $380 million borrowed under the term loan facility. Cash outflows included the $600 million repayment of the term loan facility, common stock purchases of $606 million, which included $7 million to settle shares purchased in late December 2019, and net cash paid for the aggregate convertible senior notes‑related transactions amounting to $42 million. In 2019, cash outflows included net cash paid for the aggregate convertible senior notes-related transactions of $754 million, and $47 million paid for common stock purchases, partially offset by proceeds of $220 million borrowed under the term loan facility.
Molina Healthcare, Inc. 2020 Form 10-K | 42
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under our Credit Agreement as discussed further below in “Future Sources and Uses of Liquidity—Future Sources,” and internally generated funds will be sufficient to support our operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months.
On a consolidated basis, as of December 31, 2020, our working capital was $2,911 million compared with $2,698 million as of December 31, 2019. At December 31, 2020, our cash and investments amounted to $6,165 million, compared with $4,477 million of cash and investments at December 31, 2019.
Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by our unregulated parent. For more information, see the “Liquidity”discussion presented above.
Regulatory Capital and Dividend Restrictions
Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these subsidiaries (not including the Magellan Complete Care subsidiaries) was estimated to be approximately $1,310 million at December 31, 2020, compared with $1,110 million at December 31, 2019. We estimate the Magellan Complete Care subsidiaries’ minimum capital and surplus requirement amounted to approximately $230 million at December 31, 2020. The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates.
Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as of December 31, 2020, was approximately $60 million in the aggregate. The subsidiaries may pay dividends over this amount, $29 million relatedbut only after approval is granted by the regulatory authorities.
Based on our cash and investments balances as of December 31, 2020, management believes that its regulated wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to datesprovide, additional capital to each of service priorour health plans as necessary to 2016.ensure compliance with statutory capital and surplus requirements.
Debt Ratings
Each of our high-yield senior notes is rated “BB-” by Standard & Poor’s, and “Ba3” by Moody’s Investor Service, Inc. A current example of exposure to this risk isdowngrade in California, whereour ratings could adversely affect our borrowing capacity and increase our borrowing costs.
Financial Covenants
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios are computed as defined by the state Medicaid agency is several years behind in its reconciliation and settlement with usterms of the difference between expensesCredit Agreement.
In addition, the indentures governing each of our outstanding high-yield senior notes contain cross-default provisions that it has paidare triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As of December 31, 2020, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our behalfliquidity.
Molina Healthcare, Inc. 2020 Form 10-K | 43
Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our planned exit from Puerto Rico, we have added approximately 415,000 new Medicaid members since March 31, 2020, when we first began to providersreport on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations.
It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However it does now appear that since unemployment nationally has fallen to 6.3% as of January 2021, the initial industry estimates of unemployment-related Medicaid membership increases were somewhat overstated. On a related note, the declaration of the extension of the public health emergency period to April 2021, with a potential extension from the Biden administration for the public health emergency to remain in place for all of 2021, will also likely have an impact. Therefore, we are currently unable to predict the timing or amount of the expected increases in enrollment. Increased membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs. We believe that we have the scalability necessary to both serve new members, and ably partner with our state customers for increases in membership.
Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. As a result of the COVID-19 pandemic, state regulators could restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which could reduce the liquidity of the parent company. For more information on our regulatory capital requirements and dividend restrictions, refer to Notes to Consolidated Financial Statements, Note 15, “Commitments and Contingencies—Regulatory Capital Requirements and Dividend Restrictions,” and Note 17, “Condensed Financial Information of Registrant—Note C - Dividends and Capital Contributions.”
Credit Agreement Borrowing Capacity. As of December 31, 2020, we had available borrowing capacity of $1 billion under the revolving credit facility of our Credit Agreement. In addition, the Credit Agreement provides for a $15 million swingline sub-facility and a $100 million letter of credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to $500 million, plus an unlimited amount of such term loans as long term servicesas we maintain a minimum consolidated net leverage ratio. See further discussion in the Notes to Consolidated Financial Statements, Note 11, “Debt.”
Future Uses
Common Stock Purchases. In September 2020, our board of directors authorized the purchase of up to $500 million, in the aggregate, of our common stock. This program is funded with cash on hand and supports,extends through December 31, 2021. The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. Following the purchases completed under a Rule 10b5-1 trading plan from November 2020 through February 11, 2021, there is approximately $219 million remaining available to purchase our common stock through December 31, 2021. See further information in the Notes to Consolidated Financial Statements, Note 13, “Stockholders’ Equity.”
Acquisitions. We have a disciplined and steady approach to growth. Organic growth, which includes leveraging our existing health plan portfolio and winning new territories, is our highest priority. In addition to organic growth, we will consider targeted acquisitions that are a strategic fit that we believe will leverage operational synergies, and lead to incremental earnings accretion. For further information on our acquisitions, refer to the Notes to Consolidated Financial Statements, Note 4, “Business Combinations.”
In September 2020, we entered into a definitive agreement to acquire substantially all the assets of Affinity Health Plan, Inc. The net purchase price for the transaction is approximately $380 million, subject to various adjustments at closing, which we intend to fund with cash on hand. We currently expect the transaction to close as early as the second quarter of 2021.
In September 2020, we completed the acquisition of certain assets of Passport Health Plan, Inc. The purchase consideration included estimated contingent consideration of approximately $46 million as of December 31, 2020. Half this amount is payable later in 2021, with the remainder payable in early 2022, subject to review and agreement among us and the amountsseller. The second half payment is contingent upon the outcome of certain legal challenges.
Molina Healthcare, Inc. 2020 Form 10-K | 44
Outcome of ACA Litigation. As described above in “Health Plans Segment—Trends and Uncertainties,” the U.S. Supreme Court has accepted the appeal of the Fifth Circuit Court’s decision regarding the constitutionality and severability of the individual mandate. The ACA remains in effect pending the issuance of the Supreme Court’s opinion. A decision by the Supreme Court that it has withheld from our premium for those expenses; and has yet to share with us certain premium rates related to July 2017 through December 2017.
Any circumstance such as those described abovethe entirety of the ACA is unconstitutional could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
IfPotential Impact of COVID-19 Pandemic. Beginning in early 2020 the pandemic, along with the related quarantine and social distancing measures, reduced demand for certain routine and non-critical medical services, while at the same time increased demand for other medical services, such as COVID-19 testing and emergency services. In 2020, utilization was curtailed, but could rebound to more normal levels in 2021. Increased demand for medical services, which we failare presently unable to accurately predict and effectively manage ourthe timing or magnitude, could result in a significant increase in medical care costs our operating results could be materially and adversely affected.related provider claims payments.
Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our medical care costs. Historically, our medical care ratio, meaning our medical care costsAlso, as a percentage of our premium revenue net of premium tax, has fluctuated substantially, and has varied across our state health plans. Because the premium paymentsdescribed above in “Item 1. Business—COVID-19 Pandemic,” we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small changes in our medical care ratio can create significant changes in our overall financial results. For example, if our overall medical care ratio of 90.6%, for the year ended December 31, 2017 had been one percentage point higher, or 91.6%, our net loss per diluted share for the year ended December 31, 2017 would have been approximately $11.17 rather than our actual net loss per diluted share of $9.07, a difference of $2.10.
Many factors may affect our medical care costs, including:
the level of utilization of health care services,
unexpected patterns in the annual flu season,
increases in hospital costs,
increased incidences or acuity of high dollar claims related to catastrophic illnesses or medical conditions for which we do not have adequate reinsurance coverage,
increased maternity costs,
payment rates that are not actuarially sound,
changes in state eligibility certification methodologies,
relatively low levels of hospital and specialty provider competition in certain geographic areas,
increases in the cost of pharmaceutical products and services,
changes in health care regulations and practices,
epidemics,
new medical technologies, and
other various external factors.
Many of these factors are beyond our control and could reduce our ability to accurately predict and effectively manage the costs of providing health care services. The inability to forecast and manage our medical care costs or to establish and maintain a satisfactory medical care ratio, either with respect to a particular state health plan or across the consolidated entity, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If we are unable to collect health insurer fee (HIF) reimbursement from our state partners, our business, cash flows, financial position, or results of operations could be materially and adversely affected.
Because Medicaid is a government funded program, Medicaid health plans must request reimbursement for the HIF from respective state partners to offset the impact of this tax. When states reimburse us for the amount of the HIF,
that reimbursement is itself subject to income tax, the HIF,premium refunds and applicable state premium taxes. Because the HIF is not deductible for income tax purposes, our net income is reduced by the full amount of the assessment. Based on our previous years’ experience, we expect to ultimately recognize revenue sufficient to reimburse us for the full amount of the HIF we will pay (along with related tax effects) in September of 2018. However, we are uncertain as to the timing of such reimbursements. We expect this HIF assessment, related to our Medicaid business, to be approximately $232 million, with an expected tax effect from the reimbursement of the assessment of approximately $63 million. Therefore, the total reimbursement neededactions as a result of the Medicaid-related HIF is approximately $295 million. The delay or failure of our state partners to reimburse uspandemic. In 2020, various states enacted temporary premium refunds and related actions in full for the HIF and its related tax effects could have a material adverse effect on our business, financial condition, cash flows or results of operations.
