UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2019~~March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-31719

MOLINA HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-4204626
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Oceangate, Suite 100
Long Beach,	California	90802
(Address of principal executive offices)		(Zip Code)

(562) 435-3666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value	MOH	New York Stock Exchange

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. 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). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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.

~~Large~~Large Accelerated Filer ☒ 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 Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of ~~July 26, 2019,~~April 24, 2020, was approximately ~~62,711,000.~~59,200,000.

MOLINA HEALTHCARE, INC. FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~June 30, 2019~~MARCH 31, 2020

TABLE OF CONTENTS


ITEM NUMBER	ITEM NUMBER	Page	ITEM NUMBER	Page

PART I - Financial Information
PART I			PART I

1.	Financial Statements	3	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

3.	Quantitative and Qualitative Disclosures About Market Risk	48	Quantitative and Qualitative Disclosures About Market Risk	38

4.	Controls and Procedures	49	Controls and Procedures	39

Part II - Other Information
PART II			PART II

1.	Legal Proceedings	49	Legal Proceedings	39

1A.	Risk Factors	49	Risk Factors	39

2.	Unregistered Sales of Equity Securities and Use of Proceeds	49	Unregistered Sales of Equity Securities and Use of Proceeds	40

3.	Defaults Upon Senior Securities	Not Applicable.	Defaults Upon Senior Securities	Not Applicable.

4.	Mine Safety Disclosures	Not Applicable.	Mine Safety Disclosures	Not Applicable.

5.	Other Information	Not Applicable.	Other Information	Not Applicable.

6.	Exhibits	50	Exhibits	41

	Signatures	51	Signatures	42

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended March 31,
	2019			2018		2019			2018		2020		2019
	(In millions, except per-share amounts) (Unaudited)										(In millions, except per-share amounts) (Unaudited)
Revenue:
Premium revenue	$	4,049		$	4,514	$	8,001		$	8,837	$	4,304	$	3,952
Premium tax revenue	110			106		248			210		150		138
Health insurer fees reimbursed	—			104		—			165		66		—
Service revenue	—			127		—			261
Investment income and other revenue	34			32		63			56		29		29
Total revenue	4,193			4,883		8,312			9,529		4,549		4,119
Operating expenses:
Medical care costs	3,466			3,850		6,837			7,572		3,716		3,371
General and administrative expenses	328			335		630			687		317		302
Premium tax expenses	110			106		248			210		150		138
Health insurer fees	—			99		—			174		68		—
Depreciation and amortization	22			25		47			51		20		25
Restructuring costs	2			8		5			33
Cost of service revenue	—			118		—			238
Other											4		3
Total operating expenses	3,928			4,541		7,767			8,965		4,275		3,839
Operating income	265			342		545			564		274		280
Other expenses, net:
Interest expense	22			32		45			65		21		23
Other (income) expenses, net	(14		)	5		(17		)	15
Other income, net											—		(3		)
Total other expenses, net	8			37		28			80		21		20
Income before income tax expense	257			305		517			484		253		260
Income tax expense	61			103		123			175		75		62
Net income	$	196		$	202	$	394		$	309	$	178	$	198

Net income per share:
Basic	$	3.15		$	3.29	$	6.34		$	5.10
Diluted	$	3.06		$	3.02	$	6.04		$	4.68
Net income per share - Basic											$	2.95	$	3.19
Net income per share - Diluted											$	2.92	$	2.99

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
	2019		2018		2019		2018			2020			2019
	(In millions) (Unaudited)									(In millions) (Unaudited)
Net income	$	196	$	202	$	394	$	309		$	178		$	198
Other comprehensive income (loss):
Unrealized investment income (loss)	10		1		17		(6		)
Other comprehensive (loss) income:
Unrealized investment (loss) income										(25		)	7
Less: effect of income taxes	2		—		4		(1		)	(6		)	2
Other comprehensive income (loss), net of tax	8		1		13		(5		)
Other comprehensive (loss) income, net of tax										(19		)	5
Comprehensive income	$	204	$	203	$	407	$	304		$	159		$	203

See accompanying notes.

CONSOLIDATED BALANCE SHEETS

June 30,
2019 December 31,
2018

(Dollars in millions,
except per-share amounts)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,253
$ 2,826
Investments 2,070
1,681
Receivables 1,239
1,330
Prepaid expenses and other current assets 132
149
Derivative asset 169
476
Total current assets 5,863
6,462
Property, equipment, and capitalized software, net 373
241
Goodwill and intangible assets, net 180
190
Restricted investments 98
120
Deferred income taxes 70
117
Other assets 106
24
$ 6,690
$ 7,154

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 1,767
$ 1,961
Amounts due government agencies 984
967
Accounts payable and accrued liabilities 373
390
Deferred revenue 30
211
Current portion of long-term debt 65
241
Derivative liability 169
476
Total current liabilities 3,388
4,246
Long-term debt 1,241
1,020
Finance lease liabilities 232
197
Other long-term liabilities 93
44
Total liabilities 4,954
5,507
Stockholders’ equity:
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 63 million shares at June 30, 2019, and 62 million shares at December 31, 2018 —
—
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding —
—
Additional paid-in capital 240
643
Accumulated other comprehensive income (loss) 5
(8 )
Retained earnings 1,491
1,012
Total stockholders’ equity 1,736
1,647
$ 6,690
$ 7,154



	March 31, 2020			December 31, 2019
	(Dollars in millions, except per-share amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,365		$	2,452
Investments	2,010			1,946
Receivables	1,603			1,406
Prepaid expenses and other current assets	346			163
Total current assets	6,324			5,967
Property, equipment, and capitalized software, net	385			385
Goodwill and intangible assets, net	168			172
Restricted investments	82			79
Deferred income taxes	71			79
Other assets	99			105
Total assets	$	7,129		$	6,787

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable	$	1,981		$	1,854
Amounts due government agencies	777			664
Accounts payable, accrued liabilities and other	743			484
Deferred revenue	43			249
Current portion of long-term debt	26			18
Total current liabilities	3,570			3,269
Long-term debt	1,596			1,237
Finance lease liabilities	229			231
Other long-term liabilities	87			90
Total liabilities	5,482			4,827
Stockholders’ equity:
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 59 million shares at March 31, 2020, and 62 million shares at December 31, 2019	—			—
Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding	—			—
Additional paid-in capital	140			175
Accumulated other comprehensive (loss) income	(15		)	4
Retained earnings	1,522			1,781
Total stockholders’ equity	1,647			1,960
Total liabilities and stockholders’ equity	$	7,129		$	6,787

See accompanying notes.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income

Retained
Earnings
Total
Outstanding Amount
(In millions)
(Unaudited)
Balance at December 31, 2018 62
$ —
$ 643
$ (8 ) $ 1,012
$ 1,647
Net income —
—
—
—
198
198
Adoption of new accounting standard —
—
—
—
85
85
Partial termination of 1.125% Warrants —
—
(103 ) —
—
(103 )
Other comprehensive income, net —
—
—
5
—
5
Share-based compensation 1
—
3
—
—
3
Balance at March 31, 2019 63
—
543
(3 ) 1,295
1,835
Net income —
—
—
—
196
196
Partial termination of 1.125% Warrants —
—
(321 ) —
—
(321 )
Other comprehensive income, net —
—
—
8
—
8
Share-based compensation —
—
18
—
—
18
Balance at June 30, 2019 63
$ —
$ 240
$ 5
$ 1,491
$ 1,736



	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
	Outstanding		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
	(In millions)
	(Unaudited)
Balance at December 31, 2019	62		$	—	$	175		$	4		$	1,781		$	1,960
Net income	—		—		—			—			178			178
Common stock purchases	(3	)	—		(9		)	—			(437		)	(446		)
Termination of warrants	—		—		(30		)	—			—			(30		)
Other comprehensive loss, net	—		—		—			(19		)	—			(19		)
Share-based compensation	—		—		4			—			—			4
Balance at March 31, 2020	59		$	—	$	140		$	(15	)	$	1,522		$	1,647

Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings
Total
Outstanding Amount
(In millions)
(Unaudited)
Balance at December 31, 2017 60
$ —
$ 1,044
$ (5 ) $ 298
$ 1,337
Net income —
—
—
—
107
107
Adoption of new accounting standards —
—
—
(1 ) 7
6
Exchange of 1.625% Convertible Notes 2
—
108
—
—
108
Other comprehensive loss, net —
—
—
(6 ) —
(6 )
Share-based compensation —
—
1
—
—
1
Balance at March 31, 2018 62
—
1,153
(12 ) 412
1,553
Net income —
—
—
—
202
202
Partial termination of 1.125% Warrants —
—
(113 ) —
—
(113 )
Other comprehensive income, net —
—
—
1
—
1
Share-based compensation —
—
15
—
—
15
Balance at June 30, 2018 62
$ —
$ 1,055
$ (11 ) $ 614
$ 1,658



	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total
	Outstanding	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total
	(In millions)
	(Unaudited)
Balance at December 31, 2018	62	$	—	$	643		$	(8	)	$	1,012	$	1,647
Net income	—	—		—			—			198		198
Adoption of new accounting standard	—	—		—			—			85		85
Partial termination of warrants	—	—		(103		)	—			—		(103		)
Other comprehensive income, net	—	—		—			5			—		5
Share-based compensation	1	—		3			—			—		3
Balance at March 31, 2019	63	$	—	$	543		$	(3	)	$	1,295	$	1,835

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(In millions) (Unaudited)						(In millions) (Unaudited)
Operating activities:
Net income	$	394		$	309		$	178		$	198
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47			73			20			25
Deferred income taxes	19			(6		)	14			15
Share-based compensation	19			13			12			9
Amortization of convertible senior notes and finance lease liabilities	4			13
(Gain) loss on debt extinguishment	(17		)	15
Non-cash restructuring costs	—			17
Gain on debt repayment							—			(3		)
Other, net	3			4			(3		)	6
Changes in operating assets and liabilities:
Receivables	91			(315		)	(197		)	(29		)
Prepaid expenses and other current assets	18			(181		)	(229		)	20
Medical claims and benefits payable	(194		)	(267		)	127			34
Amounts due government agencies	17			205			113			(35		)
Accounts payable and accrued liabilities	(61		)	349
Accounts payable, accrued liabilities and other							247			(30		)
Deferred revenue	(181		)	(42		)	(206		)	(4		)
Income taxes	(3		)	127			60			43
Net cash provided by operating activities	156			314			136			249
Investing activities:
Purchases of investments	(1,162		)	(914		)	(578		)	(185		)
Proceeds from sales and maturities of investments	791			1,335			493			366
Purchases of property, equipment and capitalized software	(20		)	(14		)	(21		)	(6		)
Other, net	(2		)	(9		)	3			(4		)
Net cash (used in) provided by investing activities	(393		)	398			(103		)	171
Financing activities:
Repayment of principal amount of 1.125% Convertible Notes	(185		)	(89		)
Cash paid for partial settlement of 1.125% Conversion Option	(473		)	(134		)
Cash received for partial termination of 1.125% Call Option	473			134
Cash paid for partial termination of 1.125% Warrants	(424		)	(113		)
Proceeds from borrowings under Term Loan Facility	220			—
Repayment of Credit Facility	—			(300		)
Common stock purchases							(453		)	—
Proceeds from borrowings under term loan facility							380			100
Cash paid for partial termination of warrants							(30		)	(103		)
Cash paid for partial settlement of conversion option							(27		)	(115		)
Cash received for partial settlement of call option							27			115
Repayment of principal amount of convertible senior notes							(12		)	(46		)
Other, net	27			(1		)	(3		)	1
Net cash used in financing activities	(362		)	(503		)	(118		)	(48		)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents	(599		)	209			(85		)	372
Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period	2,926			3,290			2,508			2,926
Cash, cash equivalents, and restricted cash and cash equivalents at end of period	$	2,327		$	3,499		$	2,423		$	3,298

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

Six Months Ended June 30,
2019 2018
(In millions)
(Unaudited)
Supplemental cash flow information:

Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation $ (7 ) $ (6 )

Details of change in fair value of derivatives, net:
Gain on 1.125% Call Option $ 166
$ 135
Loss on 1.125% Conversion Option (166 ) (135 )
Change in fair value of derivatives, net $ —
$ —

1.625% Convertible Notes exchange transaction:
Common stock issued in exchange for 1.625% Convertible Notes $ —
$ 131
Component allocated to additional paid-in capital, net of income taxes —
(23 )
Net increase to additional paid-in capital $ —
$ 108



	Three Months Ended March 31,
	2020			2019
	(In millions) (Unaudited)
Supplemental cash flow information:

Schedule of non-cash investing and financing activities:
Common stock used for share-based compensation	$	(7	)	$	(7	)

Details of change in fair value of derivatives, net:
(Loss) gain on call option	$	(2	)	$	155
Gain (loss) on conversion option	2			(155		)
Change in fair value of derivatives, net	$	—		$	—

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~June 30, 2019~~March 31, 2020

1. Organization and Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. provides managed healthcare services under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). We currently have ~~two~~2 reportable segments: ~~our~~the Health Plans segment and ~~our~~the Other segment. WeOur reportable segments are consistent with how we currently manage the ~~vast majority of our operations through our Health Plans segment. The Other segment includes~~business and view the ~~historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries~~markets we sold in the fourth quarter of 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Prior to the fourth quarter of 2018, the MMIS subsidiary was reported as a stand-alone segment.serve.

The Health Plans segment consists of health plans operating in 14 states and the Commonwealth of Puerto Rico. As of ~~June 30, 2019,~~March 31, 2020, these health plans served approximately 3.4 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 subsidies for premiums. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).

Our ~~health plans’~~ state Medicaid contracts ~~generally~~typically have terms of three to five ~~years. These contracts typically~~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 (“RFPs”) 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.

Recent Developments – Health Plans Segment

Refer to Note 11, “Subsequent Events,” for the description of a recent acquisition transaction.

Puerto Rico. We have decided to sell our Puerto Rico Medicaid business. In doing so, we will work closely with the regulatory authorities and the provider community, to ensure that our members in Puerto Rico are cared for and have reliable continuity of care.

Texas. On March 25, 2020, the Texas Health and Human Services Commission (“HHSC”) notified our Texas health plan that HHSC has canceled all contracts associated with their ABD program (known in Texas as “STAR+PLUS”) re-procurement awards announced in October 2019, and canceled the solicitation associated with their TANF and CHIP programs (known in Texas as “STAR/CHIP”) re-procurement. HHSC further indicated that it is currently deliberating next steps with respect to both re-procurements. Previously, in October 2019, the HHSC had awarded contracts to our Texas health plan for the STAR+PLUS program in two service areas, consisting of one legacy service area and one new service area. This would have been a reduction from our current footprint of six service areas. Also, in 2019, our Texas health plan submitted an RFP response for STAR/CHIP.

Illinois. In March 2020, we terminated our agreement to acquire all of the capital stock of NextLevel Health Partners, Inc. due to the seller’s stated unwillingness to close pursuant to the terms of the acquisition agreement.

Consolidation and Interim Financial Information

The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, are not necessarily indicative of the results for the entire year ending December 31, ~~2019.~~2020.

The unaudited consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, ~~2018.~~2019. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, ~~2018,~~2019, audited consolidated financial statements have been omitted.

These unaudited consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, ~~2018.~~2019.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:

The determination of medical claims and benefits payable of our Health Plans segment;

Health ~~plans’~~Plans segment contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;

Health ~~plans’~~Plans segment quality incentives that allow us to recognize incremental revenue if certain quality standards are met;

Settlements under risk or savings sharing programs;

The assessment of long-lived and intangible assets, and goodwill for impairment;

The determination of reserves for potential absorption of claims unpaid by insolvent providers;

The determination of reserves for ~~litigation outcomes;~~the outcome of litigation;

The determination of valuation allowances for deferred tax assets; and

The determination of unrecognized tax benefits.

2. Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in ~~non-current~~ “Restricted investments” in the accompanying consolidated balance sheets.


	June 30,				March 31,
	2019		2018		2020		2019
	(In millions)				(In millions)
Cash and cash equivalents	$	2,253	$	3,401	$	2,365	$	3,224
Restricted cash and cash equivalents	74		98		58		74
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows	$	2,327	$	3,499
Total cash, cash equivalents, and restricted cash and cash equivalents presented in the consolidated statements of cash flows					$	2,423	$	3,298

Investments

Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale (“AFS”) securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income (loss), net of applicable income taxes. Held-to-maturity (“HTM”) securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses, and unrealized losses arising from credit-related factors with respect to AFS and HTM securities are included in the determination of net income. The cost of securities sold is determined using the specific-identification method.

Our investment policy requires that all our investments have final maturities of less than 10 years, or less than 10 years average life for structured securities. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.

In general, our AFS securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for credit-related impairment. For comprehensive discussions of the fair value and classification of our investments, see Note 4, “Fair Value Measurements,” and Note 5, “Investments.”

Accrued interest receivable relating to our AFS and HTM securities is presented within “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets, and amounted to $11 million and $12 million at March 31, 2020, and December 31, 2019, respectively. We do not measure an allowance for credit losses on accrued interest receivable. Instead, we write off accrued interest receivable that has not been collected within 90 days of the interest payment due date. We recognize such write offs as a reversal of interest income. No accrued interest was written off during the three months ended March 31, 2020.

Premium Revenue Recognition and Premiums Receivable

Premium revenue is ~~fixed~~generated from our Health Plans segment contracts related to our Medicaid, Medicare and Marketplace programs. Premium revenue is generally received based on per member per month (“PMPM”) rates established in advance of the periods ~~covered and, except as described below, is not generally subject to significant accounting estimates. Premium~~covered. These premiums revenues are recognized in the month that members are entitled to receive healthcare services, and premiums collected in advance are deferred. ~~Certain components~~The state Medicaid programs and the federal Medicare program periodically adjust premiums. Additionally, many of our contracts contain provisions that may adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue ~~are subject to accounting estimates and fall into the following categories:~~as it is earned under such provisions.

Contractual Provisions That May Adjust or Limit Revenue or Profit

Medicaid Program

Medical Cost Floors (Minimums), and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded liabilities under the terms of such contract provisions of ~~$93 million and $103~~$74 million at ~~June 30, 2019~~each of March 31, 2020, and December 31, ~~2018,~~2019, respectively. Approximately ~~$76 million and $87~~$69 million of the liabilities accrued at ~~June 30, 2019~~each of March 31, 2020, and December 31, ~~2018,~~2019, respectively, relate to our participation in Medicaid Expansion programs.

In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. Receivables relating to such provisions were insignificant at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~2019.

Profit Sharing and Profit Ceiling. Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. Liabilities for profits in excess of the amount we are allowed to retain under these provisions were insignificant at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~2019.

Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we must adjust our premium revenue in the period in which we learn of the adjustment, based on our best estimate of the ultimate premium we expect to realize for the period being adjusted.

Medicare Program

Risk Adjusted Premiums. Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members’ risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and Centers for Medicare and Medicaid Services

(“CMS”) practices. Consolidated balance sheet amounts related to anticipated Medicare risk adjusted premiums and Medicare Part D settlements were insignificant at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~2019.

Minimum MLR. The Affordable Care Act (“ACA”) has established a minimum annual medical loss ratio (“Minimum MLR”) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income. The amounts payable for the Medicare Minimum MLR were ~~not significant~~insignificant at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~2019.

Marketplace Program

Refer to Note 11, “Subsequent Events,” for the description of a recent United States Supreme Court decision regarding Marketplace risk corridors.

Risk Adjustment. Under this program, our health plans’ composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment into the pool if their composite risk scores are below the average risk score (risk adjustment payable), and will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score ~~(risk~~

(risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. As of ~~June 30,~~March 31, 2020, Marketplace risk adjustment payables amounted to $456 million and related receivables amounted to $76 million, for a net payable of $380 million, of which $80 million relates to 2020 and $300 million relates primarily to 2019. As of December 31, 2019, Marketplace risk adjustment payables amounted to ~~$625~~$368 million and related receivables amounted to ~~$71~~$63 million, orfor a net payable of $~~554~~305 million~~. Approximately $390 million of the net amount at June 30,~~, which relates primarily to 2019 ~~relates to 2018 dates of service. As of December 31, 2018, Marketplace risk adjustment payables amounted to $466 million~~ and ~~related receivables amounted to $34 million, or a net of~~ ~~$432 million~~.prior periods.

