March 31, 2013 45,416,300. Current assets: Cash and cash equivalents Investments Receivables Income tax refundable Deferred income taxes Prepaid expenses and other current assets Total current assets Property, equipment, and capitalized software, net Deferred contract costs Intangible assets, net Goodwill and indefinite-lived intangible assets Auction rate securities Restricted investments Receivable for ceded life and annuity contracts Other assets Current liabilities: Medical claims and benefits payable Accounts payable and accrued liabilities Deferred revenue Current maturities of long-term debt Total current liabilities Long-term debt Deferred income taxes Liability for ceded life and annuity contracts Other long-term liabilities Total liabilities Stockholders’ equity: Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 46,571 shares at September 30, 2012 and 45,815 shares at December 31, 2011 Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders’ equity Revenue: Premium revenue Service revenue Investment income Rental income Total revenue Expenses: Medical care costs Cost of service revenue General and administrative expenses Premium tax expenses Depreciation and amortization Total expenses Operating income (loss) Interest expense Income (loss) before income taxes Income tax (benefit) expense Net income (loss) Net income (loss) per share: Basic Diluted Weighted average shares outstanding: Basic Diluted INCOME Net income (loss) Other comprehensive income, net of tax: Unrealized gain (loss) on investments Other comprehensive income (loss) Comprehensive income (loss) Operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Stock-based compensation Gain on sale of subsidiary Non-cash interest on convertible senior notes Change in fair value of interest rate swap agreement Amortization of premium/discount on investments Amortization of deferred financing costs Tax deficiency from employee stock compensation Changes in operating assets and liabilities: Receivables Prepaid expenses and other current assets Medical claims and benefits payable Accounts payable and accrued liabilities Deferred revenue Income taxes Net cash provided by operating activities Investing activities: Purchases of equipment Purchases of investments Sales and maturities of investments Proceeds from sale of subsidiary, net of cash surrendered Net cash paid in business combinations Increase in deferred contract costs Increase in restricted investments Change in other noncurrent assets and liabilities Net cash used in investing activities Financing activities: Amount borrowed under credit facility Repayment of amount borrowed under credit facility Principal payments on term loan Treasury stock purchases Credit facility fees paid Proceeds from employee stock plans Excess tax benefits from employee stock compensation Net cash provided by (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the period for: Income taxes Interest Schedule of non-cash investing and financing activities: Common stock used for stock-based compensation Details of sale of subsidiary: Decrease in carrying value of assets Decrease in carrying value of liabilities Gain on sale Proceeds from sale of subsidiary, net of cash surrendered Washington. services effective March 1, 2012. 2013. . New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin assets . In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the reporting of amounts reclassified out of accumulated other comprehensive income. The new guidance requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. The new guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this new guidance in 2013 did not impact our financial position, results of operations or cash flows. Shares outstanding at the beginning of the period Weighted-average number of shares repurchased Weighted-average number of shares issued Denominator for basic income (loss) per share Dilutive effect of employee stock options and stock grants (1) Denominator for diluted income (loss) per share (2) full. Restricted share and performance/restricted unit awards Stock options (including shares issued under our employee stock purchase plan) Total share-based compensation expense Unvested balance as of December 31, 2011 Granted Vested Forfeited Unvested balance as of September 30, 2012 Outstanding as of December 31, 2011 Granted Vested Outstanding as of September 30, 2012 Performance and restricted units expected to vest as of September 30, 2012 Outstanding as of December 31, 2011 Granted Exercised Forfeited Outstanding as of September 30, 2012 Stock options exercisable and expected to vest as of September 30, 2012 Exercisable as of September 30, 2012 we applied risk-free interest rates of Our financial instruments Corporate debt securities Government-sponsored enterprise securities (GSEs) Municipal securities U.S. treasury notes Certificates of deposit Auction rate securities Total assets at fair value Interest rate swap liability Corporate debt securities GSEs Municipal securities U.S. treasury notes Certificates of deposit Auction rate securities Total assets at fair value Interest rate swap liability Balance at December 31, 2011 Total gains (unrealized only): Included in other comprehensive income Settlements Balance at September 30, 2012 The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at September 30, 2012 Convertible senior notes Credit facility Term loan Convertible senior notes Credit facility Term loan through Corporate debt securities GSEs Municipal securities U.S. treasury notes Certificates of deposit Auction rate securities Corporate debt securities GSEs Municipal securities U.S. treasury notes Certificates of deposit Auction rate securities Due in one year or less Due one year through five years Due after ten years Health Plans segment: California Michigan Missouri New Mexico Ohio Texas Utah Washington Wisconsin Others Total Health Plans segment Molina Medicaid Solutions segment California Florida Insurance Company Michigan Missouri New Mexico Ohio Texas Utah Washington Other investments: Due in one year or less Due one year through five years Balances at beginning of period Components of medical care costs related to: Current period Prior periods Total medical care costs Payments for medical care costs related to: Current period Prior periods Total paid Balances at end of period Benefit from prior period as a percentage of: Balance at beginning of period Premium revenue Total medical care costs In estimating our claims liability at respective periods generally offset the benefit from the prior period. circumstances. Details of the liability component: Principal amount Unamortized discount Net carrying amount Interest cost recognized for the period relating to the: Contractual interest coupon rate of 3.75% Amortization of the discount on the liability component Total interest cost recognized 1.125% Notes and 3.75% Notes were as follows: agencies. Revenue: Health Plans: Premium revenue Investment income Rental income Molina Medicaid Solutions: Service revenue Depreciation and amortization: Health Plans Molina Medicaid Solutions Operating Income (Loss): Health Plans Molina Medicaid Solutions Total operating income (loss) Interest expense Income (loss) before income taxes Goodwill and intangible assets, net: Health Plans Molina Medicaid Solutions Total assets: Health Plans Molina Medicaid Solutions $16.1 million to construction in progress, included in property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of March 31, 2013. This amount represents costs, including construction costs, incurred to date by the Landlord on the properties. We have recorded a corresponding financing obligation of $16.1 million to long-term debt, and will capitalize construction costs as incurred, including imputed interest, until the properties are available for occupancy. In addition to the capitalization of the costs incurred by the Landlord, we have imputed and recorded rent expense relating to the ground leases for the property sites. Such rent expense is computed based on the fair value of the land and our incremental borrowing rate, and was immaterial for the three months ended March 31, 2013. 2012 shares as trust beneficiary. We have an equity investment in a medical service provider that provides certain vision services to our arrangement. uncertainties associated with the significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria; management of the success of risks associated with the continued growth in new Medicaid and Medicare enrollees, and the development of actuarially sound rates with respect to such new enrollees, including retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates; government audits and reviews, and any enrollment freeze or monitoring program that may result therefrom; changes with respect to the establishment of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, and the interpretation and implementation of medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements; approval by state regulators of dividends and distributions by changes in funding under high dollar claims related to catastrophic illness; the favorable resolution of litigation, arbitration, or administrative restrictions and covenants in the relatively small number of states in which we operate health plans; the availability of adequate financing to fund and capitalize changes generally affecting the managed care or Medicaid management information systems industries; increases in government surcharges, taxes, and assessments; changes in general economic conditions, including unemployment rates; and increasing consolidation in the Medicaid industry. 2012. Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals and to assist state agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: Health Washington. the new Centennial Care program. In addition 2014. Florida. Total Ending Membership by Health Plan: California Florida Michigan Missouri (1) New Mexico Ohio Texas Utah Washington Wisconsin Total Total Ending Membership by State for our Medicare Advantage Plans: California Florida Michigan New Mexico Ohio Texas Utah Washington Total Total Ending Membership by State for our Aged, Blind or Disabled Population: California Florida Michigan New Mexico Ohio Texas Utah Washington Wisconsin Total Net income (loss) per diluted share Premium revenue Service revenue Operating income (loss) Net income (loss) Total ending membership Premium revenue Service revenue Investment income Rental income Total revenue Medical care ratio General and administrative expense ratio Premium tax ratio Operating income (loss) Net income (loss) Effective tax rate the 1.125% Notes. March 31, 2012 Fee for service Pharmacy Capitation Other Total the 2013. market. We are closely monitoring the utilization patterns and loss reserves for these new members. California Florida Michigan Missouri (2) New Mexico Ohio Texas Utah Washington Wisconsin Other (3) California Florida Michigan Missouri (2) New Mexico Ohio Texas Utah Washington Wisconsin Other (3) Service revenue before amortization Amortization recorded as reduction of service revenue Service revenue Cost of service revenue General and administrative costs Amortization of customer relationship intangibles recorded as amortization Operating income (loss) Fee for service Pharmacy Capitation Other Total x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 September 30, 2012¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 13-4204626Delaware 13-4204626 90802 (Address of principal executive offices) (Zip Code) xý No ¨xý No ¨Large accelerated filerxAccelerated filer¨Non-acceleratedLarge accelerated filerx Accelerated filer ¨ Non-accelerated filer Smaller reporting company ¨ xýOctoberApril 19, 2012,2013, was approximately 46,583,300. 12346265050 5151525253 September 30,