An impairment charge with respect to our recorded goodwill, or our finite-lived intangible assets, could have a material impact on our financial results.
As of December 31, 2017, the carrying amounts of goodwill and intangible assets, net, amounted to $186 million, and $69 million, respectively.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Goodwill is not amortized, but is tested for impairment on an annual basis and more frequently if impairment indicators are present. Goodwill is impaired if the carrying amount of the reporting unit exceeds its estimated fair value. This excess is recorded as an impairment loss, and adjusted if necessary for the impact of tax deductible goodwill. The loss recognized may not exceed the total goodwill allocatedresponse to the reporting unit.
Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the greater of the undiscounted cash flows that are expected to resultreduced demand for medical services stemming from the use of the asset or related group of assets, or its value under the asset liquidation method. If it is determined that the carrying amount of the asset is not recoverable, the amount byCOVID-19, which the carrying value exceeds the estimated fair value is recorded as an impairment.
Key assumptions in our cash flow projections, including changes in membership, premium rates, health care and operating cost trends, and contract renewals and the procurement of new contracts, are consistent with those used in our long-range business plan and annual planning process. If these assumptions differ from actual results, the outcome of our goodwill impairment tests could be adversely affected.
An event or events could occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill, and intangible assets, net. For example, if the responsive bid of one or more of our health plans is not successful, we will lose our Medicaid contract in the applicable state or states. If such state health plans have recorded goodwill and intangible assets, net, the contract loss would resultresulted in a non-cash impairment charge. Additionally, if we are unable to procure new state MMIS contracts, the outcome of our goodwill impairment tests could be adversely affected and result in a non-cash impairment charge. Such a non-cash impairment charge could have a material adverse impact on our financial results.
We incurred non-cash impairment losses of $470 million in 2017. These losses included $269 million, primarily in connection with our Florida, New Mexico, and Illinois health plans. The impairments at Florida and New Mexico were the result of our recent Medicaid contract losses. The Illinois impairment was the result of management’s determination, in the course of its annual impairment assessment of the goodwill of the Illinois health plan, that the plan’s future cash flow projections were insufficient to produce an estimated fair value in excess of its carrying amount. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago.
Also during 2017, we recorded impairment losses of $28 million for our Molina Medicaid Solutions segment because management determined that Molina Medicaid Solutions will provide fewer future benefits for its support of the Health Plans segment than previously anticipated. In addition, we recorded impairment losses of $173 million for our Other segment, primarily relating to our Pathways business, because management determined that Pathways will not provide future benefits relating to the integration of its operations with the Health Plans segment to the extent previously expected.
We operate in an unstable political environment which creates uncertainties with regard to the sources and amounts of our revenues, volatility with regard to the amountreduction of our medical costs, and vulnerabilitymargin. In some cases, these premium actions were retroactive to unforeseen programmaticearlier periods in 2020, or regulatory changes.
As a resultas early as the beginning of the election of President Trump and the GOP control of both houses of Congress, the future of the ACA and its underlying programs are subject to substantial uncertainty, making long-term business planning exceedingly difficult. We are unable to predict with any degree of certainty whether the ACA will be modified or repealedstates’ fiscal years in its entirety, and if it is repealed, what it will be replaced with; nor are we able to predict when any such changes, if enacted, would become effective.
Currently, there are a number of different legislative proposals being considered, some of which would involve significantly reduced federal spending on the Medicaid program, and constitute a fundamental change2019. Beginning in the federal role in health care. These proposals include elements such assecond quarter of 2020, we have recognized retroactive premium actions that we believe to be probable, and where the following: ending the entitlement nature of Medicaid (and perhaps Medicare as well) by capping future increases in federal health spending forultimate premium amount is reasonably estimable. We recognized $564 million related to these programs, and shifting much more of the risk for health costsretroactive premium actions, in the future toaggregate, in 2020.
It is possible that certain states and consumers; reversing the ACA’s expansion of Medicaid that enables states to cover low-income childless adults; changing Medicaid to a state block grant program, including potentially capping spending on a per-enrollee basis (a “per capita cap”); requiring Medicaid beneficiaries to work; limiting the amount of lifetime benefits for Medicaid beneficiaries; prohibiting the federal government from operating Marketplaces; eliminating the advanced premium tax credits, and cost sharing reductions for low income individuals who purchase their health insurance through the Marketplaces; expanding and encouraging the use of private health savings accounts; providing for insurance plans that offer fewer and less extensive health insurance benefits than under the ACA’s essential health benefits package, including broader use of catastrophic coverage plans; establishing and funding high risk pools or reinsurance programs for individuals with chronic or high cost conditions; allowing insurers to sell insurance across state lines; and numerous other potential changes and reforms. Changes to or the repeal of the ACA, or the adoption of new health care regulatory laws, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
A reversal of the Medicaid Expansion would have a negative impact on our revenues.
In the states that have elected to participate, the ACA provided for the expansion of the Medicaid program to offer eligibility to nearly all individuals under age 65 with incomes at or below 138% of the federal poverty line. Since January 1, 2014, our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington have participated in the Medicaid Expansion program under the ACA. At December 31, 2017, our membership included approximately 668,000 Medicaid Expansion members, or 15% of our total membership. If the Medicaid Expansion is reversed by repeal of the ACA or otherwise, we could lose this membership, which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our participation in the Marketplace creates certain risks which could adversely impact our business, financial position, and results of operations.
The ACA authorized the creation of marketplace insurance exchanges (the “Marketplace”), allowing individuals and small groups to purchase federally subsidized health insurance. As of December 31, 2017, we participated in the individual Marketplace in nine states and our Marketplace membership represented 19% of our total membership, or approximately 815,000 members. In an effort to reduce our exposure to the risks related to the Marketplace, we implemented premium increases averaging 58% effective January 1, 2018 and we exited the Marketplace in Utah and Wisconsin. These market exits and price increases have resulted in substantially lower Marketplace membership.
A number of larger commercial insurance plans, including Humana Inc., have discontinued their participation in the Marketplace. The perceived instability and impending changes in the Marketplace could further promote reduced participation among the uninsured. Further, the withdrawal of cost sharing subsidies and/or premium tax credits, the elimination of the individual mandate to purchase health insurance in December 2017, the use of special enrollment periods, or any announcement that some or all of our health plans will be leaving the Marketplace for 2018, could additionally impact Marketplace enrollment. These market and political dynamics may increase the risk that our Marketplace products will be selected by individuals who have a higher risk profile or utilization rate than we anticipated when we established the pricing for our Marketplace products, leading to financial losses.
The Medicare-Medicaid Duals Demonstration Pilot Programs could be discontinued or altered, resulting in a loss of premium revenue.
To coordinate care for those who qualify to receive both Medicare and Medicaid services (the “dual eligibles”), and to deliver services to these individuals in a more financially efficient manner, under the direction of CMS some states implemented demonstration pilot programs to integrate Medicare and Medicaid services for dual eligibles.
The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). We operate MMPs in six states: California, Illinois, Michigan, Ohio, South Carolina, and Texas. At December 31, 2017, our membership included approximately 57,000 integrated MMP members, representing just over 1% of our total membership. However, the capitation payments paid to us for dual eligibles are significantly higher than the capitation payments for other members, representing 8% of our total premium revenues in 2017. If the states running the MMP pilot programs conclude that the demonstration pilot programs are not delivering better coordinated care and reduced costs, they could decide to discontinue or substantially alter such programs, resulting in a reduction to our premium revenues.
Continuing changes in health care laws, and in the health care industry, make it difficult to develop actuarially sound rates.
Comprehensive changes to the U.S. health care system make it more difficult for us to manage our business, and increase the likelihood that the assumptions we make with respect to our future operations and results will prove to be inaccurate. The continuing pace of change has made it difficult for us to develop actuarially sound rates because we have limited historical information on which to develop these rates. In the absence of significant historical information to develop actuarial rates, we must make certain assumptions. These assumptions may subsequently prove to be inaccurate. For example, rates of utilization could be significantly higher than we projected, or the assumptions of policymakers about the amount of savings that could be achieved through the use of utilization management in managed care could be flawed. Moreover, our lack of actuarial experience for a particular program, region, or population, could cause us to set our reserves at an inadequate level.