Minimum MLR. The ACA has established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income. Aggregate balance sheet amounts related to the Minimum MLR were insignificant at ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018.~~2019.

A summary of the categories of amounts due government agencies is as follows:


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Medicaid program:
Medical cost floors and corridors	$	93	$	103	$	74	$	74
Other amounts due to states	93		81		76		84
Marketplace program:
Risk adjustment	625		466		456		368
Cost sharing reduction (“CSR”)	—		183
Other	173		134		171		138
Total amounts due government agencies	$	984	$	967	$	777	$	664

Quality Incentives

At many of our health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is earned only if certain performance measures are met. Such performance measures are generally found in our Medicaid and MMP contracts. As described in Note 1, “Organization and Basis of Presentation–Use of Estimates,” recognition of quality incentive premium revenue is subject to the use of estimates.

The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of June 30, 2019, are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of June 30, 2019.


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
	2019			2018			2019			2018				2020			2019
	(In millions)												(In millions)
Maximum available quality incentive premium - current period	$	46		$	47		$	91		$	87			$	61		$	45

Quality incentive premium revenue recognized in current period:
Earned current period	$	37		$	34		$	63		$	58			$	44		$	26
Earned prior periods	10			12			30			23				12			20
Total	$	47		$	46		$	93		81				$	56		46

Quality incentive premium revenue recognized as a percentage of total premium revenue	1.2		%	1.0		%	1.2		%	0.9		%		1.3		%	1.2		%

~~Medical Care Costs~~

~~Marketplace Program~~Receivables

~~In the first half~~Receivables consist primarily of ~~2018, we recognized a benefit of approximately $76 million in reduced medical care costs related~~amounts due from government agencies, which may be subject to 2017 dates of service as a result of the federal government’s confirmation that the reconciliation of 2017 Marketplace CSR subsidies would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.

~~Leases~~

~~Right-of-use (“ROU”) assets represent~~potential retroactive adjustments. Because substantially all our ~~right to use the underlying assets over the lease term,~~receivable amounts are readily determinable and lease liabilities represent our obligation for lease payments arising from the related leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably certain that we will exercise such options. If applicable, we account for lease and non-lease components within a lease as a single lease component.

~~Because most~~substantially all of our ~~leases do not provide an implicit interest rate, we generally use~~creditors are governmental authorities, our ~~incremental borrowing rate to determine the present value of lease payments. Lease expenses~~allowance for operating lease payments are recognized on a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities, the related ROU assets are amortized on a straight-line basis over the lease term, and interest expensecredit losses is ~~recognized using the effective interest method.~~insignificant.



	March 31, 2020		December 31, 2019
	(In millions)
Government receivables	$	1,167	$	1,056
Pharmacy rebate receivables	160		150
Health insurer fee reimbursement receivables	71		5
Other	205		195
Total	$	1,603	$	1,406

The significant majority of our operating leases consist of long-term operating leases for office space. Short-term leases (those with terms of 12 months or less) are not recorded as ROU assets or liabilities in the consolidated balance sheets. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a portfolio approach to account for the related operating lease ROU assets and liabilities, rather than account for such assets and the related liabilities individually. A nominal number of our lease agreements include rental payments that adjust periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

~~For further information, including the amount and location of the ROU assets and lease liabilities recognized in the accompanying consolidated balance sheet, see Note 13, “Leases.” For further information regarding our adoption and implementation of Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases (Topic 842),~~ ~~see~~ ~~Recent Accounting Pronouncements Adopted,~~ ~~below.~~

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with ~~a maximum maturity~~final maturities of less than 10 years, or less than 10 years average life for structured securities. Restricted investments are invested principally in ~~certificates of deposit~~cash, cash equivalents, and U.S. Treasury securities. Concentration of credit risk with respect to

accounts receivable is ~~generally~~ limited because our payors consist principally of the federal government, and governments of each state or commonwealth in which our health plan subsidiaries operate.

Health Insurer Fee

Under the Affordable Care Act, the federal government imposes an annual fee, or excise tax, on health insurers for each calendar year (the “HIF”). Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred or reimbursed in that year. The HIF is reinstated in 2020, but the Further Consolidated Appropriations Act, 2020, repealed the HIF effective for years after 2020. The HIF is allocated to health insurers based on each health insurer's share of net premiums for all U.S. health insurers in the year preceding the assessment. Our estimated HIF liability for 2020 is $271 million, and was accrued as of January 1, 2020, with a corresponding deferred expense asset that will be amortized to expense through December 31, 2020, on a straight-line basis. The HIF is not deductible for income tax purposes, and is payable by September 30, 2020. Due to the reinstatement of the HIF in 2020, our effective tax rate is higher in 2020 compared with 2019.

Within our Medicaid program, we must secure additional reimbursement from our state partners for this added cost. We have obtained a contractual commitments or are receiving payments from all states in which we operate Medicaid programs to reimburse us for the HIF, and such HIF revenue is being recognized ratably throughout the year.

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of foreign and state taxes, nondeductible expenses such as the ~~Health Insurer Fee (“HIF”),~~HIF, certain compensation, and other general and administrative expenses. ~~The effective tax rate will not be impacted by HIF in 2019 given the 2019 HIF moratorium.~~

The effective tax rate may be subject to fluctuations during the year as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including projected pretax earnings, the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.

Recent Accounting Pronouncements Adopted

~~Leases.~~ In February 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which was subsequently modified by several ASUs issued in 2017 and 2018. Topic 842 was issued to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in Topic 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. In addition, Topic 842’s disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Topic 842’s transition provisions are applied using a modified retrospective approach; entities may elect whether to apply the transition provisions, including disclosure requirements, at the beginning of the earliest comparative period presented or on the adoption date.

We adopted Topic 842 effective January 1, 2019, and elected to apply the transition provisions as of that date. Accordingly, we recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019. In addition, we elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

As indicated in the accompanying consolidated statements of stockholders’ equity, the cumulative effect adjustment was an increase of $85 million to retained earnings, relating primarily to the transition provisions for sale-leaseback arrangements that did not qualify for sale treatment. Accordingly, such arrangements for certain office buildings were de-recognized and recorded as finance lease ROU assets and lease liabilities. The difference between the de-recognized assets and lease financing obligations resulted in an increase to retained earnings. The recognition of these arrangements as finance lease ROU assets and lease liabilities will not materially impact our consolidated results of operations over the terms of the leases.

~~Software Licenses.~~ ~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,~~ which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We early adopted ASU 2018-15 effective January 1, 2019, using the prospective method, with no material impact to our financial condition, results of operations or cash flows. Adoption of this guidance may be significant to us in the future depending on the extent to which we use cloud computing arrangements that qualify as service contracts.

~~Recent Accounting Pronouncements Not Yet Adopted~~

Credit Losses. In June 2016, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, aswhich was subsequently modified ~~by:~~


•	~~ASU 2018-19,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses~~;


•	~~ASU 2019-04~~,~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and~~


•	~~ASU 2019-05~~, ~~Financial Instruments -~~ ~~Credit Losses (Topic 326), Targeted Transition Relief~~.

~~This standard introduces a new current expected credit loss (“CECL”) model for measuring expected credits losses for certain types of financial instruments~~by several ASUs issued in 2018 and ~~replaces the incurred loss model. The CECL model requires~~2019. We adopted Topic 326 effective January 1, 2020,

~~companies to recognize~~using the modified retrospective approach. Under this method we recognized the cumulative effect of adopting the standard as an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount companies expect to collect over the instrument’s contractual life after consideration of historical experience, current conditions, and reasonable and supportable forecasts. This standard also introduces targeted changesadjustment to the ~~available-for-sale (“AFS”) debt securities impairment model. ASU 2016-13 is effective beginning~~opening balance of retained earnings on January 1, 2020, which was immaterial.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and ~~must~~exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by a change in the reference rate from LIBOR or another reference rate expected to be ~~adopted as a cumulative effect adjustment to retained earnings; early adoption~~discontinued, if certain conditions are met. ASU 2020-04 is ~~permitted.~~

~~We have determined that the CECL model will apply primarily to “Receivables”~~effective immediately and ~~“Restricted investments” reported in our consolidated balance sheets. The AFS debt securities impairment model will apply to “Investments” reported in our consolidated balance sheets.~~expires after December 31, 2022. We are ~~currently~~ evaluating the ~~processes~~effect of reference rate reform and ~~controls necessary to adopt and implement ASU 2016-13, along with the effects the adoption will have~~this guidance on our ~~consolidated results of operations~~contracts and ~~financial condition.~~other transactions.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not have, nor does management expect such pronouncements to have, a significant impact on our present or future consolidated financial statements.

3. Net Income per Share

The following table sets forth the calculation of net income per share:


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
	2019		2018		2019		2018			2020			2019
	(In millions, except net income per share)								(In millions, except net income per share)
Numerator:
Net income	$	196	$	202	$	394	$	309		$	178		$	198
Denominator:
Shares outstanding at the beginning of the period	62.1		61.2		62.1		59.3			61.9			62.1
Weighted-average number of shares issued:
Exchange of 1.625% Convertible Notes	—		—		—		1.1
Stock purchases										(1.7		)	—
Stock-based compensation	—		—		—		0.1			—			—
Denominator for net income per share, basic	62.1		61.2		62.1		60.5
Denominator for basic net income per share										60.2			62.1
Effect of dilutive securities:(1)
1.125% Warrants ⁽¹⁾	1.3		4.9		2.4		4.8
1.625% Convertible Notes	—		0.4		—		0.5
Warrants										0.1			3.5
Stock-based compensation	0.6		0.2		0.6		0.2			0.7			0.6
Denominator for net income per share, diluted	64.0		66.7		65.1		66.0
Denominator for diluted net income per share										61.0			66.2

Net income per share: ⁽²⁾
Basic	$	3.15	$	3.29	$	6.34	$	5.10
Diluted	$	3.06	$	3.02	$	6.04	$	4.68

Potentially dilutive common shares excluded from calculations: ⁽¹⁾
Stock-based compensation	—		0.4		—		0.4
Net income per share - Basic ⁽²⁾										$	2.95		$	3.19
Net income per share - Diluted ⁽²⁾										$	2.92		$	2.99

______________________________

(1)

~~For more information and definitions regarding the 1.125% Warrants, including partial termination transactions, refer to Note 9, “Stockholders' Equity.”~~ The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. ~~Certain potentially dilutive common~~Approximately 0.1 million anti-dilutive shares ~~issuable~~ were not included in the computation of diluted net income per share ~~because~~for the three months ended March 31, 2019. All warrants outstanding as of December 31, 2019, were settled in the first quarter of 2020. For more information refer to ~~do so would have been anti-dilutive.~~Note 8, “Stockholders' Equity.”


(2)	Source data for calculations in thousands.

4. Fair Value Measurements

We consider the carrying amounts of current assets and current liabilities (not including ~~derivatives and~~ the current portion of long-term debt) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the

classification according to the fair value hierarchy for each financial instrument, ~~see Note 4, “Fair Value Measurements,” in~~refer to our ~~2018~~2019 Annual Report on Form ~~10-K.~~10-K, Note 4, “Fair Value Measurements.”

~~Derivative~~Our financial instruments ~~include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability (see Note 8 “Derivatives~~,” for definitions and further information). These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determinemeasured at fair value on a recurring basis at March 31, 2020, were as ~~of June 30,~~follows:



	Total		Observable Inputs (Level 1)		Directly or Indirectly Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(In millions)
Corporate debt securities	$	1,260	$	—	$	1,260	$	—
Mortgage-backed securities	451		—		451		—
Asset-backed securities	143		—		143		—
Municipal securities	138		—		138		—
Certificates of deposit	7		—		7		—
Government-sponsored enterprise securities (“GSEs”)	6		—		6		—
U.S. Treasury notes	5		—		5		—
Total assets	$	2,010	$	—	$	2,010	$	—

Our financial instruments measured at fair value on a recurring basis at December 31, 2019, included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. The 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such derivative instruments is mitigated.as follows:



	Total		Observable Inputs (Level 1)		Directly or Indirectly Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
	(In millions)
Corporate debt securities	$	1,178	$	—	$	1,178	$	—
Mortgage-backed securities	420		—		420		—
Asset-backed securities	127		—		127		—
Municipal securities	78		—		78		—
Certificates of deposit	1		—		1		—
GSEs	49		—		49		—
U.S. Treasury notes	86		—		86		—
Foreign securities	7		—		7		—
Subtotal	1,946		—		1,946		—
Call option derivative asset	29		—		—		29
Total assets	$	1,975	$	—	$	1,946	$	29

Conversion option derivative liability	$	29	$	—	$	—	$	29
Total liabilities	$	29	$	—	$	—	$	29

The net changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

Derivatives

~~Our~~The following table summarizes the fair values and the presentation of our derivative financial instruments ~~measured at~~in the accompanying consolidated balance sheets:



	Balance Sheet Location	March 31, 2020		December 31, 2019
		(In millions)
Derivative asset:
Call option	Current assets: Prepaid expenses and other current assets	$	—	$	29
Derivative liability:
Conversion option	Current liabilities: Accounts payable, accrued liabilities and other	$	—	$	29

For additional description of our derivative financial instruments, see Note 11, “Debt,” and Note 12, “Derivatives,” in our 2019 Annual Report on Form 10-K. Our derivative financial instruments did not qualify for hedge treatment; therefore, the change in fair value ~~on a recurring basis at June 30, 2019, were as follows:~~

Total Observable Inputs (Level 1) Directly or Indirectly Observable Inputs (Level 2) Unobservable Inputs (Level 3)
(In millions)
Corporate debt securities $ 1,297
$ —
$ 1,297
$ —
Mortgage-backed securities 249
—
249
—
Asset-backed securities 161
—
161
—
Government-sponsored enterprise securities (“GSEs”) 159
—
159
—
Municipal securities 109
—
109
—
U.S. Treasury notes 87
—
87
—
Certificate of deposit 6
—
6
—
Other 2
—
2
—
Subtotal - current investments 2,070
—
2,070
—
1.125% Call Option derivative asset 169
—
—
169
Total assets $ 2,239
$ —
$ 2,070
$ 169

1.125% Conversion Option derivative liability $ 169
$ —
$ —
$ 169
Total liabilities $ 169
$ —
$ —
$ 169

~~Our~~of these instruments is recognized immediately in our consolidated statements of income, and reported in “Other income, net.” Gains and losses for our derivative financial instruments ~~measured at fair value on a recurring basis at December 31, 2018, were as follows:~~are presented individually in the accompanying consolidated statements of cash flows, “Supplemental cash flow information.”

In the first quarter of 2020, we received $27 million for the settlement of the call option derivative asset, and we paid $39 million to settle the outstanding $12 million principal amount of the 1.125% Convertible Notes, and settle the related conversion option. For more information, refer to Notes 7, “

Total Observable Inputs (Level 1) Directly or Indirectly Observable Inputs (Level 2) Unobservable Inputs (Level 3)
(In millions)
Corporate debt securities $ 1,123
$ —
$ 1,123
$ —
Asset-backed securities 82
—
82
—
GSEs 163
—
163
—
Municipal securities 114
—
114
—
U.S. Treasury notes 181
—
181
—
Certificates of deposit 14
—
14
—
Other 4
—
4
—
Subtotal - current investments 1,681
—
1,681
—
1.125% Call Option derivative asset 476
—
—
476
Total assets $ 2,157
$ —
$ 1,681
$ 476

1.125% Conversion Option derivative liability $ 476
$ —
$ —
$ 476
Total liabilities $ 476
$ —
$ —
$ 476

Debt,” and 8, “Stockholders' Equity.”

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our notes payable are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted market prices for similar securities in active markets or quoted prices for identical securities in inactive markets. The carrying amount and estimated fair value of the Term Loan Facility is classified as a Level 3 financial instrument, because certain inputs used to determine its fair value are not observable. As of ~~June 30, 2019,~~March 31, 2020, the carrying amount of the Term Loan Facility ~~approximates~~approximated fair value because its interest rate is a variable rate that approximates rates currently available to us.


	June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)								(In millions)
5.375% Notes	$	695	$	732	$	694	$	674	$	696	$	701	$	696	$	745
4.875% Notes	326		335		326		301		326		310		327		340
Term Loan Facility	220		220		—		—		600		600		220		220
1.125% Convertible Notes ^(1),(2)	65		231		240		732
1.125% Convertible Notes ⁽¹⁾									—		—		12		42
Totals	$	1,306	$	1,518	$	1,260	$	1,707	$	1,622	$	1,611	$	1,255	$	1,347

______________________


(1)	The fair value of the 1.125% Conversion Option (the embedded cash conversion option), which is reflected in the fair value amounts presented above, amounted to $169 million and $476 million as of June 30, 2019, and December 31, 2018, respectively. See further discussion at Note 7, “Debt,” and Note 8, “Derivatives.”


~~(2)~~	For more information on debt repayments, ~~in 2019,~~ refer to Note 7, “Debt.”

5. Investments

Available-for-Sale Investments

We consider all of our investments classified as current assets to be available-for-sale. The following tables summarize our investments as of the dates indicated:


	June 30, 2019								March 31, 2020
	Amortized		Gross Unrealized				Estimated Fair		Amortized		Gross Unrealized				Estimated Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(In millions)								(In millions)
Corporate debt securities	$	1,292	$	6	$	1	$	1,297	$	1,277	$	4	$	21	$	1,260
Mortgage-backed securities	248		1		—		249		453		6		8		451
Asset-backed securities	161		—		—		161		144		—		1		143
Municipal securities									138		—		—		138
Certificates of deposit									7		—		—		7
GSEs	160		—		1		159		6		—		—		6
Municipal securities	108		1		—		109
U.S. Treasury notes	87		—		—		87		5		—		—		5
Certificates of deposit	6		—		—		6
Other	2		—		—		2
Totals	$	2,064	$	8	$	2	$	2,070	$	2,030	$	10	$	30	$	2,010


	December 31, 2018								December 31, 2019
	Amortized		Gross Unrealized				Estimated Fair		Amortized		Gross Unrealized				Estimated Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(In millions)								(In millions)
Corporate debt securities	$	1,131	$	—	$	8	$	1,123	$	1,174	$	5	$	1	$	1,178
Mortgage-backed securities									420		1		1		420
Asset-backed securities	83		—		1		82		126		1		—		127
Municipal securities									78		—		—		78
Certificates of deposit									1		—		—		1
GSEs	164		—		1		163		49		—		—		49
Municipal securities	115		—		1		114
U.S. Treasury notes	181		—		—		181		86		—		—		86
Certificates of deposit	14		—		—		14
Other	4		—		—		4
Total current investments	$	1,692	$	—	$	11	$	1,681
Foreign securities									7		—		—		7
Totals									$	1,941	$	7	$	2	$	1,946

The contractual maturities of our available-for-sale investments as of ~~June 30, 2019~~March 31, 2020 are summarized below:


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In millions)				(In millions)
Due in one year or less	$	821	$	821	$	375	$	375
Due after one year through five years	917		921		1,032		1,017
Due after five years through ten years	124		125		183		181
Due after ten years	202		203		440		437
Totals	$	2,064	$	2,070	$	2,030	$	2,010

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains amounted to $5 million in the three months ended March 31, 2020. Gross realized investment losses were insignificant in the three months ended March 31, 2020. Gross realized investment gains and losses ~~for~~were insignificant in the three ~~and six~~ months ended ~~June 30, 2019 and 2018, were insignificant.~~March 31, 2019.

We have determined that unrealized losses at ~~June 30, 2019,~~March 31, 2020, and December 31, ~~2018, are temporary in nature, because the change in market value for these securities has~~2019, have primarily resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers. Therefore, we have determined that an allowance for credit losses is not necessary. So long as we maintain the intent and ability to hold these securities to maturity, we are unlikely to experience losses. In the event that we dispose of these securities before maturity, we expect that realized losses, if any, will be insignificant.