2012 December 31,
2011 (Amounts in thousands,
except per-share data) (Unaudited) ASSETS $ 715,480 $ 493,827 356,895 336,916 156,909 167,898 33,530 11,679 21,533 18,327 30,002 19,435 1,314,349 1,048,082 210,972 190,934 67,516 54,582 85,033 101,796 151,088 153,954 13,523 16,134 44,488 46,164 — 23,401 20,098 17,099 $ 1,907,067 $ 1,652,146 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 536,463 $ 402,476 151,029 147,214 143,301 50,947 1,143 1,197 831,936 601,834 260,551 216,929 37,478 33,127 — 23,401 22,101 21,782 1,152,066 897,073 46 46 — — 280,728 266,022 (330 ) (1,405 ) 474,557 490,410 755,001 755,073 $ 1,907,067 $ 1,652,146 March 31,
2013 December 31,
2012 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,169,511 $ 795,770 Investments 341,946 342,845 Receivables 150,251 149,682 Deferred income taxes 25,753 32,443 Prepaid expenses and other current assets 39,577 28,386 Total current assets 1,727,038 1,349,126 Property, equipment, and capitalized software, net 237,735 221,443 Deferred contract costs 53,813 58,313 Intangible assets, net 72,864 77,711 Goodwill and indefinite-lived intangible assets 151,088 151,088 Auction rate securities 13,600 13,419 Restricted investments 55,117 44,101 Derivative asset 147,385 — Other assets 29,449 19,621 $ 2,488,089 $ 1,934,822 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Medical claims and benefits payable $ 491,145 $ 494,530 Accounts payable and accrued liabilities 159,986 184,034 Deferred revenue 135,804 141,798 Income taxes payable 14,944 6,520 Current maturities of long-term debt 1,167 1,155 Total current liabilities 803,046 828,037 Long-term debt 642,005 261,784 Deferred income taxes 31,353 37,900 Derivative liabilities 223,647 1,307 Other long-term liabilities 23,839 23,480 Total liabilities 1,723,890 1,152,508 Stockholders’ equity: Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 45,415 shares at March 31, 2013 and 46,762 shares at December 31, 2012 45 47 Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding — — Additional paid-in capital 234,236 285,524 Accumulated other comprehensive loss (197 ) (457 ) Treasury stock, at cost; 111 shares at December 31, 2012 — (3,000 ) Retained earnings 530,115 500,200 Total stockholders’ equity 764,199 782,314 $ 2,488,089 $ 1,934,822 OPERATIONS Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (Amounts in thousands, except net (loss) income per share) (Unaudited) $ 1,488,718 $ 1,138,230 $ 4,308,439 $ 3,348,438 48,422 37,728 132,351 111,290 1,171 764 3,996 3,804 1,879 — 5,408 — 1,540,190 1,176,722 4,450,194 3,463,532 1,314,571 959,158 3,823,136 2,822,049 37,004 34,584 98,111 105,020 127,500 99,610 379,208 290,967 37,894 36,374 120,953 110,633 16,034 13,430 47,446 38,587 1,533,003 1,143,156 4,468,854 3,367,256 7,187 33,566 (18,660 ) 96,276 4,315 4,380 12,421 11,666 2,872 29,186 (31,081 ) 84,610 (492 ) 10,236 (15,228 ) 30,832 $ 3,364 $ 18,950 $ (15,853 ) $ 53,778 $ 0.07 $ 0.41 $ (0.34 ) $ 1.18 $ 0.07 $ 0.41 $ (0.34 ) $ 1.16 46,546 45,834 46,301 45,693 46,880 46,296 46,301 46,334 Three Months Ended March 31, 2013 2012 Revenue: Premium revenue $ 1,534,608 $ 1,325,406 Service revenue 49,756 42,205 Investment income 1,529 1,717 Rental and other income 4,694 4,259 Total revenue 1,590,587 1,373,587 Expenses: Medical care costs 1,288,754 1,130,988 Cost of service revenue 39,770 30,494 General and administrative expenses 141,407 121,474 Premium tax expenses 37,000 42,186 Depreciation and amortization 16,565 15,025 Total expenses 1,523,496 1,340,167 Operating income 67,091 33,420 Other expenses (income): Interest expense 13,037 4,298 Other income (131 ) — Total other expenses 12,906 4,298 Income before income taxes 54,185 29,122 Income tax expense 24,270 11,033 Net income $ 29,915 $ 18,089 Net income per share: Basic $ 0.65 $ 0.39 Diluted $ 0.64 $ 0.39 Weighted average shares outstanding: Basic 45,981 45,998 Diluted 46,443 46,887 Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (Amounts in thousands) (Unaudited) $ 3,364 $ 18,950 $ (15,853 ) $ 53,778 455 (165 ) 1,075 430 455 (165 ) 1,075 430 $ 3,819 $ 18,785 $ (14,778 ) $ 54,208 Three Months Ended March 31, 2013 2012 Net income $ 29,915 $ 18,089 Other comprehensive income, net of tax: Unrealized gain on investments 260 296 Other comprehensive income 260 296 Comprehensive income $ 30,175 $ 18,385 Nine Months Ended September 30, 2012 2011 (Amounts in thousands) (Unaudited) $ (15,853 ) $ 53,778 58,289 52,414 1,166 8,069 15,448 12,723 (2,390 ) — 4,414 4,095 1,270 — 5,166 5,300 825 2,451 (159 ) (647 ) 10,989 5,411 (10,574 ) (1,819 ) 133,987 6,699 (9,030 ) 246 92,354 25,400 (21,878 ) (18,957 ) 264,024 155,163 (52,548 ) (45,921 ) (234,465 ) (258,209 ) 213,665 226,413 9,162 — — (3,253 ) (18,799 ) (32,765 ) (3,034 ) (8,394 ) (4,775 ) (533 ) (90,794 ) (122,662 ) 60,000 — (20,000 ) — (846 ) — — (7,000 ) — (1,125 ) 5,571 5,640 3,698 1,590 48,423 (895 ) 221,653 31,606 493,827 455,886 $ 715,480 $ 487,492 Three Months Ended March 31, 2013 2012 Operating activities: Net income $ 29,915 $ 18,089 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,799 18,339 Deferred income taxes (16 ) 8,263 Stock-based compensation 4,421 4,666 Gain on sale of subsidiary — (1,747 ) Non-cash interest on convertible senior notes 3,723 1,443 Change in fair value of derivatives (119 ) — Amortization of premium/discount on investments 1,502 1,850 Amortization of deferred financing costs 1,248 258 Tax deficiency from employee stock compensation (42 ) (31 ) Changes in operating assets and liabilities: Receivables (569 ) (54,356 ) Prepaid expenses and other current assets (8,956 ) (5,640 ) Medical claims and benefits payable (3,385 ) 53,357 Accounts payable and accrued liabilities (31,847 ) (34,796 ) Deferred revenue (5,994 ) 44,543 Income taxes 8,424 (3,663 ) Net cash provided by operating activities 20,104 50,575 Investing activities: Purchases of equipment (11,167 ) (13,505 ) Purchases of investments (76,012 ) (88,199 ) Sales and maturities of investments 75,647 65,767 Proceeds from sale of subsidiary, net of cash surrendered — 9,162 Increase in deferred contract costs 1,756 (12,993 ) Increase in restricted investments (11,016 ) (493 ) Change in other non-current assets and liabilities (408 ) (2,457 ) Net cash used in investing activities (21,200 ) (42,718 ) Financing activities: Proceeds from issuance of 1.125% Notes, net of deferred issuance costs 537,973 — Purchase of call option relating to 1.125% Notes (149,331 ) — Proceeds from issuance of warrants 75,074 — Treasury stock purchases (50,000 ) — Repayment of amounts borrowed under credit facility (40,000 ) — Amount borrowed under credit facility — 10,000 Principal payments on term loan (291 ) (301 ) Proceeds from employee stock plans 235 2,748 Excess tax benefits from employee stock compensation 1,177 3,592 Net cash provided by financing activities 374,837 16,039 Net increase in cash and cash equivalents 373,741 23,896 Cash and cash equivalents at beginning of period 795,770 493,827 Cash and cash equivalents at end of period $ 1,169,511 $ 517,723 —- (continued) Nine Months Ended
September 30, 2012 2011 (Amounts in thousands) (Unaudited) $ 1,074 $ 43,550 $ 5,663 $ 5,026 $ 9,852 $ 3,751 $ 30,942 $ — (24,170 ) — 2,390 — $ 9,162 $ — Three Months Ended March 31, 2013 2012 (Amounts in thousands) (Unaudited) Supplemental cash flow information: Cash paid during the period for: Income taxes $ 14,712 $ 1,057 Interest $ 17,065 $ 799 Schedule of non-cash investing and financing activities: Retirement of treasury stock $ 53,000 $ — Common stock used for stock-based compensation $ 4,644 $ 8,768 Details of sale of subsidiary: Decrease in carrying value of assets $ — $ 30,942 Decrease in carrying value of liabilities — (23,527 ) Gain on sale — 1,747 Proceeds from sale of subsidiary, net of cash surrendered $ — $ 9,162 (Unaudited)September 30, 2012 September 30, 2012,March 31, 2013, these health plans served approximately1.8 millionmembers eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Our direct delivery business consists of primary care community clinics in California, Florida, New Mexico, and Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.cause upon 30 days to nine months with prior written notice. cause.Most of these contracts contain renewal options that are exercisable by the state. Our health plan subsidiaries have generally been successful in obtaining the renewal of their contracts in each state prior to the actual expiration ofretaining their contracts. Our state contracts are generally at greatest risk of loss when a state issues a new request for proposals, or RFP, subject 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 be subject to non-renewal. For instance, on February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri health plan’s prior contract with the state expired without renewal on June 30, 2012 subject to certain transition obligations. For the six months ended June 30, 2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30, 2012.services.On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its Medicaid Management Information System, or MMIS, in the state of Idaho from the Centers for Medicare and Medicaid Services, or CMS. As a result of the CMS certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs retroactive to June 1, 2010, the date that the system first began processing claims.intendsintended to award the contract for a replacement MMISMedicaid Management Information System (MMIS) to another companya different vendor, CNSI. However, in March 2013, the state of Louisiana cancelled its contract award to CNSI. CNSI is currently challenging the contract cancellation. The state has informed us that we will continue to perform under our current contract until a successor is named. Subject to the pending challenge, it is currently uncertain whether a new RFP will be issued, and if so, when it will be issued. At such time as a new RFP may be issued, we intend to respond to the state's RFP. For the ninethree months ended September 30, 2012, March 31, 2013, our revenue under the Louisiana MMIS contract was approximately $38.8$10.1 million, or 29.3% 20.3%of total service revenue. We expect that we will continue to perform under this contract through implementation and acceptance of the successor MMIS. Based uponSo long as our past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and acceptance of the successor MMIScontract continues, we expect to recognize approximately $40$40 million inof service revenue annually under our Louisiana MMISthis contract.2012. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.2011.2012. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 20112012 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 20112012 audited consolidated financial statements.20112012 consolidated statementbalance sheet, and statements of income and cash flows to conform to the 20122013 presentation.contract.contract:These are contractual provisions that require the health plan to return premiums to the extent that certain thresholds are not met. In some instances premiums are returned when medical costs fall below a certain percentage of gross premiums; or when administrative costs or profits exceed a certain percentage of gross premiums. In other instances, premiums are partially determined by the acuity of care provided to members (risk adjustment). To the extent that our expenses and profits change from the amounts previously reported (due to changes in estimates), our revenue earned for those periods will also change. In all of these instances, our revenue is only subject to estimate due to the fact that the thresholds themselves contain elements (expense or profit) that are subject to estimate. While we have adequate experience and data to make sound estimates of our expenses or profits, changes to those estimates may be necessary, which in turn willwould lead to changes in our estimates of revenue. In general, a change in estimate relating to expense or profit would offset any related change in estimate to premium, resulting in no or small impact to net income. The following contractual provisions fall into this category:$0.5approximately $0.3 million at both March 31, 2013, and $1.0 million at September 30, 2012, and December 31, 2011, respectively.2012September 30, 2012,March 31, 2013, and December 31, 2011,2012, we had not recorded any liability under the terms of this contract provision since behavioral health expenses are not less than the contractual floor.September 30, 2012,March 31, 2013, and December 31, 2011,2012, we had not recorded any liability under the terms of these contract provisions.