Our health plans segment operates with very low profit margins, and small changes in operating performance or slight changes to our accounting estimates will have a disproportionate impact on our reported net income.
A substantial portion of our premium revenue is subject to contract provisions pertaining to medical cost expenditure floors and corridors, administrative cost and profit ceilings, premium stabilization programs, and cost-plus and performance-based reimbursement programs. Many of these contract provisions are complex, or are poorly or ambiguously drafted, and thus are potentially subject to differing interpretations by ourselves and the relevant government agency with whom we contract. If the applicable government agency disagrees with our interpretation or implementation of a particular contract provisions at issue, we could be required to adjust the amount of our obligations under these provisions and/or make a payment or payments to such government agency. Any interpretation of these contract provisions by the applicable governmental agency that varies from our interpretation and implementation of the provision, or that is inconsistent with our revenue recognition accounting treatment, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In addition, many of our contracts also contain provisions pertaining to at-risk premiums that require us to meet certain quality performance measures to earn all of our contract revenues. If we are unsuccessful in achieving the stated performance measure, we will be unable to recognize the revenue associated with that measure. Any failure of our health plans to satisfy one of these performance measure provisions could have a material adverse effect on our business, financial condition, cash flows or results of operations.
If we are unable to deliver quality care, and maintain good relations with the physicians, hospitals, and other providers with whom we contract, or if we are unable to enter into cost-effective contracts with such providers, our profitability could be adversely affected.
We contract with physicians, hospitals, and other providers as a means to ensure access to health care services for our members, to manage health care costs and utilization, and to better monitor the quality of care being delivered. We compete with other health plans to contract with these providers. We believe providers select plans in which they participate based on criteria including reimbursement rates, timeliness and accuracy of claims payment, potential to deliver new patient volume and/or retain existing patients, effectiveness of resolution of calls and complaints, and other factors. We cannot be sure that we will be able to successfully attract and retain providers to maintain a competitive network in the geographic areas we serve. In addition, in any particular market, providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher health care costs, disruption to provider access for current members, a decline in our growth rate, or difficulty in meeting regulatory or accreditation requirements.
The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures, some states may reduce rates paid to providers, which may further discourage participation in the Medicaid program.
In some markets, certain providers, particularly hospitals, physician/hospital organizations, and some specialists, may have significant market positions or even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate favorable contracts which are disadvantageous to us, our profitability in those areas could be adversely affected.
Some providers that render services to our members are not contracted with our health plans. In those cases, there is no pre-established understanding between the provider and our health plan about the amount of compensation that is due to the provider. In some states, the amount of compensation is defined by law or regulation, but in most instances it is either not defined or it is established by a standard that is not clearly translatable into dollar terms. In such instances, providers may believe they are underpaid for their services and may either litigate or arbitrate their dispute with our health plan. The uncertainty of the amount to pay to such providers and the possibility of subsequent adjustment of the payment could adversely affect our business, financial condition, cash flows, or results of operations.
The exorbitant cost of specialty drugs and new generic drugs could have a material adverse effect on the level of our medical costsexisting premium refunds, and our resultsit is also possible that other states could implement some form of operations.
Introduction of new high cost specialty drugs and sudden costs spikes for existing drugs increase the risk that the pharmacy cost assumptions used to develop our capitation rates are not adequate to cover the actual pharmacy costs, which jeopardizes the overall actuarial soundness of our rates. Bearing the high costs of new specialty drugs or the high cost inflation of generic drugs without an appropriate rate adjustment or other reimbursement mechanism has an adverse impact on our financial condition and results of operations. For example, Gilead priced a new hepatitis C drug, Sovaldi, at $84,000 per standard course of therapy in 2014. With the advent of Sovaldi in early 2014, the cost of the drug was generally not factored into our 2014 capitation rates which undermined the actuarial soundness of those rates. Further, the relatively high incidence of hepatitis C in Medicaid populations coupled with the exorbitant cost of Sovaldi created a public health and public financing problem across the country. More recently, the FDA approved the first drug to treat patients with spinal muscular atrophy, Spinraza, in December 2016. After this approval, the distributor of Spinraza announced that one dose will have a list price of $125,000, which means the drug will cost between $650,000 and $750,000 to cover the five or six doses requiredretroactive premium refund in the first year, and approximately $375,000 annually thereafter, presumably forfuture. Due to these uncertainties, the life of the patient. The inordinate cost of Spinraza was not contemplated in the development ofultimate outcomes could differ materially from our 2017 capitation rates. In addition, evolving regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. Although we will continue to work with state Medicaid agencies in an effort to ensure that we receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceuticals trends, there can be no assurance that we will always be successful.
We rely on the accuracy of eligibility lists provided by state governments. Inaccuracies in those lists would negatively affect our results of operations.
Premium payments to our health plans are based upon eligibility lists produced by state governments. From time to time, states require us to reimburse them for premiums paid to us based on an eligibility list that a state later discovers contains individuals who are not in fact eligible for a government sponsored program or are eligible for a different premium category or a different program. Alternatively, a state could fail to pay us for members for whom we are entitled to payment. Our results of operations would be adversely affectedestimates as a result of such reimbursement to the state if we make or have made related payments to providers and are unable to recoup such payments from the providers.
The insolvency of a delegated provider could obligate us to pay its referral claims, which could have a material adverse effect on our business, cash flows, or results of operations.
Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Due to insolvency or other circumstances, such providers may be unable to pay claims they have incurred with third parties in connection with referral services provided to our members. The inability of delegated providers to pay referral claims presents us with both immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do so; or we have already paid claims to a delegated provider and such payments cannot be recouped when the
delegated provider becomes insolvent. Liabilities incurred or losses suffered as a result of provider insolvency could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP programs. The states in which we operate our health plans regularly face significant budgetary pressures. As discussed below, such budgetary pressures are particularly intense in the Commonwealth of Puerto Rico. State budgetary pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts which could reduce our revenues and profit margins. Moreover, some federal deficit reduction or entitlement reform proposals would fundamentally change the structure and financing of the Medicaid program. A number of these proposals include both tax increases and spending reductions in discretionary programs and mandatory programs, such as Social Security, Medicare, and Medicaid.
We are unable to determine how any future congressional spending cuts will affect Medicare and Medicaid reimbursement. We believe there will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care that, if adopted, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial condition, cash flows, or results of operations.
Our premium revenues consist of fixed monthly payments per member, and supplemental payments for other services such as maternity deliveries. These premiums are fixed by contract, and we are obligated during the contract periods to provide health care services as established by the state governments. We use a large portion of our revenues to pay the costs of health care services delivered to our members. If premiums do not increase when expenses related to medical services rise, our medical margins will be compressed, and our earnings will be negatively affected. A state could increase hospital or other provider rates without making a commensurate increase in the rates paid to us, or could lower our rates without making a commensurate reduction in the rates paid to hospitals or other providers. In addition, if the actuarial assumptions made by a state in implementing a rate or benefit change are incorrect or are at variance with the particular utilization patterns of the members of one or more of our health plans, our medical margins could be reduced. Any of these rate adjustments in one or more of the states in which we operate could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Furthermore, a state or commonwealth undergoing a budget crisis may significantly delay the premiums paid to one of our health plans. Any significant delay in the monthly payment of premiums to any of our health plans could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or such application is denied, our membership in that state will likely decrease.
States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations. Waivers and programs under demonstrations are approved for two- to five-year periods and can be renewed on an ongoing basis if the state applies and the waiver request is approved or renewed by CMS. We have no control over this renewal process. If a state in which we operate a health plan does not renew its mandated program or the federal government denies the state’s application for renewal, our business would suffer as a result of a likely decrease in membership.
The Commonwealth of Puerto Rico may fail to pay the premiums of our Puerto Rico health plan, which could negatively impact our business, financial condition, cash flows, or results of operations.
The government of Puerto Rico continues to struggle with major fiscal and liquidity challenges. The extreme financial difficulties faced by the Commonwealth may make it very difficult for ASES, the Puerto Rico Medicaid agency, to pay our Puerto Rico health plan under the terms of the parties’ Medicaid contract. As of December 31, 2017, our Puerto Rico health plan served approximately 314,000 members, and had recognized premium revenue of approximately $179 million in the fourth quarter of 2017, or approximately $60 million per month. A default by ASES on its payment obligations under our Medicaid contract, or a determination by ASES to terminate our contract based on insufficient funds available, could result in our having paid, or in our having to pay, provider claims in amounts for which we are not paid reimbursement, and could make it unfeasible for the Puerto Rico health plan to continue to operate. A default by ASES or termination of our Puerto Rico Medicaid contract could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In February 2018, ASES issued an RFP in connection with a new island-wide re-procurement for Medicaid. In the event we do not participate in the re-procurement, or if the responsive bid of our Puerto Rico health plan is unsuccessful, our current contract with ASES will expire without renewal as of December 31, 2018. Our exit from the Commonwealth may result in disruptions to our business, and cause us to incur stranded overhead costs.