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more as of ~~June 30, 2019:~~March 31, 2020:


	In a Continuous Loss Position for Less than 12 Months					In a Continuous Loss Position for 12 Months or More					In a Continuous Loss Position for Less than 12 Months					In a Continuous Loss Position for 12 Months or More
	Estimated Fair Value		Unrealized Losses		Total Number of Positions	Estimated Fair Value		Unrealized Losses		Total Number of Positions	Estimated Fair Value		Unrealized Losses		Total Number of Positions	Estimated Fair Value		Unrealized Losses		Total Number of Positions
	(Dollars in millions)										(Dollars in millions)
Corporate debt securities	$	—	$	—	—	$	263	$	1	168	$	805	$	21	627	$	—	$	—	—
GSEs	—		—		—	114		1		67
Mortgage-backed securities											211		8		128	—		—		—
Asset-backed securities											90		1		70	—		—		—
Totals	$	—	$	—	—	$	377	$	2	235	$	1,106	$	30	825	$	—	$	—	—

In a Continuous Loss Position
for Less than 12 Months

In a Continuous Loss Position
for 12 Months or More

Estimated
Fair
Value

Unrealized
Losses

Total
Number of
Positions

Estimated
Fair
Value

Unrealized
Losses

Total
Number of
Positions
(Dollars in millions)
Corporate debt securities $ 509
$ 3
285
$ 412
$ 5
298
Asset-backed securities —
—
—
68
1
52
GSEs —
—
—
127
1
76
Municipal securities —
—
—
87
1
90
Totals $ 509
$ 3
285
$ 694
$ 8
516



	In a Continuous Loss Position for Less than 12 Months					In a Continuous Loss Position for 12 Months or More
	Estimated Fair Value		Unrealized Losses		Total Number of Positions	Estimated Fair Value		Unrealized Losses		Total Number of Positions
	(Dollars in millions)
Corporate debt securities	$	222	$	1	167	$	—	$	—	—
Mortgage-backed securities	143		1		72	—		—		—
Totals	$	365	$	2	239	$	—	$	—	—

Held-to-Maturity Investments

Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities primarily in ~~certificates of deposit~~cash, cash equivalents, and U.S. Treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of these funds is limited as required by regulations in the various states in which we operate, or as needed in the event of insolvency of capitated providers. Therefore, such investments are reported as ~~non-current~~ “Restricted investments” in the accompanying consolidated balance sheets.

We have the ability to hold these restricted investments until maturity, and as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates.

~~The contractual maturities of our~~ Our held-to-maturity restricted investments are carried at amortized cost, which approximates fair ~~value, as~~value. Such investments amounted to $82 million at March 31, 2020, of ~~June 30, 2019, are summarized below:~~

Amortized Cost
Estimated
Fair Value
(In millions)
Due in one year or less $ 92
$ 92
Due after one year through five years 6
6
Totals $ 98
$ 98

which $79 million will mature in one year or less, and $3 million will mature in after one through five years.

6. Medical Claims and Benefits Payable

The following table provides the details of our medical claims and benefits payable as of the dates indicated.


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Fee-for-service claims incurred but not paid (“IBNP”)	$	1,346	$	1,562	$	1,444	$	1,406
Pharmacy payable	117		115		150		126
Capitation payable	63		52		62		55
Other	241		232		325		267
	$	1,767	$	1,961	$	1,981	$	1,854

“Other” medical claims and benefits payable includes amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Non-risk provider payables amounted to ~~$112~~$116 million and ~~$107~~$132 million as of ~~June 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively.

The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amounts by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability, based on information (principally the payment of claims) developed since that liability was first reported.


	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(In millions)						(In millions)
Medical claims and benefits payable, beginning balance	$	1,961		$	2,192		$	1,854		$	1,961
Components of medical care costs related to:
Current period	7,069			7,870			3,817			3,560
Prior periods ⁽¹⁾	(232		)	(298		)	(101		)	(189		)
Total medical care costs	6,837			7,572			3,716			3,371
Change in non-risk and other provider payables	4			56			(10		)	171
Payments for medical care costs related to:
Current period	5,585			6,248			2,274			2,197
Prior periods	1,450			1,652			1,305			1,311
Total paid	7,035			7,900			3,579			3,508
Medical claims and benefits payable, ending balance	$	1,767		$	1,920		$	1,981		$	1,995

~~_______________________~~


~~(1)~~	~~The June 30, 2018, amount includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $76 million.~~

Our estimates of medical claims and benefits payable recorded at December 31, ~~2018,~~2019, and ~~2017~~2018 developed favorably by approximately ~~$232~~$101 million and ~~$298~~$189 million as of ~~June 30,~~March 31, 2020, and 2019, ~~and 2018,~~ respectively.

The favorable prior year development recognized in the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, was primarily due to lower than expected utilization of medical services by our Medicaid members, and improved operating performance. Consequently, the ultimate costs recognized in ~~2019,~~2020, as claims payments were processed, ~~was~~were lower than our original estimates in ~~2018.~~2019.

7. Debt

~~As of June 30, 2019, contractual maturities of debt were as follows. All amounts represent the principal amounts of the debt instruments outstanding.~~

Total 2020 2021 2022 2023 2024 Thereafter
(In millions)
5.375% Notes $ 700
$ —
$ —
$ 700
$ —
$ —
$ —
4.875% Notes 330
—
—
—
—
—
330
Term Loan Facility 220
6
16
22
22
154
—
1.125% Convertible Notes 67
67
—
—
—
—
—
Totals $ 1,317
$ 73
$ 16
$ 722
$ 22
$ 154
$ 330

All of our debt is held at the parent, which is reported ~~for segment purposes,~~ in the Other segment. The following table summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance sheets:

June 30,
2019 December 31,
2018
(In millions)
Current portion of long-term debt:
1.125% Convertible Notes, net of unamortized discount $ 65
$ 241
Lease financing obligations —
1
Debt issuance costs —
(1 )
$ 65
$ 241
Non-current portion of long-term debt:
5.375% Notes $ 700
$ 700
4.875% Notes 330
330
Term Loan Facility 220
—
Debt issuance costs (9 ) (10 )
Totals $ 1,241
$ 1,020

~~Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:~~

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
(In millions)
Contractual interest at coupon rate $ —
$ 2
$ 1
$ 4
Amortization of the discount 1
6
4
13
Totals $ 1
$ 8
$ 5
$ 17



	March 31, 2020			December 31, 2019
	(In millions)
Current portion of long-term debt:
Term Loan Facility	$	26		$	6
1.125% Convertible Notes, net of unamortized discount	—			12
Total	$	26		$	18
Non-current portion of long-term debt:
5.375% Notes due 2022	$	700		$	700
4.875% Notes due 2025	330			330
Term Loan Facility	574			214
Debt issuance costs	(8		)	(7		)
Total	$	1,596		$	1,237

Credit Agreement

We are party to a Credit Agreement, which provides for an unsecured delayed draw term loan facility (the “Term Loan Facility”), and an unsecured ~~$500 million~~ revolving credit facility (the “Credit Facility”)., both described in further detail below. Borrowings under ~~our~~the Credit Agreement bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. In addition to interest payable on the principal amount of

indebtedness outstanding from time to time under the Credit Agreement, we are required to pay a quarterly commitment fee.

The Credit Agreement contains customary non-financial and financial ~~covenants, including a net leverage ratio and an interest coverage ratio.~~covenants. As of ~~June 30, 2019,~~March 31, 2020, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt. ~~Effective as of the date of the Sixth Amendment to the Credit Agreement described below, there are no guarantors as parties to the Credit Agreement.~~

Term Loan Facility. In ~~January 2019,~~March 2020, we ~~entered into a Sixth Amendment to~~drew down the ~~Credit Agreement that provided for a delayed draw~~ Term Loan ~~Facility in the aggregate principal amount~~Facility’s remaining available capacity of $380 million, for an outstanding balance of $600 million ~~under which we may request up to ten advances, each in a minimum principal amount~~as of ~~$50 million, until July~~March 31, 2020. The Term Loan Facility

~~will amortize~~ amortizes in quarterly installments, commencing on September 30, 2020, equal to the principal amount of the Term Loan Facility outstanding multiplied by rates ranging from 1.25% to 2.50% (depending on the applicable fiscal quarter) for each fiscal quarter. ~~The~~Because each advance under the Term Loan Facility ~~expires on January 31, 2024; any~~results in a permanent reduction to its borrowing capacity, no further advances are available. Any remaining outstanding balance under the Term Loan Facility will be due and payable on ~~that~~its January 31, 2024 expiration date. As of June 30, 2019, $220 million was outstanding under the Term Loan Facility, including a $120 million draw-down in the second quarter of 2019. Each advance under the Term Loan Facility results in a permanent reduction to its borrowing capacity; therefore, our borrowing capacity under the Term Loan Facility as of June 30, 2019, was $380 million.

Credit Facility. ~~The~~Our Credit Facility provides for borrowings up to $500 million, and expires on January 31, 2022; therefore, any amounts outstanding ~~under the Credit Facility~~ will be due and payable on that date. As of ~~June 30, 2019, no~~March 31, 2020, 0 amounts were outstanding under the Credit Facility, and outstanding letters of credit amounting to $2$1 million reduced our borrowing capacity under the Credit Facility to ~~$498~~$499 million.

5.375% Notes due 2022

We had $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of ~~June 30, 2019,~~March 31, 2020, which are due November 15, 2022, unless earlier redeemed. Interest, at a rate of 5.375% per annum, is payable semiannually in arrears on May 15 and November 15. The 5.375% Notes contain customary non-financial covenants and change in control provisions.

4.875% Notes due 2025

We had $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of ~~June 30, 2019,~~March 31, 2020, which are due June 15, 2025, unless earlier redeemed. Interest, at a rate of 4.875% per annum, is payable semiannually in arrears on June 15 and December 15. The 4.875% Notes contain customary non-financial covenants and change of control provisions.

1.125% Cash Convertible Senior Notes due 2020

InFor a description of the ~~first half of 2019, we entered into privately negotiated note purchase agreements with certain holders of our outstanding~~ 1.125% cash convertible senior notes due January 15, 2020 (the “1.125% Convertible Notes”).

, see Note 11, “Debt,” in our 2019 Annual Report on Form 10-K. In ~~the second quarter of 2019, we repaid $139 million aggregate principal amount, or $134 million aggregate carrying amount, of the 1.125% Convertible Notes. In addition,~~January 2020, we paid ~~$358~~$39 million to settle the ~~1.125% Convertible Notes’ embedded cash conversion option feature at fair value (which is a derivative liability we refer to as the “1.125% Conversion Option”).~~

~~In the first quarter of 2019, we repaid $46~~outstanding $12 million aggregate principal amount, or $44 million aggregate carrying amount, of the 1.125% Convertible Notes. In addition, we paid $115 million to settle the 1.125% Convertible Notes’ embedded cash conversion option feature at fair value.

In the three and six months ended June 30, 2019, we recorded gains on debt extinguishment of $14 million and $17 million, respectively, for the 1.125% Convertible Notes repayments (net of accelerated original issuance discount amortization), primarily relating to a favorable mark to market valuations on the partial terminations of the Call Spread Overlay executed in connection with the related debt repayments. These gains are reported in “Other (income) expenses, net” in the accompanying consolidated statements of income. No common shares were issued in connection with the transaction.

In connection with the 1.125% Convertible Notes purchases, we also entered into privately negotiated agreements in the first and second quarters of 2019, to partially terminate the Call Spread Overlay, defined and further discussed in Note 8, “~~Derivatives,” and Note 9, “Stockholders' Equity.” The net cash proceeds from the Call Spread Overlay partial termination transactions partially offset the cash paid to settle the 1.125% Convertible Notes.~~

~~Following the transactions described above, $67 million aggregate~~ principal amount of the 1.125% Convertible Notes, ~~were outstanding at June 30, 2019. Interest at a rate of 1.125% per annum is payable semiannually in arrears on January 15~~ and ~~July 15. The 1.125% Convertible Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial~~settle the related conversion rate is 24.5277 shares of our common stock per $1,000 principal amount, or approximately $40.77 per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Convertible Notes prior to the maturity date. The 1.125% Convertible Notes mature on January 15, 2020; therefore, they are reported in current portion of long-term debt.option.

Concurrent with the issuance of the 1.125% Convertible Notes in 2013, the 1.125% Conversion Option was separated from the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in

fair value reported in our consolidated statements of income until the 1.125% Conversion Option fully settles or expires. This initial liability simultaneously reduced the carrying value of the 1.125% Convertible Notes’ principal amount (effectively an original issuance discount), which is amortized to the principal amount through the recognition of non-cash interest expense over the expected life of the debt. The effective interest rate of 6% approximates the interest rate we would have incurred had we issued nonconvertible debt with otherwise similar terms. As of June 30, 2019, the 1.125% Convertible Notes had a remaining amortization period of less than one year, and their ‘if-converted’ value exceeded their principal amount by approximately $157 million and $581 million as of June 30, 2019 and December 31, 2018, respectively.

Cross-Default Provisions

The indentures governing the 4.875% Notes ~~the 5.375% Notes~~ and the ~~1.125% Convertible~~5.375% 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.

8. ~~Derivatives~~Stockholders' Equity

~~The following table summarizes~~Stock Purchase Program

In early December 2019, our board of directors authorized the ~~fair values and~~purchase of up to $500 million, in the ~~presentation~~aggregate, of our ~~derivative financial instruments (defined~~common stock. This program was funded by existing cash on hand and ~~discussed individually below)~~was completed in March 2020.

Under this program, pursuant to Rule 10b5-1 trading plans, we purchased approximately 3.4 million shares of our common stock for $446 million in the ~~accompanying consolidated balance sheets:~~

Balance Sheet Location June 30,
2019 December 31,
2018
(In millions)
Derivative asset:
1.125% Call Option Current assets: Derivative asset $ 169
$ 476
Derivative liability:
1.125% Conversion Option Current liabilities: Derivative liability $ 169
$ 476

~~Our derivative financial instruments do not qualify for hedge treatment; therefore,~~first quarter of 2020 (average cost of $132.45 per share). In the ~~change~~first quarter of 2020, we also paid $7 million to settle shares purchased in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in “Other (income) expenses, net.” Gains and losses for our derivative financial instruments are presented individually in the accompanying consolidated statements of cash flows, “Supplemental cash flow information.”late December 2019.

1.125% ~~Convertible Notes Call Spread Overlay~~Warrants

~~Concurrent with the issuance~~For a description of the 1.125% ~~Convertible Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option)~~Warrants, refer to our 2019 Annual Report on Form 10-K, Note 12, “Derivatives,” and ~~warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers~~Note 14, “Stockholders’ Equity.” Approximately 310,000 of the 1.125% Convertible Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Convertible Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Convertible Notes), these transactions are intended to offset cash payments in excess of the principal amount of the 1.125% Convertible Notes due upon any conversion of such notes.

were outstanding at December 31, 2019. In the first ~~and second quarters~~quarter of ~~2019, in connection with the 1.125% Convertible Notes purchases (described in Note 7, “Debt”),~~2020, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. In the second quarter of 2019, this resulted in our receipt of $358 million for the settlement of the 1.125% Call Option (which is a derivative asset), and the payment of $321 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $37 million from the Counterparties.

In the first quarter of 2019, this resulted in our receipt of $115 million for the settlement of the 1.125% Call Option, and the payment of $103 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $12 million from the Counterparties.

~~1.125% Call Option~~

~~The 1.125% Call Option,~~under which ~~is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further~~

~~discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 4, “Fair Value Measurements~~.”

~~1.125% Conversion Option~~

The embedded cash conversion option within the 1.125% Convertible Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 4, “~~Fair Value Measurements~~.”

As of June 30, 2019, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Convertible Notes mature on January 15, 2020, as described in Note 7, “~~Debt~~.”

9. ~~Stockholders' Equity~~

~~1.125% Warrants~~

~~In connection with the Call Spread Overlay transaction described in Note 8, “Derivatives~~,” in 2013, we issued 13.5 million warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if the price of our common stock exceeds the strike price of the 1.125% Warrants, we will be obligated to issue shares of our common stock subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note 3, “~~Net Income per Share~~,” for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised. Following the transactions described below, 1.7 million of the 1.125% Warrants remain outstanding.

~~As described in Note 8, “Derivatives~~,” in the first half of 2019, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased.

~~In the second quarter of 2019,~~ we paid ~~$321~~$30 million to the Counterparties for the termination of ~~3.4 million of~~ the remaining 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.

In the first quarter of 2019, we paid $103 million to the Counterparties for the termination of 1.1 million of the 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.

Share-Based Compensation

In connection with our employee stock plans, approximately ~~180,000~~98,000 shares of common stock vested or were purchased, net of shares used to settle employees’ income tax obligations, during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

Share-based compensation is recorded to “General and administrative expenses” in the accompanying consolidated statements of income. Total share-based compensation expense amounted to ~~$10~~$12 million and $7$9 million, respectively, in the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018. Total share-based compensation expense amounted to $19 million and $13 million, respectively, in the six months ended June 30, 2019 and 2018.~~

~~Equity Incentive Plan~~

In the second quarter of 2019, stockholders approved the Molina Healthcare, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The 2019 EIP provides for awards, in the form of restricted stock awards, performance units, stock options, and other stock– or cash–based awards, to eligible persons who perform services for us. The 2019 EIP will continue in effect until its termination by the board of directors; provided, however, that all awards will be granted no later than May 8, 2029. Concurrent with the adoption of the 2019 EIP, the Molina Healthcare, Inc. 2011 Equity Incentive Plan was amended, restated and merged into the 2019 EIP. A maximum of 2.9 million shares of our common stock may be issued under the 2019 EIP.2019.

As of ~~June 30, 2019,~~March 31, 2020, there was ~~$62~~$89 million of total unrecognized compensation expense related to unvested restricted stock awards (“RSAs”), and performance stock units (“PSUs”), which we expect to recognize over remaining weighted-average periods of ~~2.7~~2.9 years and ~~2.1~~1.9 years, respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of ~~15.2%~~10.7% for non-executive employees as of ~~June 30, 2019.~~March 31, 2020.

~~Also as~~As of ~~June 30, 2019,~~March 31, 2020, there was $7also $3 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of ~~1.3~~0.5 years. NoNaN stock options were granted or exercised in the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

Activity for RSAs ~~performance stock awards (“PSAs”)~~ and PSUs is summarized below:


	RSAs		PSAs		PSUs		Total		Weighted Average Grant Date Fair Value		RSAs		PSUs		Total		Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2018	399,795		3,132		201,383		604,310		$	71.50
Unvested balance, December 31, 2019											447,680		324,078		771,758		$	102.01
Granted	218,245		—		138,994		357,239		137.42		294,319		160,929		455,248		122.20
Vested	(129,526	)	(3,132	)	(10,528	)	(143,186	)	70.57		(151,110	)	(7,368	)	(158,478	)	92.92
Forfeited	(29,597	)	—		(5,010	)	(34,607	)	83.05		(12,202	)	(22,826	)	(35,028	)	101.60
Unvested balance, June 30, 2019	458,917		—		324,839		783,756		$	101.20
Unvested balance, March 31, 2020											578,687		454,813		1,033,500		$	112.31

The aggregate fair values of RSAs ~~PSUs~~ and ~~PSAs~~PSUs granted and vested are presented in the following table:


	Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2020		2019
	(In millions)				(In millions)
Granted:
RSAs	$	30	$	25	$	36	$	30
PSUs	19		16		19		18
Total granted	$	49	$	41	$	55	$	48
Vested:
RSAs	$	18	$	14	$	19	$	16
PSUs	2		—		1		2
PSAs	—		3
Total vested	$	20	$	17	$	20	$	18

~~Employee Stock Purchase Plan~~

In May 2019, stockholders approved the 2019 Employee Stock Purchase Plan (the “2019 ESPP”), which superseded the 2011 ESPP. A maximum of 3.0 million shares of our common stock may be issued under the 2019 ESPP, the terms of which are substantially similar to the Molina Healthcare, Inc. Employee Stock Purchase Plan (the “2011 ESPP”). The 2019 ESPP will continue until the earliest of: termination of the 2019 ESPP by the board of directors (which may occur at any time); issuance of all of the shares reserved for issuance under the 2019 ESPP; or May 9, 2029.

~~10. Restructuring Costs~~

~~Restructuring costs are reported by the same name in the accompanying consolidated statements of income.~~

~~IT Restructuring Plan~~

Management is focused on a margin recovery plan that includes identification and implementation of various profit improvement initiatives. To that end, we began a plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018. In early 2019, we entered into services agreements with our outsourcing vendor under which they manage certain of our information technology services.