$3.2$3.1 million and $0.7$3.2 million pursuant to our profit-sharing agreement with the state of Texas at September 30, 2012,March 31, 2013, and December 31, 2011,2012, respectively.both September 30, 2012, and December 31, 2011,2012, we had not recorded any liability under the terms of this contract provision since medical expenses arewere not less than the contractual floor.$1.7$0.3 million and $5.0 million as of December 31, 2012 for anticipated Medicare risk adjustment premiums as of September 30, 2012, and December 31, 2011, respectively.premiums.met.met:These are contract provisions that allow us to earn additional premium revenue in certain states if we achieve certain quality-of-care or administrative measures. We estimate the amount of revenue that will ultimately be realized for the periods presented based on our experience and expertise in meeting the quality and administrative measures as well as our ongoing and current monitoring of our progress in meeting those measures. The amount of the revenue that we will realize under these contractual provisions is determinable based upon that experience. The following contractual provisions fall into this category:effective beginning in 2011,incremental revenue of up to 3.25% of thetotal premium is withheld by the state. The withheld premiums can be earned by the health plan by meetingif certain performance measures.measures are met. These performance measures are generally linked to various quality-of-care measures dictated by the state.September 30, 2012March 31, 2013 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 September 30, 2012. Three Months Ended September 30, 2012 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 560 $ 532 $ — $ 532 $ 84,797 2,824 1,412 — 1,412 306,314 17,685 10,453 — 10,453 350,810 419 — 246 246 16,279 $ 21,488 $ 12,397 $ 246 $ 12,643 $ 758,200 Three Months Ended September 30, 2011 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 566 $ 345 $ 46 $ 391 $ 79,644 2,160 1,719 — 1,719 232,616 400 400 — 400 105,577 420 362 — 362 17,269 $ 3,546 $ 2,826 $ 46 $ 2,872 $ 435,106 Nine Months Ended September 30, 2012 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 1,676 $ 1,350 $ 658 $ 2,008 $ 253,418 8,222 6,810 966 7,776 896,908 41,687 30,487 — 30,487 908,532 1,284 — 492 492 52,209 $ 52,869 $ 38,647 $ 2,116 $ 40,763 $ 2,111,067 Nine Months Ended September 30, 2011 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 1,712 $ 1,219 $ 364 $ 1,583 $ 246,223 7,472 6,152 3,501 9,653 693,829 1,560 1,560 — 1,560 290,787 1,292 362 — 362 51,526 $ 12,036 $ 9,293 $ 3,865 $ 13,158 $ 1,282,365 Three Months Ended March 31, 2013 (In thousands) New Mexico $ 585 $ 332 $ 108 $ 440 $ 85,798 Ohio 3,005 1,052 — 1,052 291,518 Texas 16,264 13,512 5,995 19,507 335,296 Wisconsin 761 — 609 609 27,124 $ 20,615 $ 14,896 $ 6,712 $ 21,608 $ 739,736 Three Months Ended March 31, 2012 (In thousands) New Mexico $ 555 $ 336 $ 28 $ 364 $ 81,226 Ohio 2,678 2,678 966 3,644 293,525 Texas 5,750 5,750 — 5,750 198,236 Wisconsin 416 — — — 17,142 $ 9,399 $ 8,764 $ 994 $ 9,758 $ 590,129 or DDI,(DDI) of a Medicaid Management Information System or MMIS.(MMIS). An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing or BPO(BPO) arrangement. While providing BPO services (which include claims payment and eligibility processing), we also provide the state with other services including both hosting and support and maintenance. Our Molina Medicaid Solutions contracts may extend over a number of years, particularly in circumstances where we are delivering extensive and complex DDI services, such as the initial design, development and implementation of a complete MMIS. For example, the terms of our most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in total, consisting of two years allocated for the delivery of DDI services, followed by five years for the performance of BPO services. We receive progress payments from the state during the performance of DDI services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts – which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system enhancements) – are shorter in duration than our Idaho and Maine contracts.arrangements under the scope of FASB Accounting Standards Codification Subtopic 605-25,Revenue Recognition –– Multiple–Element Arrangements, and SEC Staff Accounting Bulletin Topic 13,Revenue Recognition.arrangements.Effective January 1, 2011,adopted a new accounting standard that amends the guidance on the accounting for multiple-element arrangements. Pursuant to the new standard,evaluate each required deliverable is evaluatedunder our multiple-element service arrangements to determine whether it qualifies as a separate unit of accounting whichaccounting. Such evaluation is generally based on whether the deliverable has standalone value to the customer. In addition to standalone value, previous guidance also required objective and reliable evidence of fair value of a deliverable in order to treat the deliverable as a separate unit of accounting. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent. We have adopted this guidance on a prospective basis for all new or materially modified revenue arrangements with multiple deliverables entered into on or after January 1, 2011. Our adoption of this guidance has not impacted the timing or pattern of our revenue recognition in 2011 or 2012. Also, there would have been no change in revenue recognized relating to multiple-element arrangements if we had adopted this guidance retrospectively for contracts entered into prior to January 1, 2011. For contracts entered into prior to January 1, 2011, objective and reliable evidence of fair value would be required, in addition to DDI standalone value which we do not have, in order to treat DDI as a separate unit of accounting. We lack objective and reliable evidence of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:assets.Premium Deficiency Charges.We assess the profitability of each contract by state for providing medical care services to our members and identify any contracts where current operating results or forecasts indicate probable future losses. Anticipated future premiums are compared with the sum of anticipated future health care costs and maintenance costs. If the anticipated future costs exceed the premiums, a loss contract accrual is recognized. In the second quarter of 2012, our Texas and Wisconsin health plans recorded premium deficiency charges of $10.0 million and $3.0 million, respectively. Such charges were recorded to medical care costs. As of September 30, 2012, the aggregate premium deficiency reserve balance was $1.5 million.$10.3$10.6 million as of September 30, 2012,March 31, 2013 and $10.7 million as of December 31, 2011.2012. Approximately $8.4$8.4 million of the unrecognized tax benefits recorded at September 30,March 31, 2013 and December 31, 2012, relate to a tax position claimed on a state refund claim that will not result in a cash payment for income taxes if our claim is denied. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $7.2$7.2 million as of September 30, 2012.March 31, 2013 and December 31, 2012. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $8.6$8.6 million due to the expiration of statute of limitations and the resolution to the state refund claim described above.September 30, 2012,March 31, 2013, and December 31, 2011,2012, we had accrued $59,000$60,000 and $65,000,$56,000, respectively, for the payment of interest and penalties.Financial Accounting Standards Board (“FASB”)FASB issued guidance for new disclosure requirements related to the nature of an entity’s rights of setoffset-off and related arrangements associated with its financial instruments and derivative instruments. The new guidance is effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. While we do not expect the adoption of this guidance in 2013 to impact our financial position, results of operations or cash flows, we do expect it to change our disclosure policies relative to certain arrangements with rights of setoff.Goodwill. In September 2011, the FASB issued guidance related to evaluating goodwill for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. An entity may begin or resume performing the qualitative assessment in any subsequent period. The new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this new guidance in 20122013 did not impact our financial position, results of operations or cash flows.(the “Affordable Care Act”)(ACA). The Affordable Care ActACA imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The fee will be imposed beginning in 2014 that is allocated to health insurers based on the ratioa company's share of the amount of an entity’sindustry's net premium revenuespremiums written during the preceding calendar year to the amount of health insurance for any U.S. health risk that is written during the preceding calendar year.couldwill have a material impact on our financial position, results of operations, or cash flows in future periods.Comprehensive Income. In June 2011, We are currently evaluating the FASB issued guidance, as amended in December 2011, relatedimpact of the fee to the presentation of other comprehensive income. The new guidance provides entities with an option to either replace the statement of income with a statement of comprehensive income which would display both the components of net income and comprehensive income in a combined statement, or to present a separate statement of comprehensive income immediately following the statement of income. The new guidance does not affect the components of other comprehensive income or the calculation of earnings per share. To be applied retrospectively with early adoption permitted, the new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. We have elected to present a separate statement of comprehensive income immediately following the statement of income. The adoption of this new guidance in 2012 did not impact our financial position, results of operations orand cash flows.Fair Value.In May 2011, the FASB issued guidance related to fair value measurement and disclosure. The new guidance is a result of joint efforts by the FASB and the International Accounting Standards Board to develop a single converged fair value framework. The new guidance expands existing disclosure requirements for fair value measurements and makes other amendments; mostly to eliminate wording differences between U.S. generally accepted accounting principles (“GAAP”) and international financial reporting standards. To be applied prospectively, the new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. Although the adoption of this new guidance in 2012 did not impact our financial position, results of operations or cash flows, it did change our disclosure policies relative to fair value measurements.or AICPA,(AICPA), and the Securities and Exchange Commission or SEC,(SEC) did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.