Large-scale medical emergencies in one or more states in which we operate our health plans could significantly increase utilization rates and medical costs.
Large-scale medical emergencies can take many forms and be associated with widespread illness or medical conditions. For example, natural disasters, such as a major earthquake in Los Angeles or Cascadia, or a major hurricane in Florida or South Carolina, could have a significant impact on the health of a large number of our covered members. Other conditions that could impact our members include a virulent influenza season or epidemic, or newly emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus, or the Chikungunya virus, conditions for which vaccines may not exist, are not effective, or have not been widely administered.
In addition, federal and state law enforcement officials have issued warnings about potential terrorist activity involving biological or other weapons of mass destruction. All of these conditions, and others, could have a significant impact on the health of the population of wide-spread areas. We seek to set our IBNP reserves appropriately to account for anticipatable spikes in utilization, such as for the flu season. However, if one of our health plan states were to experience a large-scale natural disaster, a viral epidemic or pandemic, a significant terrorism attack, or some other large-scale event affecting the health of a large number of our members, our covered medical expenses in that state would rise, which could have a material adverse effect on our business, cash flows, financial condition, or results of operations.
If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may negatively affect our business strategy.
We are a corporate parent holding company and hold most of our assets in, and conduct most of our operations through, our direct subsidiaries. As a holding company, our results of operations depend on the results of operations of our subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend on their operating results and will be subject to applicable laws and restrictions contained in agreements governing the debt of such subsidiaries. In addition, our health plan subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions that they can pay to us without prior approval of, or notification to, state regulators. In California, our health plan may dividend, without notice to or approval of the California Department of Managed Health Care, amounts by which its tangible net equity exceeds 130% of the tangible net equity requirement. Our other health plans must give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective state departments of insurance for amounts over the lesser of (a) ten percent of surplus or net worth at the prior year end or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or disapproving a dividend is not clearly defined. Health plans that declare non-extraordinary dividends must usually provide notice to the regulators ten or fifteen days in advance of the intended distribution date of the non-extraordinary dividend. We received $245 million, $100 million, and $125 million in dividends from our regulated health plan subsidiaries during 2017, 2016 and 2015, respectively. The aggregate additional amounts our health plan subsidiaries could have paid us at December 31, 2017 and 2016, without approval of the regulatory authorities, were approximately $85 million and $201 million, respectively. If the regulators were to deny or significantly restrict our subsidiaries’ requests to pay dividends to us, the funds available to our company as a whole would be limited, which could harm our ability to implement our business strategy. For example, we could be hindered in our ability to make debt service payments under our senior notes or revolving credit facility (Credit Facility).
Our use and disclosure of personally identifiable information and other non-public information, including protected health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
State and federal laws and regulations including, but not limited to, HIPAA and the Gramm-Leach-Bliley Act, govern the collection, dissemination, use, privacy, confidentiality, security, availability, and integrity of personally identifiable information (PII), including protected health information, or PHI. HIPAA establishes basic national privacy and security standards for protection of PHI by covered entities and business associates, including health plans such as ours. HIPAA requires covered entities like us to develop and maintain policies and procedures for PHI that is used or disclosed, and to adopt administrative, physical, and technical safeguards to protect PHI. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when
submitting or receiving certain electronic health care transactions, including activities associated with the billing and collection of health care claims.
Mandatory penalties for HIPAA violations range from $100 to $50,000 per violation, and up to $1.5 million per violation of the same standard per calendar year. A single breach incident can result in violations of multiple standards, resulting in possible penalties potentially in excess of $1.5 million. If a person knowingly or intentionally obtains or discloses PHI in violation of HIPAA requirements, criminal penalties may also be imposed. HIPAA authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. We have experienced HIPAA breaches in the past, including breaches affecting over 500 individuals.
New health information standards, whether implemented pursuant to HIPAA, congressional action, or otherwise, could have a significant effect on the manner in which we must handle health care related data, and the cost of complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, PII, or non-public information, we could be subject to criminal or civil sanctions. Any security breach involving the misappropriation, loss, or other unauthorized disclosure or use of confidential member information, whether by us or a third party, such as our vendors, could subject us to civil and criminal penalties, divert management’s time and energy, and have a material adverse effect on our business, financial condition, cash flows, or results of operations.
We are subject to extensive fraud and abuse laws that may give rise to lawsuits and claims against us, the outcome of which may have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Because we receive payments from federal and state governmental agencies, we are subject to various laws commonly referred to as “fraud and abuse” laws, including federal and state anti-kickback statutes, prohibited referrals, and the federal False Claims Act, which permit agencies and enforcement authorities to institute a suit against us for violations and, in some cases, to seek treble damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result in exclusion, debarment, temporary or permanent suspension from participation in government health care programs, or the institution of corporate integrity agreements. Liability under such federal and state statutes and regulations may arise if we know, or it is found that we should have known, that information we provide to form the basis for a claim for government payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was out of compliance with program requirements. Fraud, waste and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a provider, upcoding, payments made to excluded providers, improper marketing, and the violation of patient privacy rights. In particular, there has recently been increased scrutiny by the Department of Justice on health plans’ risk adjustment practices, particularly in the Medicare program. Companies involved in public health care programs such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often the subject of fraud, waste and abuse investigations and audits. The regulations and contractual requirements applicable to participants in these public-sector programs are complex and subject to change. The federal government has taken the position that claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. In addition, under the federal civil monetary penalty statute, the U.S. Department of Health and Human Services (HHS), Office of Inspector General has the authority to impose civil penalties against any person who, among other things, knowingly presents, or causes to be presented, certain false or otherwise improper claims. Qui tam actions under federal and state law can be brought by any individual on behalf of the government. Qui tam actions have increased significantly in recent years, causing greater numbers of health care companies to have to defend a false claim action, pay fines, or be excluded from the Medicare, Medicaid, or other state or federal health care programs as a result of an investigation arising out of such action. We have been the subject of qui tam actions in the past and other qui tam actions may be filed against us in the future. If we are subject to liability under a qui tam or otheractions, our business, financial condition, cash flows, or results of operations could be adversely affected.
Failure to attain profitability in any new start-up operations could negatively affect our results of operations.
Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract and process
claims. Often, we are also required to contribute significant capital to fund mandated net worth requirements, performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the certificate of authority, winning the bid to provide services, or attracting members in sufficient numbers to cover our costs, the new business would fail. We also could be required by the state or commonwealth to continue to provide services for some period of time without sufficient revenue to cover our ongoing costs or to recover our start-up costs.
Even if we are successful in establishing a profitable health plan in a new jurisdiction, increasing membership, revenues, and medical costs will trigger increased mandated net worth requirements which could substantially exceed the net income generated by the health plan. Rapid growth in an existing jurisdiction will also result in increased net worth requirements. In such circumstances, we may not be able to fund on a timely basis, or at all, the increased net worth requirements with our available cash resources. The expenses associated with starting up a health plan in a new jurisdiction, or expanding a health plan in an existing jurisdiction could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results, stock price, and result in our inability to maintain compliance with applicable stock exchange listing requirements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our future testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses.
We have identified material weaknesses in our internal control over financial reporting in the past, which have subsequently been remediated. If additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
Our compliance with Section 404 will continue to require that we incur substantial accounting expense and expend significant management time and effort. Moreover, if we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock Exchange, SEC, or other regulatory authorities which would require additional financial and management resources.
This Form 10-K reflects management's conclusion regarding the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2017. See “Management and Auditor’s Reports - Management’s Evaluation of Disclosure Controls and Procedures and Management’s Report on Internal Control Over Financial Reporting.”
We are dependent on the leadership of our new chief executive officer and other executive officers and key employees.
In May 2017, our board of directors terminated both our former chief executive officer and our former chief financial officer. On November 6, 2017, following an intensive six month executive search effort, the board hired Mr. Joseph Zubretsky as our new chief executive officer. Mr. Zubretsky, in turn, has hired other senior level executives. Under the leadership and direction of Mr. Zubretsky, our executive team has launched a vigorous turnaround plan, including many profit improvement initiatives. Our turnaround plan and operational improvements are highly dependent on the efforts of Mr. Zubretsky and our other key executive officers and employees. The loss of their leadership, expertise, and experience could negatively impact our operations. Our ability to replace them or any other key employee may be difficult and may take an extended period of time because of the limited number of individuals in the health care industry who have the breadth and depth of skills and experience necessary to operate and lead a business such as ours. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain, or motivate these personnel. If we are unsuccessful in recruiting, retaining, managing, and motivating such personnel, our business, financial condition, cash flows, or results of operations may be adversely affected.