We expect to complete the IT Restructuring Plan by the end of 2019, incurring cumulative total costs of approximately $15 million in the Other segment. This estimate of cumulative total costs is lower than the $20 million reported in our Annual Report on Form 10-K for the year ended December 31, 2018, because more of our IT employees transitioned to our outsourcing vendor than originally contemplated. Once employed by our outsourcing vendor, such employees are no longer included in the IT Restructuring Plan, which therefore resulted in lower one-time termination costs.

As of December 31, 2018, there was $6 million accrued under the IT Restructuring Plan, primarily for one-time termination benefits that require cash settlement. In the first half of 2019, we incurred $2 million of other

restructuring costs, and paid $5 million to settle one-time termination benefits and $2 million to settle other restructuring costs. As of June 30, 2019, there was $1 million accrued under the IT Restructuring Plan.

As of June 30, 2019, we had incurred cumulative restructuring costs under the IT Restructuring Plan of $11 million, including $7 million of one-time termination benefits and $4 million of other restructuring costs (primarily consulting fees).

~~2017 Restructuring Plan~~

As of December 31, 2018, accrued liabilities of $18 million remained for the restructuring and profitability improvement plan approved by the board of directors in June 2017 (the “2017 Restructuring Plan”). In the first half of 2019, we incurred $3 million of restructuring costs for adjustments to previously recorded lease contract termination costs, and paid $4 million to settle one-time termination and lease contract termination costs. As of June 30, 2019, accrued liabilities of $17 million remained for lease contract termination costs under the 2017 Restructuring Plan. We expect to continue to settle these liabilities through 2025, unless the leases are terminated sooner.

~~11.~~9. Segments

We currently have ~~two~~2 reportable segments: ~~our~~the Health Plans segment and ~~our~~the Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.

~~Description of Earnings Measures for Reportable Segments~~

Margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.

~~Margin for~~The key metrics used to assess the performance of our Health Plans segment ~~is referred to as “Medical Margin,” which represents the amount earned after~~are premium revenue, medical ~~costs are deducted from premium revenue. The medical care ratio~~margin and MCR. MCR represents the amount of medical care costs as a percentage of premium ~~revenue, and is one of the key metrics used to assess the performance of the segments.~~revenue. Therefore, the underlying ~~Medical Margin~~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 ~~the chief operating decision maker.~~management. Margin for our Health Plans segment is referred to as “Medical Margin.”

The following table presents total revenue by segment. Inter-segment revenue was insignificant for all periods presented.


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In millions)								(In millions)
Total revenue:
Health Plans	$	4,190	$	4,752	$	8,307	$	9,261	$	4,545	$	4,117
Other	3		131		5		268		4		2
Consolidated	$	4,193	$	4,883	$	8,312	$	9,529	$	4,549	$	4,119

The following table reconciles margin ~~by segment~~ to consolidated income before income taxes:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In millions)												(In millions)
Margin:
Health Plans	$	583		$	664		$	1,164		$	1,265		$	588		$	581
Other	—			9			—			23
Total margin	583			673			1,164			1,288
Add: other operating revenues ⁽¹⁾	144			242			311			431			245			167
Less: other operating expenses ⁽²⁾	(462		)	(573		)	(930		)	(1,155		)	(559		)	(468		)
Operating income	265			342			545			564			274			280
Other expenses, net	8			37			28			80			21			20
Income before income tax expense	$	257		$	305		$	517		$	484		$	253		$	260

______________________


(1)	Other operating revenues include premium tax revenue, health insurer fees reimbursed, and investment income and other revenue.


(2)	Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees, depreciation and amortization, and ~~restructuring~~other costs.

~~12.~~10. Commitments and Contingencies

COVID-19 Pandemic

On March 11, 2020, the World Health Organization officially declared COVID-19, the disease caused by the novel coronavirus, a pandemic. The ultimate effects of the pandemic, and the duration of any such effects, including any impact to our medical care ratio (which could increase or decrease), are not known or quantifiable at this time. As of March 31, 2020, we have not experienced any significant interruptions in the services we provide, nor was there a material impact of the pandemic to our consolidated financial position, results of operations, and cash flows in the first quarter of 2020.

Legal Proceedings

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly funded programs, and the repayment of previously collected revenues.

In the ordinary course of business we are involved in legal actions, some of which seek monetary damages ~~including claims for punitive damages,~~ which are not covered by insurance. We have accrued liabilities for certain matters for which we deem the loss to be both probable and reasonably estimable, but the outcome of legal actions is inherently uncertain and our estimates of such losses could be understated, and could also subsequently change as a result of further developments of these matters. For certain pending matters, accruals have not been established because we believe we are not liable or because such matters have not progressed sufficiently through discovery or factual development to enable us to reasonably estimate a range of possible loss. An adverse determination in one or more of these pending matters could have ~~a material~~an adverse effect on our consolidated financial position, results of operations, or cash flows.

~~States’ Budgets~~

~~Nearly all~~

11.Subsequent Events

Acquisition of ~~our premium~~Magellan Complete Care

MCC is a managed care organization serving members in 6 states, including Medicaid members in Arizona and statewide in Virginia. Through its Senior Whole Health branded plans, MCC provides fully integrated plans for Medicaid and Medicare dual beneficiaries in Massachusetts, as well as Managed Long Term Care (“MLTC,” commonly known nationally as “MLTSS”) in New York. As of December 31, 2019, MCC served approximately 155,000 members, with full year 2019 revenues ~~come from the joint~~greater than $2.7 billion.

The transaction is subject to federal and state ~~funding~~regulatory approvals, and other customary closing conditions, and is expected to close in the first quarter of 2021. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.

In connection with the MCC acquisition, we entered into a commitment letter on April 30, 2020, pursuant to which, among other things, the lenders have committed to provide us with debt financing in the aggregate principal amount of up to $400 million.

Marketplace Risk Corridor Ruling

On April 27, 2020, the United States Supreme Court issued its opinion in Maine Community Health Options v. United States. The Supreme Court held that §1342 of the ~~Medicaid~~Affordable Care Act obligated the federal government to pay participating insurers the full Marketplace risk corridor amounts calculated by that statute, that such payment obligations survived Congress’ appropriations riders, and ~~Children’s Health Insurance Program (“CHIP”) programs. The states and Commonwealth in which we operate our health plans regularly face significant budgetary pressures.~~

~~13.~~ ~~Leases~~

~~As discussed in Note 2, “Significant Accounting Policies,” we elected~~that impacted insurers may sue the ~~Topic 842 transition provision that allows entities to continue to apply the legacy guidance in Topic 840,~~ ~~Leases, including its disclosure requirements,~~federal government in the ~~comparative periods presented~~U.S. Court of Federal Claims to recover damages for breach of that obligation. There are no distinguishing factors regarding liability or damages between this case and the cases we ourselves have brought against the federal government for its failure to pay our Marketplace risk corridors claims for 2014, 2015, and 2016. We have already obtained summary judgment for our 2014 and 2015 risk corridor claims in the ~~year~~approximate amount of ~~adoption. Accordingly, the Topic 842 disclosures below are presented as of~~ $52 million, and we have brought another claim for approximately $76 million for the ~~three-month~~government’s failure to pay our 2016 risk corridor claims. The timing of recognition and ~~six-month periods ended June 30, 2019, only.~~

~~We are a party~~collection of these outstanding Marketplace risk corridor claims is uncertain, but we will request that the Court of Claims act as expeditiously as possible to ~~operating and finance leases primarily~~enter judgment for ~~our corporate and health plan offices. Our operating leases have remaining lease terms up~~all of the risk corridors amounts owed to ~~10 years, some of which include options to extend the leases for up to 10 years. As of June 30, 2019, the weighted average remaining operating lease term is 4 years.~~

Our finance leases have remaining lease terms of 3 years to 19 years, some of which include options to extend the leases for up to 25 years. As of June 30, 2019, the weighted average remaining finance lease term is 17 years.

As of June 30, 2019, the weighted-average discount rate used to compute the present value of lease payments was 5.5% for operating lease liabilities, and 6.6% for finance lease liabilities. The components of lease expense were as follows:

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(In millions)
Operating lease expense $ 8
$ 17

Finance lease expense:
Amortization of right-of-use (“ROU”) assets $ 4
$ 8
Interest on lease liabilities 4
8
Total finance lease expense $ 8
$ 16

~~Supplemental consolidated cash flow information related to leases follows:~~

Six Months Ended June 30, 2019
(In millions)
Cash used in operating activities:
Operating leases $ 19
Finance leases 7
Cash used in financing activities:
Finance leases 3
ROU assets recognized in exchange for lease obligations:
Operating leases 95
Finance leases 241

us.

~~Supplemental information related to leases, including location of amounts reported in the accompanying consolidated balance sheets, follows:~~

June 30, 2019
(In millions)
Operating leases:
ROU assets
Other assets $ 77
Lease liabilities
Accounts payable and accrued liabilities (current) 29
Other long-term liabilities (non-current) 56
Total operating lease liabilities $ 85
Finance leases:
ROU assets
Property, equipment, and capitalized software, net $ 233
Lease liabilities
Accounts payable and accrued liabilities (current) $ 7
Finance lease liabilities (non-current) 232
Total finance lease liabilities $ 239

~~Maturities of lease liabilities as of June 30, 2019, were as follows:~~

Operating Leases Finance Leases
(In millions)
2019 (excluding the six months ended June 30, 2019) $ 18
$ 11
2020 28
22
2021 18
22
2022 12
21
2023 10
21
Thereafter 9
311
Total lease payments 95
408
Less imputed interest (10 ) (169 )
Totals $ 85
$ 239

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. ~~We intend such~~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 ~~covered~~identified by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. All statements included in this quarterly report, other than statements of historical fact, may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words ~~“anticipate(s),~~such as “guidance,” ~~“believe(s),~~“future,” ~~“estimate(s),~~“anticipates,” ~~“expect(s),~~“believes,” ~~“intend(s),~~“estimates,” ~~“may,~~“expects,” ~~“plan(s),~~“growth,” ~~“project(s),~~“intends,” “plans,” “predicts,” “projects,” “will,” “would,” “could,” ~~“should”~~“can,” “may,” and similar ~~expressions~~terms. Readers are cautioned not to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on ~~our forward-looking statements. We caution you that we do not undertake~~ any ~~obligation to update~~ forward-looking statements, ~~made by us. Forward-looking~~as forward-looking statements ~~involve~~are not guarantees of future performance and the Company’s actual results may differ significantly due to numerous known and unknown risks and ~~uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, or expected.~~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 impact of the COVID-19 pandemic on our operations and financial results;

the numerous political, judicial, and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare,” including the ultimate outcome ~~on appeal~~ of the Texas et al. v. U.S. et al. matter;

the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with the elasticity of demand for our products based on our pricing, risk adjustment requirements, the potential for disproportionate enrollment of higher acuity members, and the discontinuation of premium tax ~~credits, and the adequacy of agreed rates;~~credits;

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;

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 general liquidity needs;

our ability to consummate, integrate, and realize benefits from acquisitions including the announced acquisition of Magellan Complete Care;

effective management of our medical costs;

our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with ~~seasonal~~the flu ~~patterns~~ or ~~other newly emergent diseases;~~coronavirus;

significant budget pressures on state governments from diminished tax revenues 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 or awarded government contracts, ~~including~~and the success of any requests for proposal, including protest filings or ~~defenses, including the Texas STAR+PLUS and STAR/CHIP RFPs;~~defenses;

the 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 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 sharing~~profit-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;

the Medicaid expansion medical cost 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;

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, ransomware 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~~expected exit from Puerto Rico, including the ~~resolution~~successful transfer of our members to alternative health plans, the ~~debt crisis~~effective run-out of claims, and the ~~effect~~return of ~~the PROMESA law, the effects of political and regulatory instability, and the impact of any future significant weather events;~~capital;

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 re-determinations, or enrollment backlogs related to the ~~annual~~ renewal of Medicaid ~~coverage;~~coverage, as well as the chilling effect of the new so-called public charge rule;

government audits, reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;

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, including litigation involving the ACA to which we are not a direct party;

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;

~~the~~ failure to comply with the financial or other covenants in our credit agreement or the indentures governing our outstanding notes;

the sufficiency of 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 industry;

increases in government surcharges, taxes, and assessments;

~~newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;~~

the unexpected loss of the leadership of one or more of our senior executives; and

increasing competition and consolidation in the Medicaid 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.

Readers should refer to the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.

This Quarterly Report on Form 10-Q and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report, and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

OVERVIEW

Molina Healthcare, Inc., a FORTUNE 500 ~~multi-state healthcare organization, arranges for the delivery of~~company, provides managed healthcare services ~~to individuals and families who receive their care through~~under the Medicaid and Medicare programs, and through the state insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 14 states and the Commonwealth of Puerto Rico, we served approximately 3.4 million members as of ~~June 30, 2019.~~March 31, 2020. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).

FIRST QUARTER 2020 HIGHLIGHTS

We ~~currently have two reportable segments: our Health Plans segment and our Other segment. We manage~~reported earnings per diluted share of $2.92, for the vast majority of our operations through our Health Plans segment. The Other segment includes the historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries we sold in the fourthfirst quarter of 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Prior to the fourth quarter of 2018, the MMIS subsidiary was reported as a stand-alone segment. Beginning in 2019, we no longer report service revenue or cost of service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above.

~~SECOND QUARTER 2019 HIGHLIGHTS~~

~~In summary, we produced pretax earnings of $257 million, and~~2020, with net income of ~~$196~~$178 million ~~in the second quarter of 2019, resulting in~~and an after-tax margin of ~~4.7%. On a year-to-date basis, pretax earnings were $517 million and net income~~3.9% percent.

Premium revenue was ~~$394 million, resulting in an after-tax margin of 4.7%. These results include, on a~~$4.3 billion.

The consolidated ~~and year-to-date basis, a~~ medical care ratio (“MCR”) ~~of 85.5% and a general and administrative (“G&A”) expense ratio of 7.6%.~~

~~Program Performance~~

~~Our second quarter and year-to-date results met or exceeded our expectations, and our financial and operational profiles are strong.~~

~~In our Medicaid business, we achieved an 88.3% MCR~~ for the first ~~half~~quarter of ~~the year and performed well,~~2020 increased to 86.3% compared with ~~TANF and ABD generally performing in-line with our expectations. Medicaid Expansion results were better than we expected, mainly due to rate advocacy efforts. Additionally, medical cost trends~~85.3% in general remained well managed across all medical cost categories as the result of our continued improvement in utilization management and payment integrity initiatives, and we continued to improve our retention of quality incentive premium revenues.

~~Performance in our Medicare business, comprising our Special Needs Plans and Medicaid-Medicare Plan (“MMP”) products, continued to perform well, managing to an MCR of 85.0% for~~ the first ~~half~~quarter of 2019, reflecting an increase in the ~~year. We are continuing to manage high-acuity members, including long-term services and supports (“LTSS”) benefits embedded~~Marketplace MCR.


•	Given the timing of the COVID-19 outbreak and related progression, the impact of COVID-19 on the MCR was limited in the quarter.


•	The prior period reserve development in the first quarter of 2020 was negligible. The first quarter of 2019 was positively impacted by approximately 140 basis points of favorable reserve development, primarily in the Medicaid line of business.


•	The general and administrative expense (“G&A”) ratio was 7.0%, which was lower than 2019 due to increased revenues. The current quarter also reflects incremental expense associated with the mobilization of our workforce to work at home and other new operational protocols related to COVID-19.

While net investment income during the quarter was on plan, the steep drop in ~~our MMP product, and risk-adjusted revenue has increased, as our risk scores are more commensurate with the acuity~~interest rates will certainly impact future quarters.

The total company after-tax margin of this population. Our medical margin performance provides us with flexibility to reinvest margins in additional benefits, which should help us maintain our product competitiveness as we position to grow this business in 2020 and beyond.

~~Finally, our Marketplace business continues to perform~~3.9% was in line with our expectations, and we managed to an MCR of 64.7% for the first half of the year. We continue to generate risk scores that are more commensurate with the acuity of our membership, and as a result, we are paying less into the risk adjustment transfer pool than we anticipated. The risk pool has seasoned and our medical cost trend is stable and well-managed, and our monthly membership lapse rate is within our expected level of less than 2%. These results and metrics were in-line with our expectations, and our medical margin performance also gives us flexibility to make any changes in rates, value-added benefits to the product, and commissions that we believe may be necessary to grow membership in 2020, while still achieving a sustainable and attractive margin.expectations.

~~Health Plan Performance~~

We significantly improved the performance of our locally operated health plans in 2018, and they have continued to perform well into 2019. Comments relating to California, Ohio, Washington and Texas, our largest health plans from a revenue standpoint, follow:

California continues to perform well in its diversified book of business in one of the more complex network environments in the country, and the MCR is performing in the mid to low 80s as a result of effective low-cost networks and effective medical cost management. Our California plan is poised to grow, particularly in returning to meaningful market share in the Marketplace.

In Ohio, we are serving 297,000 members, and we are generating strong medical margins. With a total MCR of 87.3% for the second quarter and 88.2% for the first half of the year, the temporal spike in medical costs due to the introduction of the behavioral health benefit, and the higher acuity mix due to redetermination efforts, has been ameliorated by our strong rate advocacy in the state.

In Washington, we have a well-diversified portfolio of products and our medical margin performance is returning to a level that is consistent with past periods, even with the confluence of significant membership growth due to our successful re-procurement, and the introduction of the new integrated behavioral health benefit. The relatively higher medical cost trends experiencedWhile earnings in the first quarter of 2020 met our expectations, the achievement of these results is noteworthy considering the expansive adaptations that we have made in our workforce and operations in the span of a few weeks due to the ~~significant growth, have abated due~~rapidly evolving COVID-19 pandemic, and our successful efforts to ~~increased focus on managing in-patient costs and care management.~~

In Texas, we await the announcement of awards for the state’s program for the aged, blind or disabled (“ABD”), known in Texas as STAR+PLUS, the program for Temporary Assistance for Needy Families (“TANF”), known in Texas as STAR, and the Children’s Health Insurance Program (“CHIP”),avoid disruptions in the ~~third quarter of this year. The continued, strong performance of~~services we provide to our ~~ABD program is built upon our solid skilled nursing facility network~~members and ~~an effective platform for managing personal attendant services.~~government customers.

~~G&A Expenses~~

~~Our G&A expense ratio increased 40 basis points to 7.6% in the first half of 2019, from 7.2% for the same period in 2018, due mainly to the year-over-year decline in overall revenues.~~

~~Balance Sheet and Capital Management~~

We continue to improve our balance sheet, as we repaid an additional $139 million aggregate principal amount of our 1.125% Convertible Notes in the second quarter, for a total of $185 million year to date. The impact of capital deployment actions in the quarter resulted in lower interest expense, a gain on repayment of the convertible notes, and a lower share count. In addition, we have received conversion notices for approximately $9 million principal amount of our 1.125% Convertible Notes that will be settled in the third quarter of 2019.

FINANCIAL SUMMARY


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(Dollars in millions, except per-share amounts)												(Dollars in millions, except per-share amounts)
Premium revenue	$	4,049		$	4,514		$	8,001		$	8,837		$	4,304		$	3,952
Premium tax revenue	110			106			248			210			150			138
Health insurer fees reimbursed	—			104			—			165			66			—
Investment income and other revenue	34			32			63			56			29			29

Medical care costs	3,466			3,850			6,837			7,572			$	3,716		$	3,371
General and administrative expenses	328			335			630			687			317			302
Premium tax expenses	110			106			248			210			150			138
Health insurer fees	—			99			—			174			68			—
Restructuring costs	2			8			5			33
Operating income													274			280

Operating income	265			342			545			564
Interest expense	22			32			45			65			$	21		$	23
Other (income) expenses, net	(14		)	5			(17		)	15
Other income, net													—			(3		)
Income before income tax expense	257			305			517			484			253			260
Income tax expense	61			103			123			175			75			62
Net income	196			202			394			309			178			198
Net income per diluted share	$	3.06		$	3.02		$	6.04		$	4.68

Net income per share - Diluted													$	2.92		$	2.99

Operating Statistics:
Ending total membership	3,370,000			4,063,000			3,370,000			4,063,000			3,404,000			3,393,000
MCR ⁽¹⁾	85.6		%	85.3		%	85.5		%	85.7		%	86.3		%	85.3		%
G&A ratio ⁽²⁾	7.8		%	6.9		%	7.6		%	7.2		%	7.0		%	7.3		%
Premium tax ratio ⁽¹⁾	2.6		%	2.3		%	3.0		%	2.3		%	3.4		%	3.4		%
Effective income tax expense rate	24.0		%	33.8		%	23.9		%	36.2		%
Effective income tax rate													29.8		%	23.8		%
After-tax margin ⁽²⁾	4.7		%	4.1		%	4.7		%	3.2		%	3.9		%	4.8		%

________________________


(1)	MCR 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.