(Loss) per Share(loss) per share: Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (In thousands) 46,527 46,062 45,815 45,463 — (235 ) — (160 ) 19 7 486 390 46,546 45,834 46,301 45,693 334 462 — 641 46,880 46,296 46,301 46,334 Three Months Ended March 31, 2013 2012 (In thousands) Shares outstanding at the beginning of the period 46,762 45,815 Weighted-average number of shares repurchased (867 ) — Weighted-average number of shares issued 86 183 Denominator for basic income per share 45,981 45,998 Dilutive effect of employee stock options and stock grants (1) 462 857 Dilutive effect of convertible senior notes — 32 Denominator for diluted income per share (2) 46,443 46,887 (1) September 30, 2012March 31, 2013 and 2011,2012, there were approximately 370,000202,500 and 57,000199,700 anti-dilutive weighted restricted shares, respectively. For the three months ended September 30, 2012March 31, 2013 and 20112012 there were approximately 125,00025,500 and 316,0007,900 anti-dilutive weighted options, respectively. Potentially dilutive unvested restricted shares and stock options were not included in the computation of diluted loss per share for the nine months ended September 30, 2012, because to do so would have been anti-dilutive. For the nine months ended September 30, 2011, there were no anti-dilutive weighted restricted shares. For the nine months ended September 30, 2011 there were approximately 126,000 anti-dilutive weighted options.(2) convertible senior notes3.75% Notes and 1.125% Warrants (both defined in Note 10, "Long-Term Debt") were not included in the computation of diluted income (loss) per share for the three month and nine month periodsperiod ended September 30, 2012 and 2011,March 31, 2013, because to do so would have been anti-dilutive.Share-BasedStock-Based CompensationSeptember 30, 2012,March 31, 2013, we had employee equity incentives outstanding under threetwo plans: (1) the 2011 Equity Incentive Plan; and (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer awarded); and (3) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded).2012,2013, our named executive officers were granted restricted stock awards with performance conditions as follows: our chief executive officer was awarded 186,858 shares, our chief financial officer andwas awarded 93,429 shares, our chief operating officer was awarded 62,286 shares, our chief accounting officer was awarded 28,029 shares, and our general counsel was awarded 21,800 shares. These awards were awarded 94,050 performance units, 53,236 performance units,apportioned into four equal increments, and 30,167 performance units, respectively, that wouldwill vest in accordance with the following four measures: (i) 1/4th will vest in equal 1/3rd increments over three years on March 1, 2014, March 1, 2015, and be settled in shares of the Company’s common stock equal in number to the units grantedMarch 1, 2016; (ii) 1/4th will vest upon theour achievement of certain service and performance conditions. Each ofthree-year Total Stockholder Return as determined by Institutional Shareholder Services Inc. (ISS) calculations for the grants shall vest in 2012, provided that: (i) the Company’s total operating revenue for 2012 isthree-year period ending December 31, 2013 equal to or greater than $5.5the 50th percentile within our ISS peer group; (iii) 1/4th shall vest upon our achievement of total revenue in any of the 2013, 2014, or 2015 fiscal years equal to or greater than $12 billion; and (ii)(iv) 1/4th shall vest upon our achievement of the respective officer continuesthree-year earnings before interest, taxes, depreciation and amortization (EBITDA) margin percentage for the three-year period ending December 31, 2013 equal to be employed by the Company if and when the operating revenue target is met. As of September 30, 2012, we expect such performance awards to vest in full.or greater than 2.5%. In the event the vesting conditions are not achieved, the awards shall lapse. AlsoAs of March 31, 2013, such performance goals have not yet been met, but we do expect the awards to vest in March 2012, our chief executive officer, chief financial officer, chief operating officer, and chief accounting officer were awarded 8,000 shares, 8,000 shares, 8,000 shares, and 3,000 shares, respectively, of performance units that would vest and be settled in shares of the Company’s common stock equal in number to the units granted upon the certification of our Idaho MMIS by CMS. Such awards vested when the Idaho MMIS was certified in July 2012.share-basedstock-based compensation expense was as follows for the three monthmonths ended March 31, 2013 and nine month periods ended September 30, 2012 and 2011: Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (in thousands) $ 5,093 $ 4,004 $ 13,943 $ 11,742 543 345 1,505 981 $ 5,636 $ 4,349 $ 15,448 $ 12,723 Three Months Ended March 31, 2013 2012 (In thousands) Restricted stock and performance awards $ 3,848 $ 4,398 Stock options (primarily relating to our employee stock purchase plan) 573 268 $ 4,421 $ 4,666 September 30, 2012,March 31, 2013, there was $19.0$29.2 million of total unrecognized compensation expense related to unvested restricted share awards, which we expect to recognize over a remaining weighted-average period of 2.31.9 years. AsAlso as of September 30, 2012,March 31, 2013, there was $1.9$0.8 million of total unrecognized compensation expense related to performance and restricted units,unvested stock options, which we expect to recognize in the fourth quarterover a weighted-average period of 2012.2.8 years.sharestock activity for the ninethree months ended September 30, 2012March 31, 2013 is summarized below: Weighted Average Grant Date Shares Fair Value 1,435,882 $ 18.97 498,057 31.86 (744,360 ) 20.47 (79,999 ) 23.21 1,109,580 23.45 Shares Unvested balance as of December 31, 2012 986,577 $ 23.74 Granted 601,175 31.40 Vested (409,484 ) 22.16 Forfeited (7,750 ) 22.93 Unvested balance as of March 31, 2013 1,170,518 28.23 sharesstock and stock unit awards, including those with performance conditions, granted during the three months ended March 31, 2013 and 2012 was $19.3 million and $19.8 million, respectively. The total fair value of restricted stock and stock unit awards vested during the ninethree months ended September 30, 2012March 31, 2013 and 20112012 was $24.3$13.1 million and $11.5$22.8 million, respectively.Performance and restricted unit activity for the nine months ended September 30, 2012 is summarized below: Weighted Weighted Average Average Aggregate Remaining Grant Date Intrinsic Contractual Units Fair Value Value term (In thousands) (Years) — $ — 213,022 33.59 (31,285 ) 33.73 $ 823 181,737 33.56 $ 4,571 0.3 181,737 33.56 $ 4,571 0.3 ninethree months ended September 30, 2012March 31, 2013 is summarized below: Weighted Weighted Average Average Aggregate Remaining Exercise Intrinsic Contractual Options Price Value term (In thousands) (Years) 553,049 $ 20.91 15,000 34.82 (114,229 ) 19.29 $ 1,553 (750 ) 22.37 453,070 21.78 $ 1,966 3.4 453,070 21.78 $ 1,966 3.4 438,070 21.33 $ 1,966 3.2 Options (In thousands) (Years) Outstanding as of December 31, 2012 414,061 $ 22.39 Granted 45,000 33.02 Exercised (13,001 ) 17.97 Forfeited (300 ) 17.63 Outstanding as of March 31, 2013 445,760 23.60 $ 3,398 3.8 Stock options exercisable and expected to vest as of March 31, 2013 445,760 23.60 $ 3,398 3.8 Exercisable as of March 31, 2013 390,760 22.23 $ 3,398 3.0 sole stock option awarded to the director appointed during 2012 was $13.97. To determine the nine months ended September 30, 2012 was $13.97. Nofair values of these stock options were granted in 2011.•Level 1 — Observable inputs such as quoted prices in active markets: Our Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.•Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable:Our Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, and certificates of deposit that are classified as current investments in the accompanying consolidated balance sheets, and an interest rate swap derivative recorded as a noncurrent liability. Our investments classified as Level 2 are traded frequently though not necessarily daily. Fair value for the investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. Fair value for the interest rate swap derivative is based on forward LIBOR rates that are and will be observable at commonly quoted intervals for the full term of the interest rate swap agreement. See Note 10, “Long-Term Debt,” for further information regarding the interest rate swap agreement.•Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions: Our level 3 financial instruments recorded at fair value consist of non-current auction rate securities that are designated as available-for-sale, and are reported at fair value of $13.5 million (par value of $15.0 million) as of September 30, 2012. To estimate the fair value of these securities, we use valuations from third-party pricing models that include factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would have a successful auction. To validate the reasonableness of these valuations, we compare such valuations to other third party valuations that provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2012.recordedmeasured at fair value on a recurring basis at September 30, 2012,March 31, 2013, were as follows: Total Level 1 Level 2 Level 3 (In thousands) $ 208,862 $ — $ 208,862 $ — 33,066 33,066 — — 73,899 — 73,899 — 33,691 33,691 — — 7,377 — 7,377 — 13,523 — — 13,523 $ 370,418 $ 66,757 $ 290,138 $ 13,523 $ 1,270 $ — $ 1,270 $ — Total Level 1 Level 2 Level 3 (In thousands) Corporate debt securities $ 198,567 $ — $ 198,567 $ — GSEs 27,399 27,399 — — Municipal securities 75,411 — 75,411 — U.S. treasury notes 31,938 31,938 — — Auction rate securities 13,600 — — 13,600 Certificates of deposit 8,631 — 8,631 — 1.125% Call Option derivative 147,385 — — 147,385 Total assets measured at fair value on a recurring basis $ 502,931 $ 59,337 $ 282,609 $ 160,985 Embedded conversion option derivative $ 147,309 $ — $ — $ 147,309 1.125% Warrants derivative 75,074 — — 75,074 Interest rate swap derivative 1,264 — 1,264 — Total liabilities measured at fair value on a recurring basis $ 223,647 $ — $ 1,264 $ 222,383 recordedmeasured at fair value on a recurring basis at December 31, 2011,2012, were as follows: Total Level 1 Level 2 Level 3 (In thousands) $ 231,634 $ — $ 231,634 $ — 33,949 33,949 — — 47,313 — 47,313 — 21,748 21,748 — — 2,272 — 2,272 — 16,134 — — 16,134 $ 353,050 $ 55,697 $ 281,219 $ 16,134 $ — $ — $ — $ — Total Level 1 Level 2 Level 3 (In thousands) Corporate debt securities $ 191,008 $ — $ 191,008 $ — GSEs 29,525 29,525 — — Municipal securities 75,848 — 75,848 — U.S. treasury notes 35,740 35,740 — — Auction rate securities 13,419 — — 13,419 Certificates of deposit 10,724 — 10,724 — Total assets measured at fair value on a recurring basis $ 356,264 $ 65,265 $ 277,580 $ 13,419 Interest rate swap derivative $ 1,307 $ — $ 1,307 $ — table presentstables present activity for the nine months ended September 30, 2012, relating to our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3): (Level 3) (In thousands) $ 16,134 1,439 (4,050 ) $ 13,523 $ 903 Changes in Level 3 Instruments for the Three Months Ended March 31, 2013 Total Auction Rate Securities Derivatives, Net (In thousands) Balance at December 31, 2012 $ 13,419 $ 13,419 $ — Net unrealized gains included in other comprehensive income 331 331 — Net unrealized gains included in earnings 76 — 76 Purchases and issuances of assets (liabilities) (75,074 ) — (75,074 ) Settlements (150 ) (150 ) — Balance at March 31, 2013 $ (61,398 ) $ 13,600 $ (74,998 ) The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at