We face various risks inherent in the government contracting process that could materially and adversely affect our business and profitability, including periodic routine and non-routine reviews, audits, and investigations by government agencies.
We are subject to various risks inherent in the government contracting process. These risks include routine and non-routine governmental reviews, audits, and investigations, and compliance with government reporting requirements. Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations of those laws and regulations, could result in the imposition of civilfacts or criminal penalties, the cancellation of our government contracts, the suspension or revocation of our licenses, the exclusion from participation in government sponsored health programs, or the revision and recoupment of past payments made based on audit findings. If we are unable to correct any noted deficiencies, or become subject to material fines or other sanctions, we could suffer a substantial reduction in profitability, and could also lose one or more of our government contracts. In addition, government receivables are subject to government audit and negotiation, and government contracts are vulnerable to disagreements with the government. The final amounts we ultimately receive under government contracts may be different from the amounts we initially recognize in our financial statements.
If we sustain a cyber-attack or suffer privacy or data security breaches that disrupt our information systems or operations, or result in the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure to significant liability, reputational harm, loss of business, and other serious negative consequences.
As part of our normal operations, we routinely collect, process, store, and transmit large amounts of data, including sensitive personal information as well as proprietary or confidential information relating to our business or third parties. To ensure information security, we have implemented controls to protect the confidentiality, integrity and availability of this data and the systems that store and transmit such data. However, our information technology systems and safety control systems are subject to a growing number of threats from computer programmers, hackers, and other adversaries that may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions, or cause damage, security issues, or shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or otherwise exploit security vulnerabilities. Because the techniques used to circumvent, gain access to, or sabotage security systems can be highly sophisticated and change frequently, they often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world. We may be unable to anticipate these techniques or implement adequate preventive measures, resulting in potential data loss and damage to our systems. Our systems are also subject to compromise from internal threats such as improper action by employees including malicious insiders, vendors, counterparties, and other third parties with otherwise legitimate access to our systems. Our policies, employee training (including phishing prevention training), procedures and technical safeguards may not prevent all improper access to our network or proprietary or confidential information by employees, vendors, counterparties, or other third parties. Our facilities may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human errors, or other similar events that could negatively affect our systems and our and our members’ data.
Moreover, we face the ongoing challenge of managing access controls in a complex environment. The process of enhancing our protective measures can itself create a risk of systems disruptions and security issues. Given the breadth of our operations and increasing sophistication of cyberattacks, a particular incident could occur and persist for an extended period of time before being detected. The extent of a particular cyberattack and the steps that we may need to take to investigate the attack may take a significant amount of time before such an investigation could be completed and full and reliable information about the incident is known. During such time, the extent of any harm or how best to remediate it might not be known, which could further increase the risks, costs, and consequences of a data security incident. In addition, our systems must be routinely updated, patched, and upgraded to protect against known vulnerabilities. The volume of new software vulnerabilities has increased substantially, as has the importance of patches and other remedial measures. In addition to remediating newly identified vulnerabilities, previously identified vulnerabilities must also be updated. We are at risk that cyber attackers exploit these known vulnerabilities before they have been addressed. The complexity of our systems and platforms that we operate, the increased frequency at which vendors are issuing security patches to their products, our need to test patches, and in some instances, coordinate with third-parties before they can be deployed, all could further increase our risks. The increased use of mobile devices and other technologies can heighten these and other risks. Furthermore, certain aspects of the security of various technologies are unpredictable or beyond our control.
The cost to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber-incident could be significant. We may need to expend significant additional resources in the future to continue to protect
against potential security breaches or to address problems caused by such attacks or any breach of our systems. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of members, vendors, and state contracts. In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about our members could expose our members to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us (including but not limited to material fines, damages, consent orders, penalties and/or remediation costs, mandatory disclosure to the media and regulators, or enforcement proceedings), damage our reputation, or otherwise have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Any changes to the laws and regulations governing our business, or the interpretation and enforcement of those laws or regulations, could require us to modify our operations and could negatively impact our operating results.
Our business is extensively regulated by the federal government and the states in which we operate. The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than managed care organizations. The government agencies administering these laws and regulations have broad latitude in interpreting and applying them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with members and the public. For instance, some states mandate minimum medical expense levels as a percentage of premium revenues. These laws and regulations, and their interpretations, are subject to frequent change. The interpretation of certain contract provisions by our governmental regulators may also change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations, could reduce our profitability by imposing additional capital requirements, increasing our liability, increasing our administrative and other costs, increasing mandated benefits, forcing us to restructure our relationships with providers, requiring us to implement additional or different programs and systems, or making it more difficult to predict future results. Changes in the interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a prior interpretation.
Potential divestitures of businesses or product lines may materially adversely affect our business, financial condition, cash flows, or results of operations.
As a part of our business strategy, we continually review our products and business lines across all geographies to identify opportunities for performance improvement. Depending on the particular circumstances, we may determine that a divestiture of one or more businesses or product lines would be the best means to further our plan to improve and sustain profitability and enhance our focus on the execution of our business plan. Divestitures involve risks, including: difficulties in the separation of operations, services, products and personnel; the diversion of management's attention from other business concerns; the disruption of our business; the potential loss of key employees; the retention of uncertain contingent liabilities related to the divested business or product line; and the failure of our efforts to divest any such business or product line on the terms and time frames desired by management, or at all. Furthermore, we may be unsuccessful in finding a replacement for any lost revenue or income previously derived from the divested business or product line. In addition, divestitures may result in significant impairment charges, including those related to goodwill and other intangible assets, all of which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on our results of operations, financial condition, cash flows and ability to bid for, and continue to participate in, certain programs.
Our contracts require the submission of complete and correct encounter data. The accurate and timely reporting of encounter data is increasingly important to the success of our programs because more states are using encounter data to determine compliance with performance standards and to set premium rates. We have expended and may continue to expend additional effort and incur significant additional costs to collect or correct inaccurate or incomplete encounter data and have been, and continue to be exposed to, operating sanctions and financial fines and penalties for noncompliance. In some instances, our government clients have established retroactive requirements for the encounter data we must submit. There also may be periods of time in which we are unable to meet existing requirements. In either case, it may be prohibitively expensive or impossible for us to collect or reconstruct this historical data.
We have experienced challenges in obtaining complete and accurate encounter data, due to difficulties with providers and third-party vendors submitting claims in a timely fashion in the proper format, and with state agencies in coordinating such submissions. As states increase their reliance on encounter data, these difficulties could
adversely affect the premium rates we receive and how membership is assigned to us and subject us to financial penalties, which could have a material adverse effect on our results of operations, financial condition, cash flows and our ability to bid for, and continue to participate in, certain programs.
Our business depends on our information and medical management systems, and our inability to effectively integrate, manage, update, and keep secure our information and medical management systems could disrupt our operations.
Our business is dependent on effective and secure information systems that assist us in, among other things, processing provider claims, monitoring utilization and other cost factors, supporting our medical management techniques, and providing data to our regulators. Our members and providers also depend upon our information systems for enrollment, primary care and specialist physician roster access, membership verifications, claims status, and other information. If we experience a reduction in the performance, reliability, or availability of our information and medical management systems, our operations, ability to pay claims, and ability to produce timely and accurate reports could be adversely affected. In addition, if the licensor or vendor of any software which is integral to our operations were to become insolvent or otherwise fail to support the software sufficiently, our operations could be negatively affected.
Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our operational needs. On an ongoing basis, we evaluate the ability of our existing operations to support our current and future business needs and to maintain our compliance requirements. As a result, we periodically consolidate, integrate, upgrade and expand our information systems capabilities as a result of technology initiatives, industry trends and recently enacted regulations, and changes in our system platforms. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and changing customer preferences.
Moreover, our acquisition activity requires transitions to or from, and the integration of, various information systems. If we experience difficulties with the transition to or from information systems or are unable to properly implement, maintain, upgrade or expand our systems, we could suffer from, among other things, operational disruptions, loss of members, difficulty in attracting new members, regulatory problems, and increases in administrative expenses.
Because our corporate headquarters are located in Southern California, our business operations may be significantly disrupted as a result of a major earthquake.
Our corporate headquarters is located in Long Beach, California. In addition, some of our health plans’ claims are processed in Long Beach. Southern California is exposed to a statistically greater risk of a major earthquake than most other parts of the United States. If a major earthquake were to strike the Los Angeles area, our corporate functions and claims processing could be significantly impaired for a substantial period of time. If there is a major Southern California earthquake, there can be no assurances that our disaster recovery plan will be successful or that the business operations of all our health plans and our Molina Medicaid Solutions segment, including those that are remote from any such event, would not be substantially impacted.