(2)	~~After-tax margin represents net income as a percentage of total revenue.~~ 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.

CONSOLIDATED RESULTS

NET INCOME AND OPERATING INCOME

Net income in the ~~second~~first quarter of ~~2019~~2020 amounted to ~~$196~~$178 million, or ~~$3.06~~$2.92 per diluted share, compared with ~~$202~~$198 million, or ~~$3.02~~$2.99 per diluted share, in the ~~second~~first quarter of ~~2018. Current quarter net~~2019. Operating income ~~was driven by lower operating income, which amounted to $265~~of $274 million in the ~~second~~first quarter of ~~2019,~~2020, was lower compared with ~~$342~~$280 million in the ~~second~~first quarter of ~~2018, mainly resulting from the year-over-year decline in premium revenue.~~2019.

Net income ~~in the six months ended June 30, 2019, amounted to $394 million, or $6.04~~ per ~~diluted~~ share compared with $309 million, or $4.68 per diluted share, in the six months ended June 30, 2018. Operating income amounted to $545 million in the six months ended June 30, 2019, compared with $564 million in the six months ended June 30, 2018.

~~In both the second quarter and six months ended June 30, 2019, earnings per diluted share improved due to~~was favorably impacted by the reduction ~~of the dilutive impact of the 1.125% Warrants,~~in our common shares outstanding as a result of ~~the termination transactions that settled~~

~~between June 2018 and June 2019.~~our share repurchase program. See further discussion in ~~Notes to Consolidated~~“Liquidity and Financial ~~Statements, Note 9, “Stockholders' Equity~~.Condition,” below.

PREMIUM REVENUE

Premium revenue ~~decreased $465~~increased $352 million in the ~~second~~first quarter of ~~2019,~~2020, when compared with the ~~second~~first quarter of ~~2018. Member months declined 18%~~2019. The increase was in the Medicaid and Medicare programs, and was mainly due to a 10% increase in premium revenue per-member per-month (“PMPM”), partially offset by a per-member per-month (“PMPM”) revenue increase of 8%. Premium revenue decreased $836 million in the six months ended June 30, 2019, when compared with the six months ended June 30, 2018. Member months declined 18%, partially offset by a PMPM revenue increase of 9%. In both periods, lower premium revenue was primarily in the Medicaid and Marketplace programs.

~~The~~slight decline in Medicaid premium revenue was driven primarily by the loss in membership due to the previously announced loss of the New Mexico Medicaid contract, along with the resizing of the Florida Medicaid contract as reported throughout 2018, partially offset by Medicaid premium rate increases.member months.

The decline in Marketplace premium revenue was driven primarily by a relatively smaller benefit from prior year Marketplace risk adjustment in 2019 compared with 2018 due to declining Marketplace membership, partially offset by Marketplace premium rate increases.

MEDICAL CARE RATIO

The consolidated MCR for the first quarter of 2020 increased to ~~85.6% in~~86.3%, compared to 85.3% for the ~~second~~first quarter of 2019, ~~from 85.3%~~reflecting an increase in the ~~second~~Marketplace MCR. The prior period reserve development in the first quarter of ~~2018, and decreased to 85.5% in the six months ended June 30, 2019, from 85.7% in the six months ended June 30, 2018.~~

2020 was negligible. The ~~increased MCR in the second~~first quarter of 2019 was ~~mainly due to a relatively smaller benefit from prior year Marketplace risk adjustment~~positively impacted by approximately 140 basis points of favorable reserve development, primarily in ~~2019 compared with 2018,~~the Medicaid line of business. Given the timing of the COVID-19 outbreak and related progression, the impact of ~~higher acuity Marketplace membership, partially offset by~~COVID-19 on the ~~impact of Marketplace rate increases and increased premiums tied to risk scores.~~

~~The improved~~ MCR was limited in the six months ended June 30, 2019 was mainly due to improvement in the TANF and ABD programs, partially offset by an increased MCR in the Medicaid Expansion program, primarily in California. In addition, the MCR for the six months ended June 30, 2018, included the benefit of the cost sharing (“CSR”) reimbursement related to 2017 dates of service, described in further detail below.quarter.

PREMIUM TAX REVENUE AND EXPENSES

The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was ~~2.6%~~3.4% in the ~~second~~first quarter of ~~2019, compared~~2020, consistent with ~~2.3% in~~ the ~~second~~first quarter of 2018; and 3.0% compared with 2.3% for the six months ended June 30, 2019 and 2018, respectively. The increase is mainly attributed to the state of Michigan’s implementation of an insurance provider assessment in 2019.

INVESTMENT INCOME AND OTHER REVENUE

Investment income and other revenue ~~increased to $34~~was $29 million in the ~~second~~first quarter of ~~2019,~~2020, and was unchanged compared with ~~$32 million in~~ the ~~second~~first quarter of ~~2018, and increased~~2019. We expect investment income to ~~$63 million~~decline in ~~the six months ended June 30, 2019,~~2020 compared with ~~$56 million in the six months ended June 30, 2018, mainly due~~2019, as money market and other maturing fixed income investments roll over to ~~improved annualized portfolio yields in both periods.~~lower yielding instruments.

G&A EXPENSES

The G&A expense ratio ~~increased~~decreased to ~~7.8%~~7.0% in the ~~second~~first quarter of 2020, from 7.3% in the first quarter of 2019, ~~from 6.9% in the second quarter of 2018, and increased to 7.6% in the six months ended June 30, 2019, compared with 7.2% in the six months ended June 30, 2018. This increase was primarily~~ due to increased revenues. The current quarter also reflects $6 million of incremental expense associated with the ~~impact~~mobilization of ~~lower overall revenues in 2019.~~our workforce to work at home and other new operational protocols related to COVID-19.

HEALTH INSURER FEES

~~There are no health insurer fees~~ (“HIF”) ~~expensed or reimbursed in 2019 due to the moratorium under Public Law No. 115-120.~~

In the ~~second~~first quarter of ~~2018 and the six months ended June 30, 2018, the~~2020, HIF expense amounted to ~~$99~~$68 million, ~~and $174 million, respectively,~~ and HIF reimbursements amounted to ~~$104 million and $165 million, respectively.~~

~~RESTRUCTURING COSTS~~

We$66 million. Public Law No. 115-120 provided for a HIF moratorium in 2019; therefore, there was no HIF incurred ~~restructuring costs of $2 million and $5 million~~or reimbursed in that year. The HIF is reinstated in 2020, but the ~~second quarter of 2019 and~~Further Consolidated Appropriations Act, 2020, repealed the six months ended June 30, 2019, respectively, mainly due to true-ups of lease terminations recorded in our 2017 Restructuring Plan. In the second quarter of 2018 and the six months ended June 30, 2018, we incurred restructuring costs of $8 million and $33 million, respectively, related to our 2017 Restructuring Plan.HIF effective for years after 2020.

INTEREST EXPENSE

Interest expense declined to ~~$22~~$21 million in the ~~second~~first quarter of ~~2019,~~2020, from ~~$32~~$23 million in the ~~second~~first quarter of ~~2018, and declined to $45 million in the six months ended June 30, 2019, from $65 million in the six months ended June 30, 2018.~~2019. As further described below in “Liquidity,” we ~~reduced~~repaid the $12 million principal amount outstanding of our 1.125% Convertible Notes by $185 million in the six months ended June 30, 2019, and reduced total debt by $759 million in the year ended December 31, 2018. The decrease in interest expense in 2019 was partially offset by interest expense attributable to $220 million borrowed under our Term Loan Facility in the six months ended June 30, 2019.

Interest expense includes non-cash interest expense relating primarily to the amortization of the discount on convertible senior notes, which amounted to $1 million and $6 million in the second quarter of 2019, and 2018, respectively, and $4 million and $13 million in the six months ended June 30, 2019 and 2018, respectively. The decline in the first ~~half~~quarter of ~~2019 is due to repayment of our convertible senior notes throughout 2018 and in the first half of 2019. See further discussion in Notes to Consolidated Financial Statements, Note 7, “Debt~~.”2020.

OTHER ~~(INCOME) EXPENSES,~~INCOME, NET

In the ~~second~~first quarter of 2019, ~~and the six months ended June 30, 2019,~~ we recognized gains on debt ~~extinguishment gains~~repayment of ~~$14~~$3 million, ~~and $17 million, respectively, and in the second quarter of 2018 and the six months ended June 30, 2018, we recognized debt extinguishment losses of $5 million and $15 million, respectively,~~ in connection with convertible senior notes repayment ~~transactions. The~~transactions, with no corresponding gain in ~~2019 was due to a favorable mark to market valuation on~~ the ~~partial termination~~first quarter of ~~the Call Spread Overlay executed in connection with the related debt extinguishment.~~2020. See further discussion in Notes to Consolidated Financial Statements, Note 7, “Debt.”

INCOME TAXES

~~The provision for income taxes was recorded at an effective rate of 24.0%~~Income tax expense amounted to $75 million in the ~~second~~first quarter of ~~2019,~~2020, or 29.8% of pretax income, compared with ~~33.8%~~income tax expense of $62 million, or 23.8% of pretax income in the ~~second~~first quarter of ~~2018, and 23.9% in the six months ended June 30, 2019, compared with 36.2% in the six months ended June 30, 2018.~~2019. The effective tax rate ~~for 2019 differs from 2018 as a result of~~is higher ~~non-deductible~~in 2020 due to higher nondeductible expenses in ~~2018,~~2020, primarily related to the ~~non-deductible~~nondeductible HIF. The HIF iswas not applicable in 2019 due to the moratorium ~~under Public Law No. 115-120.~~as noted above.

~~SUMMARY OF NON-RUN RATE ITEMS~~

The table below summarizes the impact of certain expenses and other items that management believes are not indicative of longer-term business trends and operations. The individual items presented below increase (decrease) income before income tax expense.

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
Amount
Per Diluted Share ⁽¹⁾
(In millions except per diluted share amounts)
Restructuring costs $ (2 ) $ (0.02 ) $ (8 ) $ (0.10 ) $ (5 ) $ (0.05 ) (33 ) (0.39 )
Gain (loss) on debt extinguishment 14
0.17
(5 ) (0.06 ) 17
0.21
(15 ) (0.21 )
$ 12
$ 0.15
$ (13 ) $ (0.16 ) $ 12
$ 0.16
$ (48 ) $ (0.60 )

~~___________________~~


~~(1)~~	Except for permanent differences between GAAP and tax (such as certain expenses that are not deductible for tax purposes), per diluted share amounts are generally calculated at the statutory income tax rate of 22.6% and 22% for 2019 and 2018, respectively.

REPORTABLE SEGMENTS

We currently have 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.

~~One of the~~The key metrics used to assess the performance of our Health Plans segment ~~is the~~are premium revenue, margin and MCR. MCR ~~which~~ 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 referred to as “Medical Margin.” Medical Margin amounted to ~~$583~~$588 million in the ~~second~~first quarter of ~~2019,~~2020, and ~~$664~~$581 million in the ~~second~~first quarter of ~~2018. Medical Margin amounted to $1,164 million in the six months ended June 30, 2019, and $1,265 million in the six months ended June 30, 2018.~~2019. Management’s discussion and analysis of the changes in the individual components of Medical Margin follows.

See Notes to Consolidated Financial Statements, Note ~~11,~~9, “Segments,” for more information on our reportable segments.

HEALTH PLANS

TRENDS AND UNCERTAINTIES

~~Decline in Membership~~COVID-19 Pandemic

On March 13, 2020, a national state of emergency was declared over the coronavirus (“COVID-19”) outbreak, to enhance the federal government’s response to the pandemic. At that time, several states had already declared some type of emergency, and ~~Premium Revenue~~by March 16, 2020, every state had made an emergency declaration. Such emergency declarations allow governors to exercise emergency powers that may include activating state emergency personnel and funds, supporting the needs of local governments, and adjusting regulations to maximize access to health care.

~~Medicaid Program~~

~~Our Medicaid contracts in New Mexico~~Molina Healthcare and its subsidiary health plans across 14 states and Puerto Rico are working diligently and in ~~all but two regions~~alignment with federal, state and local public health authorities, regulators, and other health systems to ensure no interruption in ~~Florida terminated in late 2018~~service or care coordination to our members, and ~~early 2019. As~~to proactively protect our employees.

We have activated several internal frameworks and functions designed to mitigate the implications of the COVID-19 pandemic, which include a ~~result, our Medicaid membership has decreased~~business continuity plan and an enterprise risk management framework, along with executive level cross-functional teams that have been formed to ~~approximately 97,000 members in Florida as of June 30, 2019, from 468,000 members in Florida~~address other pandemic-specific impacts, including policy coverage, financial solvency, investments and ~~New Mexico, in the aggregate, as of December 31, 2018. In 2019, we continue to serve Medicare~~liquidity, and ~~Marketplace members in both Florida and New Mexico, as well as Medicaid members in two regions in Florida.~~staff considerations.

~~In addition, our Medicaid membership has declined further in Puerto Rico as~~As a result of the ~~entry~~pandemic, various laws and other regulatory actions were enacted at the federal level, which may impact our business directly or indirectly, including the following:

Federal Economic Stabilization Programs

Phase One - Coronavirus Preparedness and Response Supplemental Appropriations Act. Enacted on March 6, 2020, this legislation provided $8.3 billion of ~~more managed~~emergency funding for federal agencies to respond to the COVID-19 outbreak.

Phase Two - Families First Coronavirus Response Act (the “FFCRA”). Enacted on March 18, 2020, the FFCRA temporarily increases each qualifying state and territory’s federal medical assistance percentage (“FMAP”) by 6.2% beginning January 1, 2020, throughout each state’s declaration of emergency. The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s FMAP.

Phase Three - Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Enacted on March 27, 2020, the CARES Act provides an estimated $2 trillion to fight the COVID-19 pandemic and stimulate the US economy. This assistance includes $349 billion for small business loans that will help providers cover qualified payroll costs, rent, utilities, and interest on mortgage and other debt obligations; $100 billion for health care ~~organizations~~providers to cover healthcare-related expenses or lost revenues directly attributable to COVID-19; and Medicare and Medicaid provisions that ~~market late last year. We served approximately 200,000 members in Puerto Rico as of June 30, 2019, compared with 252,000 members as of December 31, 2018.~~should help providers broadly, including a 20% boost to the Medicare rate on COVID-19 cases.

~~Primarily as~~The latest COVID-19 economic relief package was enacted on April 24, 2020, and provides $484 billion to replenish a ~~result~~small business lending program, and support hospitals and COVID-19 testing.

Due to the uncertainty around the duration and breadth of the ~~changes described above, our Medicaid premium revenues have decreased 11% in~~COVID-19 pandemic, we are unable to reasonably estimate the ~~six months ended June 30, 2019, when compared with the six months ended June 30, 2018, and we expect our Medicaid premium revenues to continue to decline in 2019 compared with 2018.~~

~~Marketplace Program~~

We estimate that our 2019 Marketplace end-of-year enrollment will decrease to approximately 270,000 to 280,000 members due to expected attrition. This enrollment is lower than the 308,000 and 362,000 members enrolled as of June 30, 2019, and December 31, 2018, respectively. Consequently, we expect our Marketplace premium revenues to continue to decrease in 2019 compared with 2018.

~~Status of Upcoming Contract Re-Procurements~~

~~Medicaid Program~~

~~Texas.~~ In late 2018, our Texas health plan submitted two separate request for proposal (“RFP”) responses: one with regard to the STAR+PLUS program; and the other with regard to the STAR/CHIP programs. Based on the state’s July 9, 2019, addendum to the STAR+PLUS RFP, we currently expect the STAR+PLUS, and STAR/CHIP awards to be announced in the third quarter of 2019, with an operational effective date of September 1, 2020. As of June 30, 2019, our Texas health plan served 86,000 members under the existing STAR+PLUS contract, under which we estimate annualized premium revenues of approximately $1,660 million in 2019. As of June 30, 2019, our Texas

~~health plan served 116,000 members under the existing STAR/CHIP contracts, under which we estimate annualized premium revenues of approximately $310 million in 2019.~~

~~Ohio.~~ ~~We have received information that the state of Ohio expects to release its Medicaid contract RFP early in 2020, with an announcement~~ultimate impact of the ~~awards likely in the third quarter of 2020, and an operational effective date of January 1, 2021.~~

~~California.~~ ~~We have received information that the state of California expects~~economic stabilization programs to ~~release its Medicaid contract RFP in 2020, with new contracts effective in 2023.~~

~~A loss of any of our Texas, Ohio, or California Medicaid contracts would have a material adverse effect on~~ our business, financial condition, ~~cash flows,~~ and operating results ~~of operations.~~at this time.

~~MMP Program~~Regulatory Relief for Medicaid, Medicare and Marketplace Enrollees

~~California.~~Medicaid and Medicare Waivers ~~In late April 2019,~~. The Secretary of Health and Human Services can use “Section 1135” authority to waive or modify certain Medicare, Medicaid, and CHIP requirements to ensure that sufficient health care items and services are available to meet the ~~Centers~~needs of Medicaid enrollees in affected areas if a public health emergency has been declared. After the state of emergency declaration noted above, the Center for Medicare and Medicaid Services (“CMS”) issued blanket Section 1135 waivers for many Medicare provisions and approved Section 1135 waivers for Medicaid programs in many states. The Commonwealth of Puerto Rico and all the states with which Molina contracts for Medicaid services have either submitted or are in the process of submitting Section 1135 waivers.

The waivers that impact the operations of Medicaid managed care organizations include: extension of members’ pre-existing authorizations for health services; reduction of the timeline to resolve members’ appeals; suspension of pre-admission screening for certain conditions; payment for services performed by certain out of state providers or other facilities; elimination of cost-sharing for COVID-19 related healthcare services; expansion of telehealth benefits; and relaxation of appeals requirements for Medicare Advantage members.

Due to the uncertainty around the duration and breadth of the COVID-19 pandemic, we are unable to reasonably estimate the ultimate impact of the Section 1135 waivers to our business, financial condition, and operating results at this time.

Trends and Uncertainties

We currently expect the pandemic to impact our business in the following areas:

Member Enrollment. As a result of the surge in unemployment due to the pandemic, we expect a significant increase in Medicaid eligibility and enrollment. However, due to the evolving nature of the pandemic, we are currently unable to predict the timing or amount of the expected increases in enrollment. We believe that we have the scalability necessary to handle the wave of new membership that could occur and be an able partner to our state customers.

In addition to increased Medicaid enrollment, several states that operate their own Marketplaces have reopened enrollment, or extended the deadline to enroll in the Marketplace, including where we operate in California, New York and Washington. In addition, households previously commercially insured at the workplace that do not qualify for Medicaid may be eligible for highly subsidized Marketplace products.

Demand for Healthcare Services. The pandemic, along with the related quarantine and social distancing measures, is currently reducing demand for certain routine and non-critical medical services, while at the same time increasing demand for other medical services, such as COVID-19 testing and emergency services. Discretionary utilization could continue to be lower than normal patterns for the second quarter, but then may rebound quickly in the second half of 2020 as COVID-19 care abates and health system capacity frees up, and the current social distancing measures are relaxed over time. In addition, we expect increased Medicaid enrollment to result in an increase in medical care claims and related costs.

Therefore, at this point, we cannot predict with any degree of precision how the COVID-19 situation will impact medical costs in 2020. The level of future direct COVID-19 related costs, the incidence rate of diagnosis and hospital admission and the related cost per episode, is not yet estimable. We do not know exactly when utilization patterns and levels will begin to normalize for elective medical procedures. Additionally, any potential short-term and non-recurring benefit from lower utilization would be partially limited by annual Medicare and Marketplace minimum MLR regulations; and annual Medicaid minimum MLR regulations or profit ceilings in eight of the 14 states, including Puerto Rico, in which we operate Medicaid programs.