March 31, 2013 $ 318 $ 318 $ — Changes in Level 3 Instruments for the Year Ended December 31, 2012 Total Auction Rate Securities Derivatives, Net (In thousands) Balance at December 31, 2011 $ 16,134 $ 16,134 $ — Net unrealized gains included in other comprehensive income 1,635 1,635 — Settlements (4,350 ) (4,350 ) — Balance at December 31, 2012 $ 13,419 $ 13,419 $ — The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at December 31, 2012 $ 1,059 $ 1,059 $ — tier, at September 30, 2012,tiers, are contained in the tabletables below. Our convertible senior notes are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. Borrowings under our credit facility and ourOur term loan areis classified as a Level 3 financial instruments,instrument, because certain inputs used to determine the fair value of these agreementsthis financial instrument are unobservable. The carrying value of the credit facility at September 30, 2012 approximates fair value because of the short period of time between the borrowing under the credit facility in 2012, and September 30, 2012. The carrying value of the term loan at September 30, 2012,March 31, 2013, approximates its fair value because there has been no significant change to our credit risk relating to this instrument from the term loan’s origination date in December 2011, to September 30, 2012. September 30, 2012 Carrying Total Value Fair Value Level 1 Level 2 Level 3 (In thousands) $ 173,940 $ 209,040 $ — $ 209,040 $ — 40,000 40,000 — — 40,000 47,754 47,754 — — 47,754 $ 261,694 $ 296,794 $ — $ 209,040 $ 87,754 December 31, 2011 Carrying Total Value Fair Value Level 1 Level 2 Level 3 (In thousands) $ 169,526 $ 192,049 $ — $ 192,049 $ — — — — — — 48,600 48,600 — — 48,600 $ 218,126 $ 240,649 $ — $ 192,049 $ 48,600 March 31, 2013 Level 1 Level 2 Level 3 (In thousands) 1.125% Notes $ 402,836 $ 551,271 $ — $ 551,271 $ — 3.75% Notes 177,024 223,115 — 223,115 — Term loan 47,179 47,179 — — 47,179 Financing obligation 16,133 16,133 — — 16,133 $ 643,172 $ 837,698 $ — $ 774,386 $ 63,312 December 31, 2012 Carrying Total Value Fair Value Level 1 Level 2 Level 3 (In thousands) 3.75% Notes $ 175,468 $ 208,460 $ — $ 208,460 $ — Term loan 47,471 47,471 — — 47,471 Credit facility 40,000 40,000 — — 40,000 $ 262,939 $ 295,931 $ — $ 208,460 $ 87,471 September 30, 2012 Amortized Gross
Unrealized Estimated
Fair Cost Gains Losses Value (In thousands) $ 208,217 $ 688 $ 43 $ 208,862 33,015 55 4 33,066 73,750 232 83 73,899 33,640 51 — 33,691 7,377 — — 7,377 14,950 — 1,427 13,523 $ 370,949 $ 1,026 $ 1,557 $ 370,418 December 31, 2011 Amortized Gross
Unrealized Estimated
Fair Cost Gains Losses Value (In thousands) $ 231,407 $ 442 $ 215 $ 231,634 33,912 46 9 33,949 47,099 232 18 47,313 21,627 121 — 21,748 2,272 — — 2,272 19,000 — 2,866 16,134 $ 355,317 $ 841 $ 3,108 $ 353,050 March 31, 2013 Amortized Cost Gains Losses Value (In thousands) Corporate debt securities $ 198,265 $ 441 $ 139 $ 198,567 Government-sponsored enterprise securities (GSEs) 27,372 27 — 27,399 Municipal securities 75,216 348 153 75,411 U.S. treasury notes 31,894 44 — 31,938 Certificates of deposit 8,617 14 — 8,631 Subtotal - current investments 341,364 874 292 341,946 Auction rate securities 14,500 — 900 13,600 $ 355,864 $ 874 $ 1,192 $ 355,546 December 31, 2012 Amortized Cost Gains Losses Value (In thousands) Corporate debt securities $ 190,545 $ 528 $ 65 $ 191,008 GSEs 29,481 45 1 29,525 Municipal securities 75,909 185 246 75,848 U.S. treasury notes 35,700 42 2 35,740 Certificates of deposit 10,715 9 — 10,724 Subtotal - current investments 342,350 809 314 342,845 Auction rate securities 14,650 — 1,231 13,419 $ 357,000 $ 809 $ 1,545 $ 356,264 September 30, 2012March 31, 2013 are summarized below: Estimated Cost Fair Value (In thousands) $ 210,489 $ 210,828 145,510 146,067 14,950 13,523 $ 370,949 $ 370,418 Cost (In thousands) Due in one year or less $ 173,871 $ 174,145 Due one year through five years 167,493 167,801 Due after ten years 14,500 13,600 $ 355,864 $ 355,546 Total proceeds from sales and maturities of available-for-sale securities were $76.8 million and $105.0 million for the three months ended September 30, 2012, and 2011, respectively. Total proceeds from sales and maturities of available-for-sale securities were $213.7 million and $226.4 million for the nine months ended September 30, 2012, and 2011, respectively. Net realized investment gains for the three months ended September 30, 2012,March 31, 2013, and 20112012 were $12,000$94,000 and $153,000$64,000 respectively. Net realized investment gains for the nine months ended September 30, 2012, and 2011 were $250,000 and $331,000 respectively.September 30, 2012,March 31, 2013, and December 31, 2011,2012, are temporary in nature, because the change in market value for these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial. (Dollars in thousands) Corporate debt securities $ 52,264 $ 139 28 $ — $ — — Municipal securities 21,440 153 37 — — — Auction rate securities — — — 13,600 900 19 $ 73,704 $ 292 65 $ 13,600 $ 900 19 (Dollars in thousands) Corporate debt securities $ 44,457 $ 65 23 $ — $ — — Municipal securities 35,223 246 43 — — — GSEs 5,004 1 1 — — — U.S. treasury notes 4,511 2 5 — — — Auction rate securities — — — 13,419 1,231 21 $ 89,195 $ 314 72 $ 13,419 $ 1,231 21 3534 years. Considering the relative insignificance of these securities when compared with our liquid assets and other sources of liquidity, we have no current intention of selling these securities nor do we expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the decline in the fair value of the auction securities was not due to the credit quality of the issuers, we do not consider the auction rate securities to be other-than-temporarily impaired at September 30, 2012.March 31, 2013. At the time of the first failed auctions during first quarter 2008, we held a total of $82.1$82.1 million in auction rate securities at par value; since that time, we have settled $67.1$67.6 million of these instruments at par value.ninethree months ended September 30, 2012,March 31, 2013, and 2011,2012, we recorded pretax unrealized gains of $1.4$0.3 million and $0.9$0.1 million, respectively, to accumulated other comprehensive income for the changes in their fair value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.The following tables segregate 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 loss position for 12 months or more as7. ReceivablesHealth Plans segment receivables consist primarily of amounts due from the various states in which we operate. Such receivables are subject to potential retroactive adjustment. Because all of our receivable amounts are readily determinable and our creditors are in almost all instances state governments, our allowance for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determination is made. Accounts receivable were as follows: September 30,
2012 December 31,
2011 (In thousands) $ 36,600 $ 22,175 9,440 8,864 1,240 27,092 7,908 9,350 37,971 27,458 5,175 1,608 4,568 2,825 17,024 15,006 2,661 4,909 2,121 2,489 124,708 121,776 32,201 46,122 $ 156,909 $ 167,898 March 31,
2013 December 31,
2012 (In thousands) Health Plans segment: California $ 45,962 $ 28,553 Florida 1,468 953 Michigan 9,519 12,873 New Mexico 12,153 9,059 Ohio 33,041 40,980 Texas 8,100 7,459 Utah 4,790 3,359 Washington 13,160 17,587 Wisconsin 4,404 4,098 Others 1,145 2,177 Total Health Plans segment 133,742 127,098 Molina Medicaid Solutions segment 16,509 22,584 $ 150,251 $ 149,682 PlanPlans segment subsidiaries, we maintain statutory deposits and deposits required by state authorities in certificates of deposit and U.S. treasury securities. Additionally, weWe also maintain restricted investments as protection against the insolvency of certain capitated providers. Additionally, in connection with the Molina Medicaid Solutions segment contracts with the states of Maine and Idaho, we maintain restricted investments as collateral for letters of credit. The following table presents the balances of restricted investments. September 30,
2012 December 31,
2011 (In thousands) $ 373 $ 372 5,733 5,198 — 4,711 1,000 1,000 500 504 15,911 15,905 9,079 9,078 3,506 3,518 2,979 2,895 151 151 5,256 2,832 $ 44,488 $ 46,164 March 31,
2013 December 31,
2012 (In thousands) California $ 373 $ 373 Florida 6,840 5,738 Michigan 1,014 1,014 New Mexico 15,917 15,915 Ohio 9,081 9,082 Texas 3,500 3,503 Utah 3,321 3,126 Washington 151 151 Other 4,619 5,199 Total Health Plans segment 44,816 44,101 Molina Medicaid Solutions segment 10,301 — $ 55,117 $ 44,101 September 30, 2012March 31, 2013 are summarized below. Amortized
Cost Estimated
Fair Value (In thousands) $ 44,177 $ 44,186 311 311 $ 44,488 $ 44,497 (In thousands) Due in one year or less $ 51,617 $ 51,622 Due one year through five years 3,500 3,501 $ 55,117 $ 55,123 as of and for the periods indicated. The amounts displayed for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period were (more) or less than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. Nine Months
Ended Three Months
Ended Year Ended September 30,
2012 September 30,
2012 Dec. 31, 2011 (Dollars in thousands) $ 402,476 $ 525,538 $ 354,356 3,860,825 1,361,539 3,911,803 (37,689 ) (46,968 ) (51,809 ) 3,823,136 1,314,571 3,859,994 3,332,896 875,236 3,516,994 356,253 428,410 294,880 3,689,149 1,303,646 3,811,874 $ 536,463 $ 536,463 $ 402,476 9.4 % 8.9 % 14.6 % 0.9 % 3.2 % 1.1 % 1.0 % 3.6 % 1.3 % Three Months Ended March 31, 2013 2012 (Dollars in thousands) Balances at beginning of period $ 494,530 $ 402,476 Components of medical care costs related to: Current period 1,347,181 1,167,580 Prior periods (58,427 ) (36,592 ) Total medical care costs 1,288,754 1,130,988 Payments for medical care costs related to: Current period 916,426 750,994 Prior periods 375,713 326,637 Total paid 1,292,139 1,077,631 Balances at end of period $ 491,145 $ 455,833 Benefit from prior period as a percentage of: Balance at beginning of period 11.8 % 9.1 % Premium revenue 3.8 % 2.8 % Total medical care costs 4.5 % 3.2 % $37.7$58.4 million for the ninethree months ended September 30, 2012.March 31, 2013. This amount represents our estimate, as of September 30,March 31, 2013, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation of our claims liability at December 31, 2012 was due primarily to the following factors:TheWe believe the overestimation of our claims liability at December 31, 2011 was due primarily to the following factors:ForForOffsetting somethe overestimation items described above,our liability for medical claims and benefits payable was partially offset by an underestimation of that liability at our Missouri health plan, reserves were underestimated as a result of the costs associated with an unusually large number of premature infants during the fourth quarter of 2011.We recognized favorable prior period claims development in the amount of $47.0 million for the three months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at June 30, 2012 was due primarily to the following factors:For our Texas health plan, we had only four months of paid claims data for the expansion regions that were added March 1, 2012. As a result, we overestimated the medical costs for those regions.Our contract with the state of Missouri expired without renewal on June 30, 2012; however we continue to be liable for services rendered to members who were admitted to the hospital on or before June 30, 2012, until the earlier of 90 days or their date of discharge. We overestimated the impact of 90 days of run-out claims for these members.For our Washington health plan, we overpaid certain outpatient claims during 2011 and early 2012, disrupting our payment patterns and leading to an overstatement of our liability