We face claims related to litigation which could result in substantial monetary damages.
We are subject to a variety of legal actions, including medical malpractice actions, provider disputes, employment related disputes, health care regulatory law-based litigation, breach of contract actions, intellectual property infringement actions, and securities class actions. If we incur liability materially in excess of the amount for which we have insurance coverage, our profitability would suffer. In addition, our providers involved in medical care decisions are exposed to the risk of medical malpractice claims. As an employer of physicians and ancillary medical personnel and as an operator of primary care clinics, our plans are subject to liability for negligent acts, omissions, or injuries occurring at one of our clinics or caused by one of our employees. Given the significant amount of some medical malpractice awards and settlements, the medical malpractice insurance that we maintain may not be sufficient or available at a reasonable cost to protect us from damage awards or other liabilities. Even if any claims brought against us are unsuccessful or without merit, we may have to defend ourselves against such claims. The defense of any such actions may be time-consuming and costly, and may distract our management’s attention.
Furthermore, claimants often sue managed care organizations for improper denials of or delays in care, and in some instances improper authorizations of care. Claims of this nature could result in substantial damage awards against us and our providers that could exceed the limits of any applicable medical malpractice insurance coverage. Successful malpractice or tort claims asserted against us, our providers, or our employees could adversely affect our business, financial condition, cash flows, or results of operations.
We cannot predict the outcome of any lawsuit. Some of the liabilities related to litigation that we may incur may not be covered by insurance, the insurers could dispute coverage, or the amount of insurance could be insufficient to cover the damages awarded. In addition, insurance coverage for all or certain types of liability may become unavailable or prohibitively expensive in the future or the deductible on any such insurance coverage could be set at a level which would result in us effectively self-insuring cases against us. The litigation to which we are subject could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We are subject to competition which negatively impacts our ability to increase penetration in the markets we serve.
We operate in a highly competitive environment and in an industry that is subject to ongoing changes from business consolidations, new strategic alliances, and aggressive marketing practices by other managed care organizations and service providers. Our health plans segment competes for members principally on the basis of size, location and quality of provider network; benefits supplied; quality of service; and reputation. Our Molina Medicaid Solutions segment competes for government contracts principally on the basis of cost, quality of service, expertise, and reputation. A number of these competitive elements are partially dependent upon and can be positively affected by the financial resources available to us. Many other organizations with which we compete, including large commercial plans and other service providers, have substantially greater financial and other resources than we do. For these reasons, we may be unable to grow our business, or may lose business to third parties.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with third party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Some of these third-parties also have direct access to our systems. Our arrangements with third party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data or the information and data relating to our members or customers. We are also at risk of a data security incident involving a vendor or third party, which could result in a breakdown of such third party’s data protection processes or cyber-attackers gaining access to our infrastructure through the third party. To the extent that a vendor or third party suffers a data security incident that compromises its operations, we could incur significant costs and possible service interruption,developments, which could have an adverse effect on our businessconsolidated financial position, results of operations, or cash flows.
Regulatory Capital Requirements and operations. Dividend Restrictions. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with minimum statutory capital requirements.
The Molina Healthcare Charitable Foundation. In addition,August 2020, we announced our commitment of $150 million to fund The Molina Healthcare Charitable Foundation (the “Foundation”), an independent not-for-profit charitable foundation. We contributed $15 million to the Foundation in the fourth quarter of 2020.
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and assumptions that may have disagreementsaffect reported amounts and disclosures. Actual results could differ from these estimates, and some differences could be material. Our most significant accounting estimates, which include a higher degree of judgment and/or complexity, include the following:
•Medical claims and benefits payable. See discussion below, and refer to the Notes to Consolidated Financial Statements, Notes 2, “Significant Accounting Policies,” and 10, “Medical Claims and Benefits Payable” for more information.
•Contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
•Quality incentives. For a discussion of this topic, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”
•Business Combinations, and Goodwill and intangible assets, net. At December 31, 2020, goodwill and intangible assets, net, represented approximately 10% of total assets and 45% of total stockholders’ equity, compared with third party vendors3% and service9%, respectively, at December 31, 2019.For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to the Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies,” Note 4, “Business Combinations,” and Note 9, “Goodwill and Intangible Assets, Net.”
Molina Healthcare, Inc. 2020 Form 10-K | 45
MEDICAL CARE COSTS, MEDICAL CLAIMS AND BENEFITS PAYABLE
Medical care costs are recognized in the period in which services are provided and include fee-for-service claims, pharmacy benefits, capitation payments to providers, regarding relative responsibilitiesand various other medically-related costs. Under fee-for-service claims arrangements with providers, we retain the financial responsibility for any such failuresmedical care provided and incur costs based on actual utilization of hospital and physician services. Such medical care costs include amounts paid by us as well as estimated medical claims and benefits payable for costs that were incurred but not paid as of the reporting date (“IBNP”). Pharmacy benefits represent payments for members' prescription drug costs, net of rebates from drug manufacturers. We estimate pharmacy rebates based on historical and current utilization of prescription drugs and contractual provisions. Capitation payments represent monthly contractual fees paid to providers, who are responsible for providing medical care to members, which could include medical or incidents under applicable business associate agreementsancillary costs like dental, vision and other supplemental health benefits. Such capitation costs are fixed in advance of the periods covered and are not subject to significant accounting estimates. Other medical care costs include all medically-related administrative costs, amounts due to providers pursuant to risk-sharing or other applicable outsourcing agreements. Any contractual remedies and/incentive arrangements, provider claims, and other healthcare expenses. Examples of medically-related administrative costs include expenses relating to health education, quality assurance, case management, care coordination, disease management, and 24-hour on-call nurses. Additionally, we include an estimate for the cost of settling claims incurred through the reporting date in our medical claims and benefits payable liability.
Medical claims and benefits payable consist mainly of fee-for-service IBNP, unpaid pharmacy claims, capitation costs, other medical costs, including amounts payable to providers pursuant to risk-sharing or indemnification obligationsother incentive arrangements and amounts payable to providers on behalf of certain state agencies for certain state assessments in which we mayassume no financial risk. IBNP includes the costs of claims incurred as of the balance sheet date which have for vendor or service provider failures or incidents may not be adequate to fully compensate us for any losses suffered as a result of any vendor’s failure to satisfy its obligationsbeen reported to us, and our best estimate of the cost of claims incurred but not yet reported to us. We also include an additional reserve to ensure that our overall IBNP liability is sufficient under moderately adverse conditions. We reflect changes in these estimates in the consolidated results of operations in the period in which they are determined.
The estimation of the IBNP liability requires a significant degree of judgment in applying actuarial methods, determining the appropriate assumptions and considering numerous factors. Of those factors, we consider estimated completion factors (measures the cumulative percentage of claims expense that will ultimately be paid for a given month of service based on historical payment patterns) and the assumed healthcare cost trend (the year-over-year change in per-member per-month medical care costs) to be the most critical assumptions. Other relevant factors also include, but are not limited to, healthcare service utilization trends, claim inventory levels, changes in membership, product mix, seasonality, benefit changes or under applicable law. Further,changes in Medicaid fee schedules, provider contract changes, prior authorizations and the incidence of catastrophic or pandemic cases.
For claims incurred more than three months before the financial statement date, we may notmainly use estimated completion factors to estimate the ultimate cost of those claims. Completion factors measure the cumulative percentage of claims expense that will ultimately be adequately indemnified against all possible lossespaid for a given month of service based on historical claims payment patterns. We analyze historical claims payment patterns by comparing claim incurred dates to claim payment dates to estimate completion factors. The estimated completion factors are then applied to claims paid through the termsfinancial statement date to estimate the ultimate claims cost for a given month’s incurred claim activity. The difference between the estimated ultimate claims cost and conditionsthe claims paid through the financial statement date represents our estimate of claims remaining to be paid as of the financial statement date and is included in our IBNP liability.
For claims incurred within three months before the financial statement date, actual claims paid are a less reliable measure of our contracts with third party vendorsultimate cost since a large portion of medical claims are not submitted to us until several months after services have been submitted. Accordingly, we estimate our IBNP liability for claims incurred during these months based on a blend of estimated completion factors and service providers. Our outsourcing arrangements couldassumed medical care cost trend. The assumed medical care cost trend represents the year-over-year change in per-member per-month medical care costs, which can be adversely impactedaffected by many factors including, but not limited to, our ability and practices to manage medical and pharmaceutical costs, changes in vendors’level and mix of services utilized, mix of benefits offered, including the impact of co-pays and deductibles, changes in medical practices, changes in member demographics, catastrophes and epidemics, and other relevant factors.