To provide our members with immediate access to medical care without leaving their homes, and mitigate a potential surge in “pent-up” demand, Molina is:

Providing supplemental telemedicine for our members through our partnership with Teladoc;

Continuing to monitor and update all other tele-health services based on Medicaid agency updates; and

Outreaching to and educating members on community resources as well as their ability to receive free home delivery of prescriptions through CVS Pharmacy.

We are also covering screening tests for COVID-19, including office visits, urgent care, or ER visits associated with testing.

Providers. As noted above, in the near term the pandemic has caused reduced demand for certain routine and non-critical medical services, which in turn is creating financial stress for certain Medicaid providers. State Medicaid agencies have turned to managed care organizations, either explicitly or via CMS Section 1135 waivers (as described above) to provide temporary cash advances to impacted providers for insolvency protection. We have established policies to support our provider network by directing providers to programs that are available under the economic stabilization programs described above. An example of such a program is CMS’s Accelerated Advance Payments program, which can provide three months of payments for healthcare providers. We believe that our provider payment policies will mitigate the risk of an increase in provider receivables that may be uncollectible.

Workforce. Our most significant operational asset is our workforce of nearly 10,000 employees nationwide. On March 18, 2020, we announced that we had temporarily transitioned thousands of our employees to remote status. This precaution was taken to protect the health and wellness of our staff by reducing the likelihood of exposure to COVID-19. As of March 24, 2020, substantially all employees were transitioned to remote status. As of March 31, 2020, we have not experienced any significant interruptions in the services we provide, nor was there a material impact of the pandemic to our consolidated financial position, results of operations, and cash flows in the first quarter of 2020.

Outsourcing and Other Vendors. Our business is dependent on effective and secure information systems. We have partnered with third parties to support our information technology systems. The pandemic may impact the ability of our outsourced information technology service providers, and other third-party vendors, to perform contracted services.

Capital and Financial Resources. Refer to “Liquidity and Financial Condition” below for a discussion of potential pandemic-related impacts to our capital and financial resources.

We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic. However, we are limited in our ability to estimate the ultimate impact on our operations (including claims volumes), financial results, and cash flows at this time. Due to the evolving nature of the pandemic, we are continually processing, assembling and assessing information on utilization. We believe that our cash resources, borrowing capacity available under our 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.

Other Recent Developments

Acquisition of Magellan Complete Care. On April 30, 2020, we entered into a definitive agreement to acquire the Magellan Complete Care (“MCC”) line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of certain tax benefits, which we intend to fund with cash on hand.

The transaction is subject to federal and state regulatory approvals, and other customary closing conditions, and is expected to close in the first quarter of 2021. In connection with this transaction, Magellan Health, Inc. has agreed to provide certain transition services following the closing.

Marketplace Risk Corridor Ruling. On April 27, 2020, the United States Supreme Court issued its opinion in Maine Community Health Options v. United States. The 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, that such payment obligations survived Congress’ appropriations riders, 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. There are no distinguishing factors regarding liability or damages between this case and the cases we ourselves have brought against the federal government for its failure to pay our Marketplace risk corridors claims for 2014, 2015, and 2016. We have already obtained summary judgment for our 2014 and 2015 risk corridor claims in the approximate amount of $52 million, and we have brought another claim for approximately $76 million for the government’s failure to pay our 2016 risk corridor claims. The timing of recognition and collection of these

outstanding Marketplace risk corridor claims is uncertain, but we will request that the Court of Claims act as expeditiously as possible to enter judgment for all of the risk corridors amounts owed to us.

Other RFPs. We await the decision by the state of Kentucky on its Medicaid RFP, which we expect to be issued before the end of the second quarter. We believe there will be a general tendency by states to delay procurements until the COVID-19 crisis has abated.

Update on Status of Significant Contracts

California. Our managed care contracts with the California ~~Medicaid agency’s request for~~Department of Health Care Services (“DHCS”) cover six regions in central and southern California (including the Los Angeles region covered under a ~~three-year extension of its duals demonstration program, through December 31, 2022. We estimate annualized premium revenues of approximately $180 million in 2019 under our California MMP program.~~

~~Illinois.~~ The current authority for our MMP program in Illinois ends December 31, 2019. In March 2019, the Illinois Medicaid agency submitted a request to CMS for a one-year extension of its duals demonstration program,separate subcontract with Health Net). These contracts are effective through December 31, 2020, and are expected to be renewed annually until the effectiveness of new forms of contract following request for proposal (“RFP”) awards. DHCS has publicly indicated it expects to release the final Medicaid RFP in mid-2021, for implementation in January 2024.

Texas. On March 25, 2020, the HHSC notified our Texas health plan that HHSC has canceled all contracts associated with their ABD program (known in Texas as “STAR+PLUS”) re-procurement awards announced in October 2019, and canceled the solicitation associated with their TANF and CHIP programs (known in Texas as “STAR/CHIP”) re-procurement. HHSC further indicated that it is currently deliberating next steps with respect to both re-procurements. We do not expect the HHSC to re-issue the RFPs in the near future. Previously, in October 2019, the HHSC had awarded contracts to our Texas health plan for the STAR+PLUS program in two service areas, consisting of one legacy service area and one new service area. This would have been a ~~possible three-year extension through 2022. We estimate annualized premium revenues~~reduction from our current footprint of ~~approximately $130 million~~six service areas. Also, in 2019, ~~under~~ our ~~Illinois MMP program.~~Texas health plan submitted an RFP response for STAR/CHIP.

~~Ohio.~~ ~~In late April~~For a discussion of additional Health Plans segment trends, uncertainties and other developments, refer to our 2019 CMS approved the Ohio Medicaid agency’s request for a three-year extension of its duals demonstration program, through December 31, 2022. We estimate annualized premium revenues of approximately $580 million in 2019 under our Ohio MMP program.

~~Pressures~~Annual Report on ~~Medicaid Funding~~

~~Due to states’ budget challenges~~Form 10-K, “Item 1. Business—Our Business,” and ~~political agendas at both the state~~“—Legislative 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 and results of operations. These proposals include elements such as the following, as well as numerous other potential changes and reforms:

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.~~

~~ACA~~

In December 2018, in a case brought by the state of Texas and nineteen other states, a federal judge in Texas held that the ACA’s individual mandate is unconstitutional. He further held that the individual mandate is inseverable from the entire body of the ACA, and thus the entire ACA is unconstitutional. The District Court stayed its order pending appeal, and the decision has now been appealed to and argued before a three judge panel of the Fifth Circuit Court of Appeals. A decision of that court is expected by October of 2019, after which the case may be further appealed to the United States Supreme Court. Any final, not-appealable determination that the ACA is unconstitutional would have a material adverse effect on our business, financial condition, cash flows, and results of operations.Political Environment.”

MEMBERSHIP

The following tables set forth our Health Plans segment membership as of the dates indicated:

June 30,
2019 December 31,
2018 June 30,
2018
Ending Membership by Program:
TANF and CHIP 2,008,000
2,295,000
2,464,000
Medicaid Expansion 595,000
660,000
675,000
ABD 359,000
406,000
415,000
Total Medicaid 2,962,000
3,361,000
3,554,000
MMP – Integrated ⁽¹⁾
57,000
54,000
55,000
Medicare Special Needs Plans (“Medicare”) 43,000
44,000
45,000
Total Medicare 100,000
98,000
100,000
Total Medicaid and Medicare 3,062,000
3,459,000
3,654,000
Marketplace 308,000
362,000
409,000
3,370,000
3,821,000
4,063,000

Ending Membership by Health Plan:
California 590,000
608,000
639,000
Florida ⁽²⁾
142,000
313,000
398,000
Illinois 221,000
224,000
219,000
Michigan 360,000
383,000
397,000
New Mexico ⁽²⁾
26,000
222,000
241,000
Ohio 297,000
302,000
320,000
Puerto Rico 200,000
252,000
326,000
South Carolina 130,000
120,000
114,000
Texas 360,000
423,000
450,000
Washington 811,000
781,000
776,000
Other ⁽³⁾
233,000
193,000
183,000
3,370,000
3,821,000
4,063,000



	March 31, 2020	December 31, 2019	March 31, 2019
Ending Membership by Government Program:
Medicaid	2,970,000	2,956,000	2,964,000
Medicare	105,000	101,000	97,000
Marketplace	329,000	274,000	332,000
Total	3,404,000	3,331,000	3,393,000

Ending Membership by Health Plan:
California	550,000	565,000	600,000
Florida	123,000	132,000	144,000
Illinois	230,000	224,000	219,000
Michigan	367,000	362,000	369,000
Ohio	300,000	288,000	295,000
Puerto Rico	170,000	176,000	207,000
South Carolina	136,000	131,000	126,000
Texas	345,000	341,000	377,000
Washington	878,000	832,000	815,000
Other ⁽¹⁾	305,000	280,000	241,000
Total	3,404,000	3,331,000	3,393,000

_________________________


(1)	~~MMP members receive both Medicaid and Medicare coverage from Molina Healthcare.~~


~~(2)~~	Our Medicaid contracts in New Mexico and in all but two regions in Florida terminated in late 2018 and early 2019. During 2019, we continue to serve Medicare and Marketplace members in both Florida and New Mexico, as well as Medicaid members in two regions in Florida.


~~(3)~~	“Other” includes the Idaho, Mississippi, New Mexico, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.

~~THREE AND SIX MONTHS ENDED JUNE 30, 2019, COMPARED WITH THREE AND SIX MONTHS ENDED JUNE 30, 2018~~

FINANCIAL PERFORMANCE ~~BY PROGRAM~~

The ~~following~~ tables in the section below summarize ~~member months,~~ premium revenue, ~~medical care costs,~~Medical Margin, and MCR by state health plan and ~~medical margin~~ by government program for the periods indicated ~~(PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):~~

Three Months Ended June 30, 2019

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 6.1
$ 1,196
$ 196.36
$ 1,048
$ 172.13
87.7 % $ 148
Medicaid Expansion 1.8
695
384.94
594
328.85
85.4
101
ABD 1.1
1,176
1,088.48
1,061
981.84
90.2
115
Total Medicaid 9.0
3,067
341.72
2,703
301.15
88.1
364
MMP 0.1
406
2,421.89
356
2,118.95
87.5
50
Medicare 0.2
166
1,296.99
132
1,034.43
79.8
34
Total Medicare 0.3
572
1,934.17
488
1,648.73
85.2
84
Total Medicaid and Medicare 9.3
3,639
392.52
3,191
344.14
87.7
448
Marketplace 0.9
410
440.20
275
295.71
67.2
135
10.2
$ 4,049
$ 396.87
$ 3,466
$ 339.72
85.6 % $ 583

Three Months Ended June 30, 2018

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 7.5
$ 1,393
$ 186.18
$ 1,205
$ 161.13
86.5 % $ 188
Medicaid Expansion 2.1
761
372.04
676
330.83
88.9
85
ABD 1.3
1,288
1,033.34
1,209
969.27
93.8
79
Total Medicaid 10.9
3,442
319.52
3,090
286.89
89.8
352
MMP 0.1
367
2,224.30
313
1,893.91
85.1
54
Medicare 0.2
157
1,168.40
133
989.33
84.7
24
Total Medicare 0.3
524
1,751.49
446
1,488.85
85.0
78
Total Medicaid and Medicare 11.2
3,966
358.23
3,536
319.37
89.2
430
Marketplace 1.2
548
440.93
314
253.04
57.4
234
12.4
$ 4,514
$ 366.57
$ 3,850
$ 312.68
85.3 % $ 664

Six Months Ended June 30, 2019

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 12.3
$ 2,369
$ 192.83
$ 2,070
$ 168.56
87.4 % $ 299
Medicaid Expansion 3.6
1,359
377.30
1,188
329.65
87.4
171
ABD 2.2
2,343
1,078.40
2,103
967.59
89.7
240
Total Medicaid 18.1
6,071
336.20
5,361
296.85
88.3
710
MMP 0.3
794
2,388.88
689
2,073.30
86.8
105
Medicare 0.3
329
1,290.88
265
1,041.06
80.6
64
Total Medicare 0.6
1,123
1,911.98
954
1,624.97
85.0
169
Total Medicaid and Medicare 18.7
7,194
385.82
6,315
338.67
87.8
879
Marketplace 1.9
807
415.94
522
269.14
64.7
285
20.6
$ 8,001
$ 388.66
$ 6,837
$ 332.11
85.5 % $ 1,164

Six Months Ended June 30, 2018

Member
Months ⁽¹⁾
Premium Revenue Medical Care Costs
MCR ⁽²⁾
Medical Margin
Total PMPM Total PMPM
TANF and CHIP 14.9
$ 2,766
$ 185.66
$ 2,477
$ 166.32
89.6 % $ 289
Medicaid Expansion 4.1
1,513
372.39
1,317
324.19
87.1
196
ABD 2.5
2,542
1,023.83
2,364
951.99
93.0
178
Total Medicaid 21.5
6,821
318.11
6,158
287.22
90.3
663
MMP 0.3
724
2,180.86
618
1,858.87
85.2
106
Medicare 0.3
314
1,178.58
264
992.05
84.2
50
Total Medicare 0.6
1,038
1,735.05
882
1,473.30
84.9
156
Total Medicaid and Medicare 22.1
7,859
356.59
7,040
319.43
89.6
819
Marketplace 2.6
978
373.67
532
203.34
54.4
446
24.7
$ 8,837
$ 358.40
$ 7,572
$ 307.11
85.7 % $ 1,265

~~_______________________~~


~~(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.~~

~~Medicaid Program~~

The Medical Margin of our Medicaid program increased $12 million, or 3% in the second quarter of 2019 when compared with the second quarter of 2018, and increased $47 million, or 7% in the six months ended June 30, 2019, when compared with the six months ended June 30, 2018. The increase in both periods was due to improvement in the overall Medicaid MCR, which more than offset the impact of declining Medicaid premium revenue. The Medicaid MCR decreased to 88.1% from 89.8%, or 170 basis points, in the second quarter of 2019 when compared to the same period in 2018, and decreased to 88.3% from 90.3%, or 200 basis points, in the six months ended June 30, 2019, when compared with the same period in 2018.

The improved Medicaid MCR for both periods in 2019 mainly resulted from a lower MCR in the ABD program, which was principally driven by lower pharmacy costs from re-contracted pharmacy benefits management and our continued focus on medical cost management. The improvement in the MCR for the second quarter of 2019 was additionally driven by a decrease in the Medicaid Expansion MCR, which improved 350 basis points when compared with the second quarter of 2018, mainly due to the impact of rate increases and retrospective premium increases. The Medicaid Expansion MCR increased slightly in the six months ended June 30, 2019, when compared with the six months ended June 30, 2018, due to lower premium revenue in California and higher inpatient and outpatient fee for service costs in California. The decline in Expansion premium revenue in California mainly resulted from the rate reduction we received in July 2018.

Medicaid premium revenue decreased $375 million and $750 million in the second quarter of 2019 and the six months ended June 30, 2019, respectively, mainly due to the loss in membership in connection with the termination of our Medicaid contracts in New Mexico and in all but two regions in Florida in late 2018 and early 2019, partially

~~offset by net rate increases in certain other markets. As noted above, we expect lower Medicaid premium revenue throughout 2019, when compared with 2018.~~

~~Medicare Program~~

The Medical Margin of our Medicare program increased $6 million, or 8%, in the second quarter of 2019, when compared with the second quarter of 2018, and increased $13 million, or 8%, in the six months ended June 30, 2019 when compared with the six months ended June 30, 2018. Premiums continue to increase and are higher compared with the prior year, mainly due to risk scores that are more commensurate with the acuity of our population.

~~Marketplace Program~~

The Marketplace Medical Margin decreased $99 million in the second quarter of 2019, when compared with the second quarter of 2018, and decreased $161 million in the six months ended June 30, 2019, when compared with the six months ended June 30, 2018. The decrease in both periods in 2019 is mostly attributed to a decrease in premium revenues, driven by a decrease in membership of over 20%, partially offset by premium rate increases and increased premiums tied to risk scores. Additionally, the decrease in premiums in both periods in 2019 reflects a relatively smaller benefit from prior year Marketplace risk adjustment in 2019 compared with 2018, and the impact of higher acuity membership. As noted above, we expect Marketplace premium revenue to be lower in 2019, when compared with 2018.

The decrease in Medical Margin for the six months ended June 30, 2019, was partially driven by the impact of $76 million of CSR reimbursement recognized in the six months ended June 30, 2018. The CSR benefit related to 2017 dates of service and was recognized following the federal government’s confirmation that the reconciliation would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.

The MCR for the Marketplace program amounted to 67.2% in the second quarter of 2019, compared with 57.4% in the second quarter of 2018, and 64.7% in the six months ended June 30, 2019, compared with 54.4% in the six months ended June 30, 2018. The increased MCR in both periods in 2019 reflects a relatively smaller benefit from prior year Marketplace risk adjustment in 2019 compared with 2018, and the impact of higher acuity membership, partially offset by the impact of rate increases and increased premiums tied to risk scores. Additionally, the increase in MCR for the six months ended June 30, 2019, reflects the impact of the CSR reimbursement recognized in the six months ended June 30, 2018.

~~FINANCIAL PERFORMANCE BY HEALTH PLAN~~

The following tables summarize member months, premium revenue, medical care costs, MCR, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are(dollars in millions):

Health ~~Plans Segment Financial Data — Medicaid and Medicare~~Plan Performance


															Three Months Ended March 31,
	Three Months Ended June 30, 2019														2020										2019
	Member Months	Premium Revenue				Medical Care Costs				MCR			Medical Margin		Premium Revenue				Medical Margin			MCR			Premium Revenue				Medical Margin			MCR
	Member Months	Total		PMPM		Total		PMPM											Medical Margin			MCR			Premium Revenue				Medical Margin			MCR
California	1.6	$	499	$	305.40	$	415	$	253.85	MCR	83.1	%	Medical Margin		Premium Revenue		$	84		$	551		$	85			84.5	%		$	555		$	74	86.7	%
Florida	0.3	126		417.10		120		399.22		95.7			6		154				30			80.4			223				70			68.4
Illinois	0.6	242		364.15		215		323.96		89.0			27		308				34			89.1			227				42			81.2
Michigan	1.1	403		376.39		332		310.08		82.4			71		411				74			82.0			405				74			81.7
Ohio	0.9	630		701.22		553		615.59		87.8			77		720				83			88.5			620				68			89.2
Puerto Rico	0.6	122		198.95		109		177.56		89.2			13		105				(2		)	101.5			102				12			88.1
South Carolina	0.4	140		362.24		125		322.55		89.0			15		157				19			87.8			136				21			85.1
Texas	0.7	598		916.74		551		844.02		92.1			47		743				91			87.7			747				106			85.9
Washington	2.4	611		257.79		535		225.67		87.5			76		773				113			85.5			661				46			93.0
Other ^{(1) (2)}	0.7	268		394.85		236		347.43		88.0			32
	9.3	$	3,639	$	392.52	$	3,191	$	344.14	87.7	%		$	448
Other ⁽¹⁾															382				61			83.9			276				68			75.2
Total															$	4,304			$	588		86.3	%		$	3,952			$	581		85.3	%

Three Months Ended June 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.8
$ 517
$ 289.80
$ 441
$ 247.36
85.4 % $ 76
Florida 1.2
377
353.81
362
339.31
95.9
15
Illinois 0.6
203
311.60
170
261.59
84.0
33
Michigan 1.2
388
342.45
331
292.20
85.3
57
New Mexico ⁽²⁾
0.7
313
469.88
290
435.36
92.7
23
Ohio 1.0
535
571.08
482
514.57
90.1
53
Puerto Rico 0.9
184
188.26
165
168.20
89.3
19
South Carolina 0.4
123
350.22
107
304.20
86.9
16
Texas 0.7
576
835.66
510
740.55
88.6
66
Washington 2.2
571
252.61
526
232.49
92.0
45
Other ⁽¹⁾
0.5
179
322.99
152
274.59
85.0
27
11.2
$ 3,966
$ 358.23
$ 3,536
$ 319.37
89.2 % $ 430

Six Months Ended June 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 3.3
$ 998
$ 302.59
$ 863
$ 261.66
86.5 % $ 135
Florida 0.7
288
399.86
247
343.24
85.8
41
Illinois 1.3
469
356.16
400
303.50
85.2
69
Michigan 2.2
798
369.66
658
305.00
82.5
140
Ohio 1.8
1,220
680.20
1,090
607.85
89.4
130
Puerto Rico 1.2
224
181.91
199
161.40
88.7
25
South Carolina 0.8
276
362.68
240
315.84
87.1
36
Texas 1.3
1,197
909.59
1,083
822.59
90.4
114
Washington 4.8
1,225
258.10
1,121
236.19
91.5
104
Other ^{(1) (2)}
1.3
499
383.07
414
317.56
82.9
85
18.7
$ 7,194
$ 385.82
$ 6,315
$ 338.67
87.8 % $ 879

Six Months Ended June 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 3.6
$ 1,011
$ 281.14
$ 853
$ 237.26
84.4 % $ 158
Florida 2.2
759
352.68
707
328.26
93.1
52
Illinois 1.1
344
305.94
292
259.87
84.9
52
Michigan 2.3
764
339.56
662
294.19
86.6
102
New Mexico ⁽²⁾
1.4
632
468.00
600
444.44
95.0
32
Ohio 1.9
1,086
573.87
942
497.75
86.7
144
Puerto Rico 1.9
370
190.68
339
174.74
91.6
31
South Carolina 0.7
245
349.15
211
300.87
86.2
34
Texas 1.4
1,138
822.72
1,029
744.05
90.4
109
Washington 4.5
1,155
254.64
1,100
242.48
95.2
55
Other ⁽¹⁾
1.1
355
318.94
305
273.97
85.9
50
22.1
$ 7,859
$ 356.59
$ 7,040
$ 319.43
89.6 % $ 819

~~______________________~~

__________________


(1)	“Other” includes the Idaho, Mississippi, New Mexico, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.