at June 30, 2012.For our Michigan health plan, certain inpatient claims with an unusually long run-out were paid in late 2011 and early 2012, resulting in an artificial increase in the amount of time we typically apply for claims payments when estimating the reserve. In the process of developing the reserves as of June 30, 2012, an adjustment was applied to offset these late claim payments, but the adjustment did not completely remove the effect. As a result, reserves were overstated as of June 30, 2012.We recognized favorable prior period claims development in the amount of $49.5 million and $51.8 million for the nine months ended September 30, 2011, and the year ended December 31, 2011, respectively. This was primarily caused by the overestimation of our liability for claims and medical benefits payable at December 31, 2010, as a result of the following factors:We overestimated the impact of a buildup in claims inventory in Ohio.We overestimated the impact of the settlement of disputed provider claims in California.We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule reduction in New Mexico effective November 2010.September 30, 2012,March 31, 2013, we adjusted our base calculation to take account of the following factors which we believe are reasonably likely to change our final claims liability amount:Ournearly doubled effectivehas leveled off in 2013, we have seen a reduction in per member per month (PMPM) cost for outpatient services and an increase in PMPM costs for inpatient services over the past six to nine months. We have estimated the impact of these shifts in cost in our March 1, 2012. In addition, effective March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not previously responsible. Reserves for new coverage and new regions are now based on the newly developing claims lag patterns and comparisons with similar coverage in other regions with more historical data. The lag patterns are still incomplete and therefore the true reserve liability is more uncertain than usual.31, 2013 liability. CaliforniaWisconsin health plan has enrolledis experiencing significant membership increases, and is expected to approximately 20,000 new ABD members since September 30, 2011, as a result of the mandatory assignment of ABD members to managed care plans effective July 1, 2011. These new members converted from a fee-for-service environment. Due to the relatively recent transition of these members to managed care, their utilization of medical services is less predictable than it is for many of our other members.Our claims inventory had increased significantlydouble in size during the first quarterfour months of 2013. This new membership is transitioning to our health plan from a terminated health plan. We enrolled approximately40,000new members in February and March 2013.We have computed a separate reserve analysis for these members and have noted that paid claims are less than what we would expect for newly transitioned members. Therefore, we have increased the reserves for this membership, in anticipation of higher claims costs later than usual for these members. followed by a significant reductionwith gradual growth in claims inventory inmembership. As of March 2013 the second quarterhealth plan covered approximately28,000members under this program. Because of 2012the high costs for these members and a slight drop in the third quarter. Changes in claims inventory can impact historical claims lag patterns.relative newness of the product category, there is still some uncertainty about the cost and reserve liability for these members as of March 31, 2013. 20112012 and for the ninethree months ended September 30, 2012,March 31, 2013, the absence of adverse development of the liability for claims and medical benefits payable at the close of the previous period resulted in the recognition of substantial favorable prior period development. In both years, however, the recognition of a benefit from prior period claims development did not have a material impact on our consolidated results of operations because the amountreplenishment of benefit recognized in each year was roughly consistent with that recognizedreserves in the previous year.Credit FacilityOn September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility (the “Credit Facility”) with various lenders and U.S. Bank National Association, as LC Issuer, Swing Line Lender, and Administrative Agent. The Credit Facility is used for general corporate purposes.The Credit Facility has a term of five years under which all amounts outstanding will be due and payable on September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $195 million. September 30, 2012 there was $40.0March 31, 2013, maturities of long-term debt for the years ending December 31 are as follows (in thousands): Total 2013 2014 2015 2016 2017 Thereafter 1.125% Notes $ 550,000 $ — $ — $ — $ — $ — $ 550,000 3.75% Notes 187,000 — 187,000 — — — — Term loan 47,179 863 1,206 1,259 1,309 1,372 41,170 $ 784,179 $ 863 $ 188,206 $ 1,259 $ 1,309 $ 1,372 $ 591,170 outstanding under the Credit Facility. Additionally, as of September 30, 2012, our lenders had issued two letters of credit in the aggregate principal amount of $10.31.125% Cash Convertible Senior Notes due 2020 (the 1.125% Notes). This transaction included the initial issuance of $450.0 million on February 11, 2013, plus the exercise of the full amount of the $100.0 million over-allotment option on February 13, 2013. The aggregate net proceeds of the 1.125% Notes were $458.9 million, after payment of the net cost of the Call Spread Overlay described below and in Note 11, “Derivative Financial Instruments,” and transaction costs. Additionally, we used $50.0 million of the net proceeds to purchase shares of our common stock (see Note 12, “Stockholders' Equity”), and $40.0 million to repay the principal owed under our Credit Facility.Molina Medicaid Solutions contractssettlement of the 1.125% Notes, we paid approximately $16.9 million in transaction costs. Such costs have been allocated to the 1.125% Notes, the 1.125% Call Option (defined below) and the 1.125% Warrants (defined below) according to their relative fair values. The amount allocated to the 1.125% Notes, or $12.0 million, was capitalized and will be amortized over the term of the 1.125% Notes. The aggregate amount allocated to the 1.125% Call Option and 1.125% Warrants, or $4.9 million, was recorded to interest expense in the quarter ended March 31, 2013.statesissuance of Mainethe 1.125% Notes, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and Idaho, which reduceswarrant transactions (collectively, the amount available1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes. These transactions represent a Call Spread Overlay, whereby the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by the sales price 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% Notes), these transactions are intended to offset cash payments due upon any conversion of the 1.125% Notes. We used $149.3 million of the proceeds from the settlement of the 1.125% Notes to pay for the 1.125% Call Option, and simultaneously received $75.1 million for the sale of the 1.125% Warrants, for a net cash outlay of $74.2 million for the Call Spread Overlay. The 1.125% Call Option and the 1.125% Warrants are derivative financial instruments; refer to Note 11, “Derivative Financial Instruments” for further discussion.Credit Facility.Borrowings under1.125% Call Option, and will be entitled to receive from the Credit Facility bear interest based, at our election, on the base rate pluscounterparties an applicable margin or the Eurodollar rate. The base rate is, for any day, a rateamount of interest per annumcash, generally equal to the highestamount by which the market price per share of (i)common stock exceeds the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sumstrike price of the federal funds rate for such day plus 0.50% per annum and (iii)1.125% Call Options during the Eurodollar rate (without giving effectrelevant valuation period. The strike price under the 1.125% Call Option is initially equal to the applicable margin) for a one month interestconversion price of the 1.125% Notes. Additionally, if the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the on such day (or if such day is not a business day, the immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which Eurodollar deposits are offered in the interbank Eurodollar market plus an applicable margin. The applicable margins range between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon our leverage ratio. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility,1.125% Warrants, we are requiredwill be obligated to payissue to the counterparties a quarterly commitment feenumber of 0.25%shares equal in value to 0.50% (based upon our leverage ratio)the product of the unused amount by which such market value exceeds such strike price and 1/160th of the lenders’ commitments under the Credit Facility.Our obligations under the Credit Facility are secured by a lien on substantially allaggregate number of shares of our assets,commonexception ofstrike price are subject to adjustment under certain of our real estate assets, and by a pledge of the capital stock or membership interests of our operating subsidiaries and health plans (with the exception of the California health plan).The Credit Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain as of the end of any fiscal quarter (calculated for each four consecutive fiscal quarter period) a ratio of total consolidated debt to total consolidated EBITDA, as defined in the Credit Facility, of not more than 2.75 to 1.00, and a fixed charge coverage ratio of not less than 1.75 to 1.00. At September 30, 2012, we were in compliance with all financial covenants under the Credit Facility.In the event of a default, including cross-defaults relating to specified other debt in excess of $20.0 million, the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding, including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and all rights and remedies created under the Credit Facility or applicable law.As$187.0 million of September 30, 2012, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the “Notes”) remain outstanding.3.75% Notes) outstanding as of March 31, 2013 and December 31, 2012, respectively. The 3.75% Notes rank equally in right of payment with our existing and future senior indebtedness. The 3.75% Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 31.9601 shares of our common stock per one thousand dollar principal amount of the 3.75% Notes. This represents aan initial conversion price of approximately $31.29$31.29 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.Thethetheir issuance of the Notes have been allocated between a liability component and an equity component. WeThe reduced carrying value on the 3.75% Notes resulted in a debt discount that is amortized back to the 3.75% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 3.75% Notes at an effective rate approximating what we would have determined that theincurred had nonconvertible debt with otherwise similar terms had been issued. The effective interest rate of the 3.75% Notes is 7.5%, principally based on the seven-yearseven-year U.S. treasuryTreasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. As of September 30, 2012,March 31, 2013, we expect the 3.75% Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 24 months.18 months. The 3.75% Notes’ if-converted value did not exceed their principal amount as of September 30, 2012.March 31, 2013. At September 30, 2012,March 31, 2013, the equity component of the 3.75% Notes, net of the impact of deferred taxes, was $24.0 million. $24.0 million.following table provides the detailsprincipal amounts, unamortized discount and net carrying amounts of the liability amounts recorded: As of As of September 30, December 31, 2012 2011 (In thousands) $ 187,000 $ 187,000 (13,060 ) (17,474 ) $ 173,940 $ 169,526 Three Months Ended