Actuarial standards of practice generally require a level of confidence such that our overall best estimate of the IBNP liability has a greater probability of being adequate versus being insufficient, where the liability is sufficient to account for moderately adverse conditions. Adverse conditions are situations that may cause actual claims to be higher than the otherwise estimated value of such claims at the time of the estimate, such as changes in the
Molina Healthcare, Inc. 2020 Form 10-K | 46
magnitude or service providers’ operationsseverity of claims, uncertainties related to our entry into new geographical markets or financial conditionprovision of services to new populations, changes in state-controlled fee schedules, and modifications or other matters outsideupgrades to our claims processing systems and practices. Therefore, in many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial standards of practice.
When subsequent actual claims payments are less than we estimated, we recognize a benefit for favorable prior period development that is reported as part of “Components of medical care costs related to: “Prior years” in the table presented in Note 10, “Medical Claims and Benefits Payable.” Our reserving practice is to consistently recognize the actuarial best estimate including a provision for moderately adverse conditions for each current period. This provision is reported as part of “Components of medical care costs related to: Current year” in the table presented in Note 10. Assuming stability in the size of our control. If we fail to adequately monitor and regulatemembership, the performanceuse of this consistent methodology, during any given period, usually results in the replenishment of reserves at a level that generally offsets the benefit of favorable prior period development in that period. In the case of material growth or decline of membership, replenishment can exceed or fall short of the favorable development, assuming all other factors remain unchanged.
Because of the significant degree of judgment involved in estimation of our third party vendorsIBNP liability, there is considerable variability and service providers,uncertainty inherent in such estimates. The following table reflects the hypothetical change in our estimate of claims liability as of December 31, 2020 that would result if we could be subject to additional risk, including significant cybersecurity risk. Violations of, or noncompliance with, laws and/or regulations governingchange our business or noncompliance with contract termscompletion factors for the fourth through the twelfth months preceding December 31, 2020, by third party vendors and service providers couldthe percentages indicated. A reduction in the completion factor results in an increase our exposure to liabilityin medical claims liabilities. The following tables do not include amounts relating to our members, providers, or other third parties, or sanctions and/or fines fromrecent acquisitions of Magellan Complete Care and Passport. Dollar amounts are in millions.
| | | | | |
| Increase (Decrease) in Estimated Completion Factors | Increase
(Decrease)
in Medical Claims
and
Benefits Payable |
| (6)% | $ | 491 | |
| (4)% | 327 | |
| (2)% | 164 | |
| 2% | (164) | |
| 4% | (327) | |
| 6% | (491) | |
The following table reflects the regulatorshypothetical change in our estimate of claims liability as of December 31, 2020 that overseewould result if we alter our business. In turn, this couldassumed medical care cost trend factors by the percentages indicated. An increase in the PMPM costs associatedresults in an increase in medical claims liabilities. Dollar amounts are in millions.
| | | | | |
| (Decrease) Increase in Trended Per Member Per Month Cost Estimates | (Decrease)
Increase
in Medical Claims
and
Benefits Payable |
| (6)% | $ | (179) | |
| (4)% | (120) | |
| (2)% | (60) | |
| 2% | 60 | |
| 4% | 120 | |
| 6% | 179 | |
There are many related factors working in conjunction with one another that determine the operationaccuracy of our business or have an adverseestimates, some of which are qualitative in nature rather than quantitative. Therefore, we are seldom able to quantify the impact that any single factor has on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason,a change in estimate. Given the variability inherent in the reserving process, we may notwill only be able to find alternative partners inidentify specific factors if they represent a timely manner or on acceptable financial terms, and may incur significant costs and/or disruption to our operations in connection with any such vendor or service provider transition.departure from expectations. As a result, we maydo not expect to be able to meetfully quantify the full demandsimpact of our members or customers and, in turn, our business, financial condition, or results of operations may be harmed. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third party vendors and service providers, as a result of regulatory restrictionsindividual factors on outsourcing, unanticipated delays in transitioning our operations to the third party, vendor or service provider noncompliance with contract terms or violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or financial problems that could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our obligations under our outstanding indebtedness.estimates.
We have a significant amount of indebtedness. As of December 31, 2017, our total indebtedness was approximately $2,169 million, including lease financing obligations. As of December 31, 2017, we also had $194 million available for borrowing under our Credit Facility. In addition, as of January 2, 2018, we had $550 million available under our Bridge Credit Agreement, subject to the use of proceeds conditions set forth therein.
Our substantial indebtedness could have significant consequences, including:
increasing our vulnerability to adverse economic, industry, or competitive developments;
requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, make capital expenditures, and pursue future business opportunities;
exposing us to the risk of increased interest rates to the extent of any future borrowings, including borrowings under our Credit Facility, at variable rates of interest;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, including our Credit Facility and our outstanding senior notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing our outstanding senior notes and the agreements governing such other indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product and service development, debt service requirements, acquisitions, and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our substantial indebtedness may prevent us from exploiting.
The terms of our debt impose, and will impose, restrictions on us that may affect our ability to successfully operate our business and our ability to make payments on our outstanding senior notes.
The indentures governing our outstanding senior notes and the credit agreement governing our Credit Facility contain various covenants that could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest. These covenants limit our ability to, among other things:
incur additional indebtedness or issue certain preferred equity;
pay dividends on, repurchase, or make distributions in respect of our capital stock, prepay, redeem, or repurchase certain debt or make other restricted payments;
make certain investments;
create certain liens;
sell assets, including capital stock of restricted subsidiaries;
enter into agreements restricting our restricted subsidiaries’ ability to pay dividends to us;
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate our restricted subsidiaries as unrestricted subsidiaries.
All of these covenants may restrict our ability to pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under the indentures for our outstanding senior notes and/or the credit agreement
governing our Credit Facility and the Bridge Credit Agreement including, as a result of cross default provisions and, in the case of our Credit Facility and our Bridge Credit Agreement, permit the lenders to cease making loans to us. If there were an event of default under the indentures governing our outstanding senior notes and/or the credit agreement governing our Credit Facility, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt instruments in the event of a default thereunder.
In addition, the restrictive covenants in the credit agreement governing our Credit Facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control.
If our operating performance declines, we may be required to obtain waivers from the lenders under our Credit Facility, from the holders of our outstanding senior notes or from the holders of other obligations, to avoid defaults thereunder. For example, in February 2017, to avoid default under our Credit Facility as a result of our failure to comply with certain financial covenants therein applicable to the three months ended December 31, 2016, we sought, and obtained, a waiver of such defaults by the required lenders under our Credit Facility.
If we are not able to obtain such waivers, our creditors could exercise their rights upon default, and we could be forced into bankruptcy or liquidation.
We may not have the funds necessary to pay the amounts due upon conversion or required repurchase of our outstanding notes, and our indebtedness may contain limitations on our ability to pay the amounts due upon conversion or required repurchase.
As of December 31, 2017, the aggregate outstanding principal amount of our 1.125% cash convertible senior notes due January 15, 2020 (1.125% Convertible Notes), and our 1.625% convertible senior notes due 2044 (1.625% Convertible Notes) was $550 million and $161 million, respectively. Both our 1.125% Convertible Notes and our 1.625% Convertible Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger. The stock price trigger for the 1.125% Convertible Notes is $53.00 per share. The 1.125% Convertible Notes met this trigger in the quarter ended December 31, 2017, and are convertible to cash through at least March 31, 2018. Because the 1.125% Convertible Notes may be converted into cash within 12 months, their carrying amount is reported in current portion of long-term debt as of December 31, 2017. For economic reasons related to the trading market for our 1.125% Convertible Notes, we believe that the amount of the notes that may be converted over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Convertible Notes becomes closed or restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Convertible Notes, which normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that marginal premium, holders of our 1.125% Convertible Notes may elect to convert the notes to cash.
The stock price trigger for the 1.625% Notes is $75.51 per share. The 1.625% Convertible Notes did not meet this stock price trigger in the quarter ended December 31, 2017. However, on contractually specified dates beginning in 2018, holders of the 1.625% Convertible Notes may require us to repurchase some or all of such notes. In addition, beginning May 15, 2018 until August 19, 2018, holders may convert some or all of the 1.625% Convertible Notes. Because of these put and conversion features, the 1.625% Convertible Notes are reported in current portion of long-term debt as of December 31, 2017.
If conversion requests are received, the settlement of the notes must be paid primarily in cash pursuant to the terms of the relevant indentures.
In addition, in the event of a change in control or the termination in trading of our stock, each holder of our 1.125% Convertible Notes and our 1.625% Convertible Notes would have the right to require us to purchase some or all of their notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest.