~~(2)~~	In 2019, “Other” includes the New Mexico health plan. The New Mexico health plan’s Medicaid contract terminated on December 31, 2018, and therefore its 2019 results are not individually significant to our consolidated operating results.

In summary, we believe our health plan portfolio performance was essentially in line with expectations in the first quarter of 2020, despite cost pressures in certain Medicaid markets. The health plans most impacted by COVID-19 are Washington, California, and Michigan. While Washington was the first state impacted, Michigan has experienced the highest number of cases. The net impact was not material, however, as these increased costs were offset by the reduced demand for certain routine and non-critical medical services. Comments relating to California, Ohio, Texas and Washington, our largest health plans from a premium revenue standpoint, follow:

~~Health Plans Segment Financial Data —~~Our California health plan continues to perform well in its diversified book of business in one of the more complex network environments in the country, and the MCR is performing in the low- to mid-80s as a result of a stable premium rate environment and effective medical cost management. Medical margin increased in the first quarter of 2020 compared with the same period in 2019, due to an improvement in the MCR.

In Ohio, premium revenues and Medical Margin have increased due to higher premium revenue PMPM in Medicaid, resulting from rate increases.

Our Texas health plan experienced a decline in both premium revenues and Medical Margin in 2020, mainly due to the overall decline in Marketplace membership, and higher Medicaid and Marketplace MCRs. The Medicaid MCR increased due to higher medical care costs PMPM. The Marketplace MCR increased due to lower pricing and was in line with our expectations.

In Washington, premium revenues increased in 2020 due to Medicaid and Marketplace membership growth. We have a well-diversified portfolio of products and our Medical Margin performance improved year-over-year due to the premium growth and improved MCR. The MCR improved, despite some pressure in medical care costs, due to higher premium revenue PMPM in Medicaid and our continuing increased focus on medical care management.

Government Program Performance

Three Months Ended June 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.2
$ 61
$ 382.22
$ 35
$ 220.31
57.6 % $ 26
Florida 0.1
50
390.03
30
236.50
60.6
20
Michigan —
10
521.67
6
308.37
59.1
4
Ohio 0.1
24
754.67
19
565.69
75.0
5
Texas 0.3
167
379.29
117
267.12
70.4
50
Washington 0.1
51
803.11
35
548.48
68.3
16
Other⁽¹⁾
0.1
47
527.41
33
376.04
71.3
14
0.9
$ 410
$ 440.20
$ 275
$ 295.71
67.2 % $ 135



	Three Months Ended March 31,
	2020						2019
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR
	Premium Revenue		Medical Margin		MCR		Premium Revenue		Medical Margin		MCR
Medicaid	$	3,286	$	365	88.9	%	3,004		346		88.5	%
Medicare	634		117		81.7		551		85		84.7
Marketplace	384		106		72.3		397		150		62.2
	$	4,304	$	588	86.3	%	$	3,952	$	581	85.3	%

Medicaid

Three Months Ended June 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.2
$ 73
$ 426.16
$ 21
$ 117.92
27.7 % $ 52
Florida 0.1
100
698.31
38
269.86
38.6
62
Michigan —
15
288.67
7
146.97
50.9
8
New Mexico —
31
418.82
18
247.06
59.0
13
Ohio —
31
518.64
23
381.46
73.6
8
Texas 0.7
222
330.12
160
238.72
72.3
62
Washington 0.2
56
787.80
41
572.48
72.7
15
Other⁽²⁾
—
20
NM
6
NM
NM
14
1.2
$ 548
$ 440.93
$ 314
$ 253.04
57.4 % $ 234
Medicaid premium revenue increased $282 million in the first quarter of 2020, mainly due to higher premium revenue PMPM in several states, primarily in Ohio and Illinois due to rate increases, and from membership growth in Washington.

The Medical Margin in our Medicaid program increased $19 million, or 5%, in the first quarter of 2020 when compared with the first quarter of 2019, driven mainly by the growth in premium revenues, partially offset by an increase in the MCR.

The Medicaid MCR increased to 88.9% in the first quarter of 2020, from 88.5% in the first quarter of 2019, or 40 basis points. The prior year was positively impacted by the aforementioned favorable reserve development.

Six Months Ended June 30, 2019
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.3
$ 117
$ 361.73
$ 68
$ 210.71
58.2 % $ 49
Florida 0.3
111
406.52
56
205.17
50.5
55
Michigan —
20
492.23
11
255.98
52.0
9
Ohio 0.1
54
805.96
34
505.10
62.7
20
Texas 0.9
315
341.18
226
245.82
72.0
89
Washington 0.1
98
756.26
64
490.84
64.9
34
Other⁽¹⁾
0.2
92
501.13
63
344.61
68.8
29
1.9
$ 807
$ 415.94
$ 522
$ 269.14
64.7 % $ 285
In addition, we experienced medical cost pressure in the Medicaid line of business early in the quarter resulting from slightly higher than normal seasonal flu combined with early, but largely undetected COVID-19 costs diagnosed as severe respiratory illness and pneumonia. We also experienced increased pharmacy costs in the quarter as members pre-filled their chronic medications in advance of the height of the crisis. These increased costs were offset by lower medical care costs very late in the quarter, as elective and discretionary healthcare services began to be postponed and deferred.

The MCR for TANF and CHIP increased 610 basis points, which was partially offset by an improved MCR for the ABD program due to increases in premium revenue PMPM, lower pharmacy costs from re-contracted pharmacy benefits management, and our continued focus on medical cost management.

The decrease in the Medicaid Expansion MCR in the first quarter of 2020, when compared with the first quarter of 2019, was mainly due to an increase in premium revenue PMPM.

Medicare

Six Months Ended June 30, 2018
Member
Months Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 0.4
$ 122
$ 334.47
$ 52
$ 141.73
42.4 % $ 70
Florida 0.3
145
468.36
22
73.13
15.6
123
Michigan 0.1
28
254.69
16
145.49
57.1
12
New Mexico 0.1
65
429.19
37
246.77
57.5
28
Ohio 0.1
57
458.48
40
319.53
69.7
17
Texas 1.4
451
318.93
306
216.83
68.0
145
Washington 0.2
95
653.89
71
486.90
74.5
24
Other⁽²⁾
—
15
NM
(12 ) NM
NM
27
2.6
$ 978
$ 373.67
$ 532
$ 203.34
54.4 % $ 446
Medicare premium revenue increased by $83 million in the first quarter of 2020, 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.

~~_________________________~~The Medical Margin for Medicare increased $32 million, or 38%, in the first quarter of 2020 when compared with the first quarter of 2019, primarily due to the increase in premium revenue discussed above, partially offset by an increase in medical care costs PMPM.


~~(1)~~	~~“Other” includes the New Mexico, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results in 2019.~~


~~(2)~~	~~“Other” includes the Utah and Wisconsin health plans, where we did not participate in the Marketplace in 2018. Therefore, the ratios for 2018 periods are not meaningful (NM).~~

~~Health Plans Segment Financial Data — Total~~The Medicare MCR decrease was also due to the increase in premium revenue PMPM discussed above, partially offset by an increase in medical care costs PMPM. The increase in medical care costs PMPM was mainly attributed to fluctuations of medical care costs in certain markets.

Marketplace

Three Months Ended June 30, 2019

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 1.8
$ 560
$ 312.21
$ 450
$ 250.87
80.4 % $ 110
Florida 0.4
176
408.99
150
350.47
85.7
26
Illinois 0.6
242
364.15
215
323.96
89.0
27
Michigan 1.1
413
378.86
338
310.05
81.8
75
Ohio 1.0
654
703.09
572
613.85
87.3
82
Puerto Rico 0.6
122
198.95
109
177.56
89.2
13
South Carolina 0.4
140
362.24
125
322.55
89.0
15
Texas 1.0
765
700.15
668
611.53
87.3
97
Washington 2.5
662
271.96
570
234.05
86.1
92
Other ^{(1) (2)}
0.8
315
410.27
269
350.76
85.5
46
10.2
$ 4,049
$ 396.87
$ 3,466
$ 339.72
85.6 % $ 583
Marketplace premium revenue decreased $13 million in the first quarter of 2020, driven mainly by a decrease in membership.

The Marketplace Medical Margin decreased $44 million in the first quarter of 2020, when compared with the first quarter of 2019, primarily due to the decrease in premium revenues, and the increase in the Marketplace MCR.

Three Months Ended June 30, 2018

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 2.0
$ 590
$ 301.73
$ 462
$ 236.04
78.2 % $ 128
Florida 1.3
477
394.38
400
331.13
84.0
77
Illinois 0.6
203
311.60
170
261.59
84.0
33
Michigan 1.2
403
340.08
338
285.78
84.0
65
New Mexico⁽²⁾
0.7
344
464.90
308
416.99
89.7
36
Ohio 1.0
566
567.96
505
506.66
89.2
61
Puerto Rico 0.9
184
188.26
165
168.20
89.3
19
South Carolina 0.4
123
350.22
107
304.20
86.9
16
Texas 1.4
798
585.50
670
492.23
84.1
128
Washington 2.4
627
268.84
567
242.80
90.3
60
Other ⁽¹⁾
0.5
199
360.90
158
285.65
79.1
41
12.4
$ 4,514
$ 366.57
$ 3,850
$ 312.68
85.3 % $ 664
The Marketplace MCR increased in the first quarter of 2020, which was mainly attributable to our lowering prices in 2020 in an effort to be more competitive.

Six Months Ended June 30, 2019

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 3.6
$ 1,115
$ 307.88
$ 931
$ 257.10
83.5 % $ 184
Florida 1.0
399
401.69
303
305.23
76.0
96
Illinois 1.3
469
356.16
400
303.50
85.2
69
Michigan 2.2
818
371.91
669
304.10
81.8
149
Ohio 1.9
1,274
684.77
1,124
604.12
88.2
150
Puerto Rico 1.2
224
181.91
199
161.40
88.7
25
South Carolina 0.8
276
362.68
240
315.84
87.1
36
Texas 2.2
1,512
675.34
1,309
584.90
86.6
203
Washington 4.9
1,323
271.34
1,185
242.96
89.5
138
Other ^{(1) (2)}
1.5
591
397.61
477
320.90
80.7
114
20.6
$ 8,001
$ 388.66
$ 6,837
$ 332.11
85.5 % $ 1,164

Six Months Ended June 30, 2018

Member
Months
Premium Revenue Medical Care Costs MCR Medical Margin
Total PMPM Total PMPM
California 4.0
$ 1,133
$ 286.07
$ 905
$ 228.44
79.9 % $ 228
Florida 2.5
904
367.18
729
296.29
80.7
175
Illinois 1.1
344
305.94
292
259.87
84.9
52
Michigan 2.4
792
335.59
678
287.23
85.6
114
New Mexico⁽²⁾
1.5
697
464.11
637
424.58
91.5
60
Ohio 2.0
1,143
566.77
982
486.79
85.9
161
Puerto Rico 1.9
370
190.68
339
174.74
91.6
31
South Carolina 0.7
245
349.15
211
300.87
86.2
34
Texas 2.8
1,589
567.95
1,335
477.43
84.1
254
Washington 4.7
1,250
267.01
1,171
250.05
93.6
79
Other ⁽¹⁾
1.1
370
333.35
293
263.24
79.0
77
24.7
$ 8,837
$ 358.40
$ 7,572
$ 307.11
85.7 % $ 1,265

~~__________________~~


~~(1)~~	~~“Other” includes the Idaho, Mississippi, New York, Utah and Wisconsin health plans, which are not individually significant to our consolidated operating results.~~


~~(2)~~	In 2019, “Other” includes the New Mexico health plan. The New Mexico health plan’s Medicaid contract terminated on December 31, 2018, and therefore its 2019 results are not individually significant to our consolidated operating results.

OTHER

The Other segment includes ~~the historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries we sold in the fourth quarter of 2018, as well as~~ certain corporate amounts not allocated to the Health Plans segment. ~~Prior~~Such amounts are immaterial to ~~the fourth quarter~~our consolidated results of 2018, the MMIS subsidiary was reported as a stand-alone segment. Beginning in 2019, we no longer report service revenue or cost of service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above.operations.

~~FINANCIAL OVERVIEW~~

~~The Other segment margin in the second quarter and six months ended June 30, 2018, was insignificant.~~

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 Health Plans segment regulated ~~health plan~~ subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. ~~Such cash flows are~~Premium revenue is our primary source of liquidity. Thus, any ~~future~~ decline in the receipt of premium revenue, and our profitability, ~~may~~could have a negative impact on our liquidity. In the first quarter of 2020, we did not experience noticeable delays of, or changes in, the timing and level of premium receipts as a result of the COVID-19 pandemic, but there can be no assurances that we will not experience such delays in the future.

A 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. In the ~~three and six months ended June 30, 2019,~~first quarter of 2020, the parent received ~~$345~~$50 million ~~and $634 million, respectively,~~ in dividends from the regulated health plan subsidiaries. See further discussion of dividends below in “Future Sources of Liquidity.”

To satisfy minimum statutory net worth requirements, the parent company may contribute capital to the regulated health plan subsidiaries. In the ~~three and six months ended June 30, 2019,~~first quarter of 2020, the parent contributed capital of $6$10 million to the regulated health plan subsidiaries.

Cash, cash equivalents and investments at the parent company amounted to ~~$467~~$841 million and ~~$170~~$997 million as of ~~June 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively. The ~~increase~~decrease in ~~2019~~2020 was mainly due to purchases of our common stock amounting to $453 million, $42 million net cash paid for the aggregate 1.125% Convertible Notes-related transactions, and the parent capital contribution described above. These payments were partially offset by proceeds of $380 million borrowed under our Term Loan Facility and dividends received from ~~our~~ regulated health plan

subsidiaries, ~~and proceeds from borrowings~~as described above. We borrowed the remaining available capacity under the Term Loan Facility ~~partially offset by principal repayments of~~in March 2020, to provide us with additional flexibility should there be unexpected events relating to the COVID-19 pandemic impacting our ~~outstanding 1.125% Convertible Notes, as described further below in “Cash Flow Activities.”~~access to the capital markets, or our cash flows.

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~~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 ~~certificates of deposit~~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:


	Six Months Ended June 30,									Three Months Ended March 31,
	2019			2018			Change			2020			2019			Change
	(In millions)									(In millions)
Net cash provided by operating activities	$	156		$	314		$	(158	)	$	136		$	249		$	(113	)
Net cash (used in) provided by investing activities	(393		)	398			(791		)	(103		)	171			(274		)
Net cash used in financing activities	(362		)	(503		)	141			(118		)	(48		)	(70		)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents	$	(599	)	$	209		$	(808	)	$	(85	)	$	372		$	(457	)

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 for the ~~six months ended June 30, 2019~~first quarter of 2020 was ~~$156~~$136 million, compared with ~~$314~~$249 million in the ~~six months ended June 30, 2018.~~first quarter of 2019. The ~~$158~~$113 million decrease in cash flow was due to ~~settlements with government agencies, mainly related to~~ the ~~final 2017 CSR settlement paid in 2019, timing~~net impact of ~~CMS Medicare premium receipts in 2018, and the use of cash associated with declines in Medicaid and Marketplace membership. These items were partially offset by a net benefit from~~ timing differences in ~~other current assets~~government receivables and ~~liabilities.~~payables, and accelerated payments to providers.

Investing Activities

Net cash used in investing activities was ~~$393~~$103 million in the ~~six months ended June 30, 2019,~~first quarter of 2020, compared with ~~$398~~$171 million provided by investing activities in the ~~six months ended June 30, 2018,~~first quarter of 2019, a decrease in cash flow of ~~$791~~$274 million. The year over year decline was primarily due to ~~lower proceeds from sales and maturities~~increased purchases of investments ~~net of purchases,~~ in the ~~six months ended June 30, 2019, largely driven by cash flow needs associated with our financing activities, as described below.~~first quarter of 2020.

Financing Activities

Net cash used in financing activities was ~~$362~~$118 million in the ~~six months ended June 30, 2019,~~first quarter of 2020, compared with ~~$503~~$48 million in the ~~six months ended June 30, 2018, an increase in cash flow~~first quarter of ~~$141 million, due to less cash used in 2019 compared with 2018.~~2019. In the ~~six months ended June 30,~~first quarter of 2020, cash paid for common stock purchases amounted to $453 million, which included $7 million to settle shares purchased in late December 2019, and net cash paid for the aggregate

1.125% Convertible Notes-related transactions amounted to $42 million. These cash outflows were partially offset by proceeds of $380 million borrowed under the Term Loan Facility. In the first quarter of 2019, net cash paid for the aggregate 1.125% Convertible Notes-related transactions amounted to ~~$609~~$149 million, partially offset by proceeds of ~~$220~~$100 million borrowed under the Term Loan Facility. In the six months ended June 30, 2018, net cash used in financing activities included net cash paid for the aggregate 1.125% Convertible Notes-related transactions of $202 million, and the $300 million repayment of the Credit Facility.

FINANCIAL CONDITION

We believe that our cash resources, ~~our~~ 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, at ~~June 30, 2019,~~March 31, 2020, our working capital was ~~$2,475~~$2,754 million, compared with ~~$2,216~~$2,698 million at December 31, ~~2018.~~2019. At ~~June 30, 2019,~~March 31, 2020, our cash and investments amounted to ~~$4,423~~$4,457 million, compared with ~~$4,629~~$4,477 million at December 31, ~~2018.~~2019.

Regulatory Capital and Dividend Restrictions

Each of our regulated HMO 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 HMO 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 (net assets) requirement for these subsidiaries was estimated to be approximately ~~$1,050~~$1,200 million at ~~June 30, 2019, and $1,040~~March 31, 2020, compared with $1,110 million at December 31, ~~2018.~~2019. Our HMO subsidiaries were in compliance with these minimum capital requirements as of both dates.

Under applicable regulatory requirements, the amount of dividends that may be paid ~~through the remainder of 2019~~ by our HMO subsidiaries without prior approval by regulatory authorities as of ~~June 30, 2019,~~March 31, 2020, is approximately ~~$127~~$114 million in the aggregate. Our HMO subsidiaries ~~can~~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 March 31, 2020, management believes that its regulated health plan 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 rated “BB-” by Standard & Poor’s, and “B2” by Moody’s Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and increase our borrowing costs.

Financial Covenants

Our Credit Agreement 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 Agreement. In our 2019 Annual Report on Form 10-K, we reported that the required net leverage ratio was < 4.0x. As a result of the share purchase program described in the Notes to Consolidated Financial Statements, Note 8, “Stockholders' Equity,” such required ratio has changed and the updated value is presented in the table below.