Our ability to comply with the conversion or repurchase obligations under our 1.125% Convertible Notes and our 1.625% Convertible Notes will depend on the extent to which we have cash or financing available to satisfy such obligations and may also be limited by law, by regulatory authority, or by agreements governing our future indebtedness. The indentures for the 1.125% Convertible Notes and the 1.625% Convertible Notes provide that it would be an event of default if we do not make the cash payments due upon conversion or required repurchase of the notes. The occurrence of an event of default under one or both of these indentures may also constitute an event of default under our Credit Facility, our Bridge Credit Agreement and under our other indebtedness we may have
outstanding at such time. Any such default could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including our Credit Facility and Bridge Credit Agreement, and the indentures governing our outstanding senior notes, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
There can be no assurance that any rating assigned by the rating agencies to our debt or our corporate rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. During 2017, both Moody’s and Standard and Poor’s downgraded our debt ratings. In February 2018, both Moody’s and S&P downgraded our corporate and debt ratings further to BB- and B3, respectively, with modest negative impact on future borrowing cost. A further lowering or withdrawal of the ratings assigned to our debt securities by rating agencies would likely increase our future borrowing costs and reduce our access to capital, which could have a materially adverse impact on our business, financial condition, cash flows, or results of operations.
If federal spending on the Medicaid program is reduced, populations served by Molina Medicaid Solutions could decline and our revenues could be materially reduced.
As noted above, some of the ACA modifications considered involve significantly reduced federal spending on the Medicaid program. Among the proposals being considered include reversing the ACA’s expansion of Medicaid, and changing Medicaid to a state block grant program, possibly including a per capita cap. An end to Medicaid Expansion could lower the populations served by Molina Medicaid Solutions. Changing Medicaid to a state block grant program would turn control of the program to states and cap what the federal government spends on Medicaid each year. Fixed state block grants could mean states will cut benefits or force beneficiaries to take on more cost-sharing. If Medicaid Expansion were reversed and the funding of Medicaid capped, the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and as a result our profitability would be negatively impacted.
We may be unable to retain or renew the state government contracts of the Molina Medicaid Solutions segment on terms consistent with our expectations or at all.
Molina Medicaid Solutions currently provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida. If we are unable to continue to operate in any of those six jurisdictions, or if our current operations in any of those jurisdictions are significantly curtailed, the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and as a result our profitability would be negatively impacted.
If the responsive bids to RFPs of Molina Medicaid Solutions are not successful, our revenues could be materially reduced and our operating results could be negatively impacted.
The government contracts of Molina Medicaid Solutions may be subject to periodic competitive bidding. In such process, Molina Medicaid Solutions may face competition as other service providers, some with much greater
financial resources and greater name recognition, attempt to enter our markets through the competitive bidding process. Molina Medicaid Solutions also anticipates bidding in other states which have issued RFPs for procurement of a new MMIS. If our responsive bids in other states are not successful, we will be unable to grow in a manner consistent with our projections. In addition, we may be unable to support the carrying amount of goodwill we have recorded for this business, because its fair value estimated future cash flows. Even if our responsive bids are successful, the bids may be based upon assumptions or other factors which could result in the contract being less profitable than we had expected or had been the case prior to competitive re-bidding.
Because of the complexity and duration of the services and systems required to be delivered under the government contracts of Molina Medicaid Solutions, there are substantial risks associated with full performance under the contracts.
The state contracts of Molina Medicaid Solutions typically require significant investment in the early stages that is expected to be recovered through billings over the life of the contracts. These contracts involve the construction of new computer systems and communications networks and the development and deployment of complex technologies. Substantial performance risk exists under each contract. Some or all elements of service delivery under these contracts are dependent upon successful completion of the design, development, construction, and implementation phases. Any increased or unexpected costs or delays in connection with the performance of these contracts, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our business, financial condition, cash flows, or results of operations.
If we fail to comply with our state government contracts or government contracting regulations, our business could be adversely affected.
Molina Medicaid Solutions’ contracts with state government customers may include unique and specialized performance requirements. In particular, contracts with state government customers are subject to various procurement regulations, contract provisions, and other requirements relating to their formation, administration, and performance. Any failure to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include termination of the contracts, forfeiture of profits, suspension of payments, imposition of fines, and suspension from future government contracting. Further, any negative publicity related to our state government contracts or any proceedings surrounding them may damage our business by affecting our ability to compete for new contracts. The termination of a state government contract, our suspension from government work, or any negative impact on our ability to compete for new contracts, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our business may be adversely affected by the transition from traditional fee-for-service to Medicaid managed care.
To reduce expenses, a number of state Medicaid programs are expected to pursue the transition from a fee-for-service focus of their Medicaid programs to a Medicaid managed care focus. A shift in Medicaid payment models from fee-for-service to managed care will require a concomitant shift in the focus of MMIS. In connection with such a transition, MMIS must also make a transition from a system built around claims adjudication to one that performs analytics and can be used to manage Medicaid population health outcomes. If our Molina Medicaid Solutions segment is unable to accomplish this transition, our business, financial condition, cash flows, or results of operations may be adversely affected.
Risks Related to Our Common Stock
Future sales of our common stock or equity-linked securities in the public market could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
We may issue equity securities in the future, or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Sales of a substantial number of shares of our common stock or other equity securities, including sales of shares in connection with any future acquisitions, could be substantially dilutive to our stockholders. These sales may have a harmful effect on prevailing market prices for our common stock and our ability to raise additional capital in the financial markets at a time and price favorable to us. Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options, or warrants to purchase our common stock in the future and those stock appreciation rights, options, or warrants are exercised or as the restricted stock units vest, our stockholders may experience further dilution. Holders of our shares of
common stock have no preemptive rights that entitle holders to purchase a pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our stockholders. Our certificate of incorporation provides that we have authority to issue 150 million shares of common stock and 20 million shares of preferred stock. As of December 31, 2017, approximately 60 million shares of common stock and no shares of preferred or other capital stock were issued and outstanding.
It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a premium on their stock price.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These provisions may prohibit stockholders owning 15% or more of our outstanding voting stock from merging or combining with us. In addition, any change in control of our state health plans would require the approval of the applicable insurance regulator in each state in which we operate.
Our certificate of incorporation and bylaws also contain provisions that could have the effect of delaying, deferring, or preventing a change in control of our company that stockholders may consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
a staggered board of directors, so that it would take three successive annual meetings to replace all directors,
prohibition of stockholder action by written consent, and
advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.
In addition, changes of control are often subject to state regulatory notification, and in some cases, prior approval.
Further, our board of directors or a committee thereof has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors or a committee thereof to create and issue a new series of preferred stock could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.
LEGAL PROCEEDINGSRECENTLY ISSUED ACCOUNTING STANDARDS
Refer to the Notes to Consolidated Financial Statements, Note 19, “Commitments and Contingencies—Legal Proceedings,2, “Significant Accounting Policies,” for a discussion of legal proceedings.recent accounting pronouncements that affect us.
MANAGEMENT AND AUDITOR’S REPORTS
MANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of any possible controls and procedures.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by thisMolina Healthcare, Inc. 2020 Form 10-K pursuant to Rule 13a-15(b) and Rule 15d-15(b) of| 47
See accompanying notes.
The Registrant was incorporated in 2002. Prior to that date, Molina Healthcare of California (formerly known as Molina Medical Centers) operated as a California health plan and as the parent company for three other state health plans. In June 2003, the employees and operations of the corporate entity were transferred from Molina Healthcare of California to the Registrant.
The Registrant’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The accompanying condensed financial information of the Registrant should be read in conjunction with the consolidated financial statements and accompanying notes.
The Registrant provides certain centralized medical and administrative services to itsour subsidiaries pursuant to administrative services agreements including medical affairsthat include, but are not limited to, information technology, product development and qualityadministration, underwriting, claims processing, customer service, certain care management health education, credentialing,services, human
The Registrant and its subsidiaries are included in the consolidated federal and state income tax returns filed by the Registrant. Income taxes are allocated to each subsidiary in accordance with an intercompany tax allocation agreement. The agreement allocates income taxes in an amount generally equivalent to the amount which would
be expensed by the subsidiary if it filed a separate tax return. Net operating loss benefits are paid to the subsidiary by the Registrant to the extent such losses are utilized in the consolidated tax returns.
When the Registrant receives dividends from its subsidiaries, such amounts are recorded as a reduction to the investments in the respective subsidiaries.
For all periods presented, the Registrant made capital contributions to certain subsidiaries primarily to comply with minimum net worth requirements and to fund business combinations. Such amounts have been recorded as an increase in investment in the respective subsidiaries, net of insignificant returns of capital.subsidiaries.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the undersigned registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 1st16th day of March, 2018.February, 2021.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