Credit ~~Facility~~Agreement Financial Covenants	Required Per Agreement	As of ~~June 30, 2019~~
		March 31, 2020
Net leverage ratio	<~~4.0x~~ 2.5x	~~1.0x~~1.4x
Interest coverage ratio	>3.5x	~~14.7x~~13.5x

In addition, the indentures governing the 4.875% Notes ~~the 5.375% Notes~~ and the ~~1.125% Convertible~~5.375% 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 ~~June 30, 2019,~~March 31, 2020, we were in compliance with all covenants under the Credit Agreement and the indentures governing our outstanding notes.

Capital Plan Progress

In the first quarter of ~~2019,~~2020, we ~~repaid $46~~purchased approximately 3.4 million common shares at an average price of $132.45 per share, amounting to $446 million in the aggregate. In addition, the net cash paid for the aggregate 1.125%

Convertible Notes-related transactions amounted to $42 million, which included repayment of $12 million aggregate principal amount of our 1.125% Convertible Notes and ~~entered into privately negotiated termination agreements to terminate~~settlement of the remaining respective ~~portion~~portions of the related 1.125% Call Option and 1.125% Warrants.

In the second quarter of 2019, we repaid an additional $139 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants. Following these transactions, the remaining principal amount outstanding of our 1.125% Convertible Notes is $67 million.

FUTURE SOURCES AND USES OF LIQUIDITY

Future Sources

Our Health Plans segment regulated subsidiaries generate significant cash flows from premium revenue, which weis generally ~~receive~~received a short time before ~~we pay for the~~ related healthcare ~~services. Such cash flows~~services are paid. Premium revenue is our primary source of liquidity. Thus, any ~~future~~ decline in the receipt of premium revenue, and our profitability, ~~may~~could have a negative impact on our liquidity.

Potential Impact of COVID-19 Pandemic. As a result of the surge in unemployment due to the pandemic, we expect a significant increase in Medicaid eligibility and enrollment. However, due to the evolving nature of the pandemic, we are currently unable to predict the timing or amount of the expected increases in enrollment. Such an increase in membership would increase our premium revenue, but would also likely result in a significant increase in medical care claims and related costs.

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 would reduce the liquidity of the parent company.

Credit Agreement Borrowing Capacity. As of ~~June 30, 2019,~~March 31, 2020, we had available borrowing capacity of $380 million under the Term Loan Facility, following our draw down of $220 million in the first half of 2019. Under the Term Loan Facility, we may request up to ten advances, each in a minimum principal amount of $50 million, until July 31, 2020. In addition, we have available borrowing capacity of $498$499 million under our Credit Facility. See further discussion in the Notes to Consolidated Financial Statements, Note 7, “Debt.”

~~Savings from~~Commitment Letter. In connection with the ~~IT Restructuring Plan.~~MCC acquisition, we entered into a commitment letter on April 30, 2020, pursuant to which, among other things, the lenders have committed to provide us with debt financing in the aggregate principal amount of up to $400 million. ~~Management~~

We believe that our cash resources, borrowing capacity available under our Credit Facility, 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.

Future Uses

Potential Impact of COVID-19 Pandemic. The pandemic, along with the related quarantine and social distancing measures, is currently reducing demand for certain routine and non-critical medical services, while at the same time increasing demand for other medical services, such as COVID-19 testing and emergency services. Discretionary utilization could continue to be lower than normal patterns for the second quarter, but then may rebound quickly in the second half of 2020 as COVID-19 care abates and health system capacity frees up, and the current social distancing measures are relaxed over time. Such a surge, as to 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. In addition, we expect increased Medicaid enrollment to result in an increase in medical care claims and related costs.

Also as described above in “Health Plans Segment—Trends and Uncertainties,” the near-term reduced demand is creating financial stress for certain Medicaid providers which may lead state Medicaid agencies to turn to managed care organizations to provide temporary cash advances to impacted providers for insolvency protection.

Acquisitions. Our strategic focus has shifted to 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.

On April 30, 2020, we entered into a definitive agreement to acquire the Magellan Complete Care (“MCC”) line of business of Magellan Health, Inc. The purchase price for the transaction is approximately $820 million, net of certain tax benefits, which we intend to fund with cash on ~~a margin recovery plan that includes identification~~hand. The transaction is subject to federal and ~~implementation~~state regulatory approvals, and other customary closing conditions, and is expected to close in the first quarter of ~~various profit improvement initiatives. To that end, we began a plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018.~~ 2021.

In ~~early~~October 2019, we entered into ~~services agreements~~a definitive agreement to acquire certain assets of YourCare Health Plan, Inc. Following the closing of this transaction, expected to occur in mid-2020, we will serve approximately 46,000 Medicaid members in seven counties in western New York. The purchase price will be funded with our outsourcing vendor under which they manage certain of our information technology services. We expect the IT Restructuring Plan to be completed by the end of 2019. We currently estimate that this plan will reduce annualized run-rate expenses by approximately $15 million to $20 million in the first full year, increasing to approximately $30 million to $35 million by the end of the fifth full year. Such savings, if achieved, would reduce Other segment general and administrative expenses in our consolidated statements of income. Further details are described in the Notes to Consolidated Financial Statements, Note 10, “~~Restructuring Costs~~.”

~~Future Uses~~available cash.

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 statutory capital and surplus requirements.

~~1.125% Convertible Notes.~~ The fair value of the 1.125% Convertible Notes was $231 million as of June 30, 2019, which amount reflects both the principal amount outstanding and the estimated fair value of the 1.125% Conversion Option. The 1.125% Convertible Notes mature on January 15, 2020. As conversion requests are received, the settlement of the notes must be paid in cash pursuant to the terms of the applicable indenture. We have received conversion notices for approximately $9 million principal amount that will be settled in the third quarter of 2019.

We have sufficient available cash, combined with borrowing capacity available under our Credit Agreement, to fund conversions as they occur, and to repay the outstanding principal amount of the 1.125% Convertible Notes at maturity. Refer to the Notes to Consolidated Financial Statements, Note 7, “~~Debt,” for a detailed discussion of the 1.125% Convertible Notes, including recent transactions.~~

CONTRACTUAL OBLIGATIONS

A summary of future obligations under our various contractual obligations and commitments as of December 31, ~~2018,~~2019, was disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Other than the financing transactions described in ~~the~~ Notes to Consolidated Financial Statements, Note 7, “Debt,” and Note 11, “Subsequent Events,” there were no significant changes to this previously filed information outside the ordinary course of business during the ~~six months ended June 30, 2019. See also Note 13, “Leases”, for a summary~~first quarter of ~~the maturities of our lease liabilities as of June 30, 2019.~~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. Our critical accounting estimates relate to:

•

Medical claims and benefits payable. Refer to Notes to Consolidated Financial Statements, Note 6, “Medical Claims and Benefits Payable,” for a table that presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, there have been no significant changes during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.


•	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 Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”


•	Quality incentives. For a discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies.”


•	Goodwill and intangible assets, net. There have been no significant changes, during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, to our disclosure reported in “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings and financial position are exposed to financial market risk relating to 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 ~~June 30, 2019,~~March 31, 2020, the fair value of our fixed income investments would decrease by approximately ~~$37~~$52 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 Notes to Consolidated Financial Statements, Note 4, “Fair Value Measurements,” and Note 5, “Investments.”

Borrowings under our Credit Agreement bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. As of ~~June 30, 2019, $220~~March 31, 2020, $600 million was outstanding under the Term Loan Facility. For further information, see Notes to Consolidated Financial Statements, Note 7, “Debt.”

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, has concluded, based upon its evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ~~Act of 1934, as amended (the “Exchange Act”))~~Act), are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting during the fiscal quarter ended ~~June 30, 2019~~March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

LEGAL PROCEEDINGS

For information regarding legal proceedings, see Notes to Consolidated Financial Statements, Note ~~12,~~10, “Commitments and Contingencies.”

RISK FACTORS

Certain risks may have a material adverse effect on our business, financial condition, cash flows, results of operations, or stock price, and you should carefully consider them before making an investment decision with respect to our securities. In addition to the other information set forth in this report, you should carefully consider the risk ~~factors~~factor set forth below and those discussed inunder the caption “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. The risk ~~factors~~factor below together with those described in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, cash flows, results of operations, or stock price.

Our business, financial condition, and results of operations will 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 impact our business, financial condition, cash flows, or 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 in the states in which we operate, resulting in increases in medical care costs associated with those impacted members;

The reduced demand for certain routine and non-critical medical services has created financial stress for certain Medicaid providers and could result in the insolvency of such providers, and/or demands that we make direct payments or loans to them;

It has created, and may continue to create, volatility in the capital markets and such volatility could have a negative impact on our ability to access those markets on acceptable terms, or at all;

State tax revenues may decline significantly, threatening the ability of certain states to continue to make timely monthly capitation payments to us;

We will incur increased costs associated with the measures we are currently implementing and planning to implement to mitigate the implications of the COVID-19 pandemic and to transfer our workforce to work-from-home status; and

It 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, the ultimate impact on our business, financial condition, and operating results cannot be reasonably estimated at this time.

There are numerous risks associated with our intended acquisition of Magellan Complete Care.

On April 30, 2020, we entered into a definitive agreement to acquire the Magellan Complete Care (“MCC”) line of business of Magellan Health, Inc. MCC is a managed care organization serving members in the six states of Arizona, Florida, Massachusetts, New York, Virginia, and Wisconsin. The transaction is subject to federal and state regulatory approvals, and other customary closing conditions. In connection with this transaction, Magellan Health, Inc. has agreed to provide to us certain transition services following the closing.

There are numerous risks associated with the intended transaction, including but not limited to the risk that: (i) state or federal regulatory approvals may be delayed or not obtained, or are obtained subject to conditions that are not anticipated; (ii) the transition services Magellan Health has agreed to provide following the closing are not provided in a timely or efficient manner or that certain necessary transition services are not provided at all; (iii) there is attrition in MMC membership pending the completion of the proposed transaction; (iv) Molina is unable to successfully retain or integrate the employees and operations of MCC, including issues related to disparate claims processing and record-keeping systems and difficulties integrating the acquired businesses on our own information technology platforms; (v) Molina is unable to maintain MCC provider relations or experiences medical cost increases resulting from unfavorable changes in contracting or re-contracting with providers; (vi) disruption results from the announcement or pendency of the transaction, including potential adverse reactions by customers, employees, suppliers, regulators, or federal or state legislators, making it more difficult to maintain business and operational relationships; (vii) expected synergies from the transaction are not realized to the extent expected or within the expected time period; and (viii) unexpected costs are incurred in connection with the completion and/or integration of MCC. In addition, there are numerous risk and uncertainties associated with the COVID-19 pandemic, including the duration and scope of its impact on the benefits Molina expects to realize from the transaction, which impact Molina cannot reasonably estimate at this time. The realization of any of the foregoing risks could have an adverse effect on our business, financial condition, cash flows, or results of operations.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Purchases of common stock made by us, or on our behalf during the quarter ended ~~June 30, 2019,~~March 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

Approximate
Dollar Value
of Shares Authorized to Be Purchased Under the Plans or Programs
April 1 - April 30 136
$ 142.69
—
$ —
May 1 - May 31 2,195
$ 130.81
—
$ —
June 1 - June 30 408
$ 152.56
—
$ —
Total 2,739
$ 134.64
—



	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31	980	$	143.27	1,190,088	$	286,000,000
February 1 - February 29	—	$	—	1,015,529	$	153,000,000
March 1 - March 31	59,947	$	122.55	1,161,066	$	—
Total	60,927	$	122.88	3,366,683

_______________________


(1)	During the three months ended ~~June 30, 2019,~~March 31, 2020, we withheld ~~2,739~~60,927 shares of common stock, ~~under our 2011 Equity Incentive Plan~~ to settle employee income tax ~~obligations.~~obligations, for releases of awards granted under the Molina Healthcare, Inc. 2019 Equity Incentive Plan. For further information refer to Note 8, “Stockholders' Equity.”

INDEX TO EXHIBITS



Exhibit No.	Title	Method of Filing

~~10.1~~3.1	~~2019 Equity Incentive Plan - Form~~Certificate of ~~Restricted Stock Award Agreement~~ ~~(Employee/Officer with No Employment Agreement)~~ Incorporation.*	Filed ~~herewith.~~

~~10.2~~	~~2019 Equity Incentive Plan -~~as Exhibit 3.2 to registrant’s Registration Statement on Form ~~of Performance Stock Unit Award Agreement (Employee/Officer with No Employment Agreement)~~	~~Filed herewith.~~

~~10.3~~	2019 Equity Incentive Plan - Form of Restricted Stock Award Agreement (Officer with Employment Agreement)	~~Filed herewith.~~

~~10.4~~	~~2019 Equity Incentive Plan - Form of Performance Stock Unit Award Agreement (Officer with Employment Agreement)~~	~~Filed herewith.~~S-1 filed December 30, 2002

31.1	Section 302 Certification of Chief Executive Officer	Filed herewith.

31.2	Section 302 Certification of Chief Financial Officer	Filed herewith.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

101.INS	XBRL Taxonomy Instance Document.	Filed herewith.

101.SCH	XBRL Taxonomy Extension Schema Document.	Filed herewith.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.	Filed herewith.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.	Filed herewith.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.	Filed herewith.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

*The Certificate of Incorporation is being re-filed at this time to reset the link to this exhibit to the relevant SEC filing included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		MOLINA HEALTHCARE, INC.
		(Registrant)

Dated:	~~July 31, 2019~~May 1, 2020	/s/ JOSEPH M. ZUBRETSKY
		Joseph M. Zubretsky
		Chief Executive Officer
		(Principal Executive Officer)

Dated:	~~July 31, 2019~~May 1, 2020	/s/ THOMAS L. TRAN
		Thomas L. Tran
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Molina Healthcare, Inc. ~~June 30, 2019~~March 31, 2020 Form 10-Q | 5142



	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings		Total
	Outstanding	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings		Total
	(In millions)
	(Unaudited)
Balance at December 31, 2018	62	$	—	$	643		$	(8	)	$	1,012	$	1,647
Net income	—	—		—			—			198		198
Adoption of new accounting standard	—	—		—			—			85		85
Partial termination of 1.125% Warrants	—	—		(103		)	—			—		(103		)
Other comprehensive income, net	—	—		—			5			—		5
Share-based compensation	1	—		3			—			—		3
Balance at March 31, 2019	63	—		543			(3		)	1,295		1,835
Net income	—	—		—			—			196		196
Partial termination of 1.125% Warrants	—	—		(321		)	—			—		(321		)
Other comprehensive income, net	—	—		—			8			—		8
Share-based compensation	—	—		18			—			—		18
Balance at June 30, 2019	63	$	—	$	240		$	5		$	1,491	$	1,736



	Total		2020		2021		2022		2023		2024		Thereafter
	(In millions)
5.375% Notes	$	700	$	—	$	—	$	700	$	—	$	—	$	—
4.875% Notes	330		—		—		—		—		—		330
Term Loan Facility	220		6		16		22		22		154		—
1.125% Convertible Notes	67		67		—		—		—		—		—
Totals	$	1,317	$	73	$	16	$	722	$	22	$	154	$	330



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(In millions)
Operating lease expense	$	8	$	17

Finance lease expense:
Amortization of right-of-use (“ROU”) assets	$	4	$	8
Interest on lease liabilities	4		8
Total finance lease expense	$	8	$	16



	Six Months Ended June 30, 2019
	(In millions)
Cash used in operating activities:
Operating leases	$	19
Finance leases	7
Cash used in financing activities:
Finance leases	3
ROU assets recognized in exchange for lease obligations:
Operating leases	95
Finance leases	241



	June 30, 2019
	(In millions)
Operating leases:
ROU assets
Other assets	$	77
Lease liabilities
Accounts payable and accrued liabilities (current)	29
Other long-term liabilities (non-current)	56
Total operating lease liabilities	$	85
Finance leases:
ROU assets
Property, equipment, and capitalized software, net	$	233
Lease liabilities
Accounts payable and accrued liabilities (current)	$	7
Finance lease liabilities (non-current)	232
Total finance lease liabilities	$	239



	June 30, 2019	December 31, 2018	June 30, 2018
Ending Membership by Program:
TANF and CHIP	2,008,000	2,295,000	2,464,000
Medicaid Expansion	595,000	660,000	675,000
ABD	359,000	406,000	415,000
Total Medicaid	2,962,000	3,361,000	3,554,000
MMP – Integrated ⁽¹⁾	57,000	54,000	55,000
Medicare Special Needs Plans (“Medicare”)	43,000	44,000	45,000
Total Medicare	100,000	98,000	100,000
Total Medicaid and Medicare	3,062,000	3,459,000	3,654,000
Marketplace	308,000	362,000	409,000
	3,370,000	3,821,000	4,063,000

Ending Membership by Health Plan:
California	590,000	608,000	639,000
Florida ⁽²⁾	142,000	313,000	398,000
Illinois	221,000	224,000	219,000
Michigan	360,000	383,000	397,000
New Mexico ⁽²⁾	26,000	222,000	241,000
Ohio	297,000	302,000	320,000
Puerto Rico	200,000	252,000	326,000
South Carolina	130,000	120,000	114,000
Texas	360,000	423,000	450,000
Washington	811,000	781,000	776,000
Other ⁽³⁾	233,000	193,000	183,000
	3,370,000	3,821,000	4,063,000



	Three Months Ended June 30, 2019
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	6.1	$	1,196	$	196.36	$	1,048	$	172.13	87.7	%	$	148
Medicaid Expansion	1.8	695		384.94		594		328.85		85.4		101
ABD	1.1	1,176		1,088.48		1,061		981.84		90.2		115
Total Medicaid	9.0	3,067		341.72		2,703		301.15		88.1		364
MMP	0.1	406		2,421.89		356		2,118.95		87.5		50
Medicare	0.2	166		1,296.99		132		1,034.43		79.8		34
Total Medicare	0.3	572		1,934.17		488		1,648.73		85.2		84
Total Medicaid and Medicare	9.3	3,639		392.52		3,191		344.14		87.7		448
Marketplace	0.9	410		440.20		275		295.71		67.2		135
	10.2	$	4,049	$	396.87	$	3,466	$	339.72	85.6	%	$	583



	Three Months Ended June 30, 2018
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	7.5	$	1,393	$	186.18	$	1,205	$	161.13	86.5	%	$	188
Medicaid Expansion	2.1	761		372.04		676		330.83		88.9		85
ABD	1.3	1,288		1,033.34		1,209		969.27		93.8		79
Total Medicaid	10.9	3,442		319.52		3,090		286.89		89.8		352
MMP	0.1	367		2,224.30		313		1,893.91		85.1		54
Medicare	0.2	157		1,168.40		133		989.33		84.7		24
Total Medicare	0.3	524		1,751.49		446		1,488.85		85.0		78
Total Medicaid and Medicare	11.2	3,966		358.23		3,536		319.37		89.2		430
Marketplace	1.2	548		440.93		314		253.04		57.4		234
	12.4	$	4,514	$	366.57	$	3,850	$	312.68	85.3	%	$	664



	Six Months Ended June 30, 2018
	Member Months ⁽¹⁾	Premium Revenue				Medical Care Costs				MCR ⁽²⁾		Medical Margin
	Member Months ⁽¹⁾	Total		PMPM		Total		PMPM		MCR ⁽²⁾		Medical Margin
TANF and CHIP	14.9	$	2,766	$	185.66	$	2,477	$	166.32	89.6	%	$	289
Medicaid Expansion	4.1	1,513		372.39		1,317		324.19		87.1		196
ABD	2.5	2,542		1,023.83		2,364		951.99		93.0		178
Total Medicaid	21.5	6,821		318.11		6,158		287.22		90.3		663
MMP	0.3	724		2,180.86		618		1,858.87		85.2		106
Medicare	0.3	314		1,178.58		264		992.05		84.2		50
Total Medicare	0.6	1,038		1,735.05		882		1,473.30		84.9		156
Total Medicaid and Medicare	22.1	7,859		356.59		7,040		319.43		89.6		819
Marketplace	2.6	978		373.67		532		203.34		54.4		446
	24.7	$	8,837	$	358.40	$	7,572	$	307.11	85.7	%	$	1,265