September 30, Nine Months Ended
September 30, 2012 2011 2012 2011 (in thousands) $ 1,753 $ 1,753 $ 5,259 $ 5,259 1,499 1,384 4,414 4,095 $ 3,252 $ 3,137 $ 9,673 $ 9,354 Principal Balance Unamortized Discount Net Carrying Amount (In thousands) March 31, 2013: 1.125% Notes $ 550,000 $ 147,164 $ 402,836 3.75% Notes 187,000 9,976 177,024 $ 737,000 $ 157,140 $ 579,860 December 31, 2012: 3.75% Notes $ 187,000 $ 11,532 $ 175,468 Three Months Ended March 31, 2013 2012 (in thousands) Interest cost recognized for the period relating to the: Contractual interest coupon rate $ 2,527 $ 1,753 Amortization of the discount on the liability component 3,723 1,443 Total interest cost recognized $ 6,250 $ 3,196 On 7, 2011, our wholly owned subsidiary, Molina Center LLC, entered into a Term Loan Agreement with various lenders and East West Bank, as Administrative Agent (the “Administrative Agent”). PursuantAdministrative Agent) to the terms of the Term Loan Agreement, Molina Center LLC borrowed the aggregate principal amount of $48.6borrow $48.6 million to finance a portion of the $81.0 million purchase price for the acquisition of the approximately 460,000 square foot office building, or Molina Center, located in Long Beach, California. commencing January 1, 2012.. The Eurodollar rate is a per annum rate of interest equal to the greater of (a) the rate that is published in the Wall Street Journal as the London interbank offered rate for deposits in United States dollars, for a period of one month,“Interest Period”Interest Period means the period commencing on the first day of each calendar month and ending on the last day of sucheach calendar month. The loan matures on November 30, 2018, and is subject to a 25-year25-year amortization schedule that commenced on January 1, 2012. Balance Sheet Location March 31, 2013 (In thousands) Derivative asset: 1.125% Call Option Non-current assets: Derivative asset $ 147,385 Derivative liabilities: Embedded cash conversion option Non-current liabilities: Derivative liabilities $ 147,309 1.125% Warrants Non-current liabilities: Derivative liabilities 75,074 Interest rate swap Non-current liabilities: Derivative liabilities 1,264 $ 223,647 Three Months Ended March 31, 2013 (In thousands) Derivative gains (losses): 1.125% Call Option $ (1,946 ) Embedded cash conversion option 2,022 Interest rate swap 43 $ 119 $42.5$42.5 million notional amount interest rate swap agreement or Swap Agreement,(Swap), with an effective date of March 1, 2013. While not designated as a hedge instrument, the2013. The Swap Agreement is intended to reduce our exposure to fluctuations in the contractual variable interest rates under our Term Loan Agreement, and expires on the maturity date of the Term Loan Agreement, which is November 30, 2018.2018. Since its inception, the Swap has not been designated as a hedge. Under the Swap, Agreement beginning on March 1, 2013, we will receive a variable rate of the one-month LIBOR plus 3.25%, and pay a fixed rate of 5.34%. The Swap Agreement is measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. Gains and losses relating to changes in its fair value are reported in earnings in the current period. For the three months and nine months ended September 30, 2012, we have recorded losses of $0.2 million and $1.3 million, respectively, to general and administrative expense. As of September 30, 2012, the fair value of the Swap Agreement is a liability of $1.3 million, recorded to other noncurrent liabilities. We do not use derivatives for trading or speculative purposes. We believe that we are not exposed to more than a nominal amount of credit risk relating to the Swap Agreement because the counterparty is an established and well-capitalized financial institution.11.12. Stockholders’ EquityOctober 26, 2011,February 13, 2013, our board of directors authorized the repurchase of $75$75 million in aggregate of either our common stock or our convertible senior notes due 2014 (see Note 10, “Long-Term Debt”).the 3.75% Notes, in addition to the $50.0 million repurchase discussed above. The repurchase program expired October 25, 2012. Noextends through December 31, 2014.were purchased under this program inincluding common stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be determined at the nine months ended September 30, 2012.time of the offering. “Share-Based, “Stock-Based Compensation,” we issued approximately 755,000279,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the ninethree months ended September 30, 2012. Stock plan activity resulted in a $14.7 million increase to additional paid-in capital for the same period.March 31, 201312..which serve Medicaid populations in nine states (subsequent to the termination of our Medicaid contract in Missouri effective June 30, 2012), and also includes our smaller direct delivery line of business. Our state health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics.processingprocess outsourcing solutions; hosting services; and information technology development and administrativesupport services to state Medicaid agencies in an additional five states. Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 (In thousands) (In thousands) $ 1,488,718 $ 1,138,230 $ 4,308,439 $ 3,348,438 1,171 764 3,996 3,804 1,879 — 5,408 — 48,422 37,728 132,351 111,290 $ 1,540,190 $ 1,176,722 $ 4,450,194 $ 3,463,532 $ 14,753 $ 12,207 $ 43,600 $ 34,915 5,526 5,605 14,689 17,499 $ 20,279 $ 17,812 $ 58,289 $ 52,414 $ (969 ) $ 33,773 $ (41,867 ) $ 100,273 8,156 (207 ) 23,207 (3,997 ) 7,187 33,566 (18,660 ) 96,276 4,315 4,380 12,421 11,666 $ 2,872 $ 29,186 $ (31,081 ) $ 84,610 September 30, December 31, 2012 2011 $ 145,021 $ 159,963 91,100 95,787 $ 236,121 $ 255,750 $ 1,672,149 $ 1,425,764 234,918 226,382 $ 1,907,067 $ 1,652,146 13. Three Months Ended March 31, 2013 2012 (In thousands) Revenue: Health Plans: Premium revenue $ 1,534,608 $ 1,325,406 Investment income 1,529 1,717 Rental and other income 4,694 4,259 Molina Medicaid Solutions: Service revenue 49,756 42,205 $ 1,590,587 $ 1,373,587 Depreciation and amortization: Health Plans $ 15,238 $ 13,743 Molina Medicaid Solutions 6,561 4,596 $ 21,799 $ 18,339 Operating Income: Health Plans $ 60,738 $ 25,011 Molina Medicaid Solutions 6,353 8,409 Total operating income 67,091 33,420 Interest expense (13,037 ) (4,298 ) Other income 131 — Income before income taxes $ 54,185 $ 29,122 March 31,
2013 December 31,
2012 (In thousands) Goodwill and intangible assets, net: Health Plans $ 136,874 $ 139,710 Molina Medicaid Solutions 87,078 89,089 $ 223,952 $ 228,799 Total assets: Health Plans $ 2,280,460 $ 1,702,212 Molina Medicaid Solutions 207,629 232,610 $ 2,488,089 $ 1,934,822 Molina Medicaid SolutionsOn April 6, 2012, Molina Medicaid Solutions received a schedule from the statetheour subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was $519.2$572.9 million at September 30, 2012,March 31, 2013, and $492.4$549.7 million at December 31, 2011.yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.September 30, 2012,March 31, 2013, our health plans had aggregate statutory capital and surplus of approximately $525.4$585.5 millioncompared with the required minimum aggregate statutory capital and surplus of approximately $270.0 million. $341.7 million. All of our health plans were in compliance with the minimum capital requirements at September 30, 2012.March 31, 2013. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.Receivable/LiabilityCeded Lifeeach calendar year beginning on or after January 1, 2014. The fee will be imposed beginning in 2014 based on a company's share of the industry's net premiums written during the preceding calendar year. If the fee assessment is enacted as written, our minimum capitalization requirements will increase significantly on January 1, 2014; we are currently evaluating the impact of the fee assessment to our financial position, results of operations and Annuity Contractscash flows.PriorFebruary 27, 2013, we entered into a lease (the Lease) with 6th & Pine Development, LLC (the Landlord) for office space located in Long Beach, California. The Lease consists of two office buildings under construction, including a building which comprises approximately 70,000 square feet of office space (Building A); and a building which is expected to February 17, 2012, we reportedcomprise approximately 120,000 square feet of office space (Building B).100% ceded reinsurance arrangementperiod of five years each. Initial annual rent for life insurance policies writtenBuilding A is expected to be approximately $2.5 million, and held byinitial annual rent for Building B is expected to be approximately $4.0 million. Rent will increase 3.75% per year through the initial term. Rent during the extension terms will be the greater of then-current rent or fair market rent.wholly owned insurance subsidiary, Molina Healthcare Insurancechief financial officer and a director of the Company, by recording a non-current receivable fromand his wife. In addition, in connection with the reinsurer with a corresponding non-current liability for ceded life and annuity contracts. Effective February 17, 2012, we sold Molina Healthcare Insurance Company. The transaction resulteddevelopment of the buildings being leased, the Landlord has pledged shares ofelimination of both the noncurrent receivableCompany he holds as trustee. Dr. J. Mario Molina, our chief executive officer and liability for ceded life and annuity contracts, each amounting to $23.4 million as of December 31, 2011. Additionally, a gain of approximately $2.4 million was recorded upon closingchairman of the transaction, recorded to general and administrative expensesboard of directors, holds a partial interest in the accompanying consolidated income statement.We remain liable for benefits payable under the life insurance policies that were held by Molina Healthcare Insurance Company, in the event that both the reinsurer and the buyer of Molina Healthcare Insurance Company are unable to pay those benefits. We believe the possibility of our having to pay such benefits is remote, and no provision for the payment of such benefits is included in our consolidated financial statements.14. Related Party Transactionsmembers. Wemembers; we account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee.accounting. For the three months ended September 30, 2012March 31, 2013 and 2011,2012, we paid $7.0$7.7 million, and $5.0$6.6 million, respectively, for medical service fees to this provider. FornineBoard, President and Chief Executive Officer. Dr. Molina is paid no salary and receives no dividends in connection with his work for, or ownership of, JMMPC. JMMPC provides outpatient professional medical services to the general public for routine non-life threatening, outpatient health care needs. Substantially all of the individuals served by JMMPC are members of our health plans. JMMPC does not have agreements to provide professional medical services with any other entities. September 30,March 31,2013 and March 31, 2012.2011,the offsetting Wells Fargo's interest in the financing arrangement is included in other liabilities in the accompanying consolidated balance sheets.paid $20.6 million,may be obligated or entitled to repurchase Wells Fargo's interest in the Investment Fund. The value attributed to the put/call is nominal. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code and $16.8 million, respectively,applicable U.S. Treasury regulations. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in Wells Fargo's projected tax benefits not being realized and, therefore, require us to indemnify Wells Fargo for medical service feesany loss or recapture of NMTCs related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. We do not anticipate any credit recaptures will be required in connection with this provider.Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.effectivenessimplementation of the Affordable Care Act, including the impact of the health insurance industry excise tax, the expansion of Medicaid eligibility in participating states to previously uninsured populations unfamiliar with managed care, the implementation of state insurance exchanges currently expected to become operational by October 1, 2013, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures, including the duals demonstration programs in California, Illinois, Ohio, Michigan, Texas, and Washington;Texas;Texas, and other risks associated with the expansion of our Texas health plan's service areas in 2012;uncertainties regarding the implementation of the Patient Protection and Affordable Care Act, including the potential refusal of a state to expand Medicaid eligibility to its uninsured population, issues surrounding state insurance exchanges, the impact of the health insurance industry excise tax, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures;the Company’sour medical costs, including seasonal flu patterns and rates of utilization that are consistent with the Company’sour expectations and the reduction over time of the highour accruals for incurred but not reported medical costs associated with new populations;the Company’sour efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, including the pending RFP in New Mexico, and the Company’sour ability to grow the Company’sincrease our revenues consistent with the Company’sour expectations;the accurate estimation of incurred but not reported medical costs across the Company’sour health plans;dually eligible enrollees;the continuation and renewal of the government contracts of both the Company’sour health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine or Idaho;additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Maine or Idaho;the Company’sour provider contracts and the loss of providers;the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;the Company’sour health plan subsidiaries;the Company’sour contracts as a result of regulatory changes, programmatic adjustments, or other reforms;proceedings;the Company’sany future credit facility;the Company’s acquisitionsour expansion and start-upgrowth activities and to meet our liquidity needs, including the Company’s liquidity needs;state’sstate's failure to renew its federal Medicaid waiver;an inadvertent unauthorized disclosure of protected health information; 2011, as updated in Part II, Item 1A—Risk Factors, in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, 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.2011.OverviewPlans;Plans and Molina Medicaid Solutions. September 30, 2012,March 31, 2013, these health plans served approximately1.8 millionmembers eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Our direct delivery business consists of primary care community clinics in California, Florida, New Mexico, and Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.cause upon 30 days to nine months with prior written notice. cause.Most of these contracts contain renewal options that are exercisable by the state. Our health plan subsidiaries have generally been successful in obtaining the renewal of their contracts in each state prior to the actual expiration ofretaining their contracts. Our state contracts are generally at greatest risk of loss when a state issues a new request for proposals, or RFP, subject 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 be subject to non-renewal. For instance, on February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri health plan’s prior contract with the state expired without renewal on June 30, 2012 subject to certain transition obligations. For the six months ended June 30, 2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30, 2012.services.With regard to our Ohio health plan, as a result of a lawsuit challenging the selection of several plans including our health plan for the new Medicaid managed care program in Ohio, the Ohio Office of Medical Assistance (OMA)services effective March 1, 2012.on October 5, 2012 that the operation of the program is being delayed from the previously scheduled January 1, 2013 start date and will now commence on July 1, 2013. Following the trial court’s dismissal of the lawsuit, the court of appeals has permitted the state of Ohio to move forward with working on implementing the new program and finalizing the provider agreements with our Ohio plan and the other selected managed care plans.During fiscal year 2012, we expect to respond to several RFPs and invitations to negotiate with respect to new business, including proposals to serve dual eligible populations and applications to participate in CMS’ Capitated Financial Alignment Demonstration project. On August 27, 2012, our Ohio health plan was chosen to participate in the Southwest, West Central, and Central markets under the Ohio Integrated Care Delivery System (ICDS). The Ohio ICDS is intended to improve care coordination for individuals enrolled in both Medicaid and Medicare. The selection of Molina of Ohio was made by the Ohio Department of Jobs and Family Services (ODJFS) pursuant to the request for applications for qualified health plans to serve in the ICDS issued in April 2012. The commencement of the ICDS is subject to the readiness review of the selected health plans, and the execution of three-way provider agreements between the health plans, ODJFS, and CMS. Enrollment of dual eligible members in the ICDS is expected to begin on April 1, 2013. Furthermore, on June 29, 2012, the Florida Agency for Health Care Administration (AHCA) issued invitations to negotiate for the Long-term Care Managed Care component ofawarded our Florida health plan contracts in three regions under the Statewide Medicaid Managed Care Long-Term Care program. We submittedAs a bid for eightresult of eleven regionsthe awards, we will now enter into a comprehensive pre-contracting assessment, with the program currently scheduled to commence on August 27, 2012, representing approximately thirty countiesDecember 1, 2013. Under the program, we will provide long-term care benefits, including institutional and 90,000 beneficiaries. We expecthome and community-based services.stateNew Mexico Human Services Department, or HSD, to announce contract awardsparticipate in January 2013 with phased-in enrollment beginning August 2013 and extending through March 2014.with regard to existing business, on August 31, 2012,continuing to provide physical and acute health care services, under the state ofnew program our New Mexico issued an RFP for all covered Medicaidhealth plan will expand its services (physical health,to provide behavioral health and long-term care), with such services expectedcare services. The selection of our New Mexico health plan was made by HSD pursuant to commence onits request for proposals issued in August 2012. The operational start date for the program is currently scheduled for January 1, 2014 under the new Medicaid contract. The awards are expected to be announced in January 2013.design,business processing and information technology development implementation, and business process outsourcing solutionsadministrative services to state governments for their Medicaid Management Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states ofagencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provideand drug rebate administration services for the Florida Medicaid program.On October 12, 2012, the Governor of the U.S. Virgin Islands announced a partnership in which the Company will provide MMIS to the U.S. Virgin Islands through our West Virginia fiscal agent operation. The contract outlining the sharing of the Company’s platform went through several rounds of review at the federal level and has been approved by CMS. The partnership will benefit both the Virgin Islands and taxpayers by circumventing the costs associated with establishing an independent system while gaining leverage from operating under a common platform. This partnership can serve as a model for the country by demonstrating that state and territorial governments can reduce local and federal costs by sharing such technologies for their Medicaid populations.On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its MMIS in the state of Idaho from the Centers for Medicare and Medicaid Services, or CMS. As a result of the CMS certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs retroactive to June 1, 2010, the date that the system first began processing claims.intendsintended to award the contract for a replacement MMISMedicaid Management Information System (MMIS) to another company.a different vendor, CNSI. However, in March 2013, the state of Louisiana cancelled its contract award to CNSI. CNSI is currently challenging the contract cancellation. The state has informed us that we will continue to perform under our current contract until a successor is named. Subject to the pending challenge, it is currently uncertain whether a new RFP will be issued, and if so, when it will be issued. At such time as a new RFP may be issued, we intend to respond to the state's RFP. For the ninethree months ended September 30, 2012, March 31, 2013, our revenue under the Louisiana MMIS contract was $38.8approximately $10.1 million, or 29.3% 20.3% of total service revenue. We expect that we will continue to perform under this contract through implementation and acceptance of the successor MMIS. Based uponSo long as our past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and acceptance of the successor MMIScontract continues, we expect to recognize approximately $40 million inof service revenue annually under our Louisiana MMISthis contract.ninethree months ended September 30, 2012,March 31, 2013, we received approximately 96% of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.ninethree months ended September 30, 2012,March 31, 2013, we recognized approximately 4% of our premium revenue in the form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.$75$70 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the TANF Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range between approximately $110$100 in California to $260 in Ohio. Among our ABD membership, PMPM premiums range from approximately $330$400 in Utah to $1,400 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care contract (most often pharmacy, inpatient, behavioral health and catastrophic case benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest PMPM premiums in the aggregate, at approximately $1,200 PMPM. September 30, June 30, December 31, September 30, 2012 2012 2011 2011 346,000 350,000 355,000 350,000 71,000 70,000 69,000 67,000 219,000 220,000 222,000 217,000 — 79,000 79,000 78,000 90,000 89,000 88,000 89,000 272,000 260,000 248,000 256,000 291,000 301,000 155,000 148,000 85,000 86,000 84,000 82,000 411,000 356,000 355,000 350,000 41,000 42,000 42,000 41,000 1,826,000 1,853,000 1,697,000 1,678,000 7,300 7,000 6,900 6,500 900 900 800 700 9,300 8,900 8,200 7,600 900 900 800 800 200 200 200 100 1,100 800 700 600 8,300 8,300 8,400 7,400 6,100 5,700 5,000 4,500 34,100 32,700 31,000 28,200 44,100 41,100 31,500 23,700 10,300 10,400 10,400 10,400 40,700 40,000 37,500 31,600 5,600 5,600 5,600 5,600 29,000 29,600 29,100 29,900 101,300 111,000 63,700 61,800 8,900 8,800 8,500 8,300 23,400 4,400 4,800 4,700 1,600 1,700 1,700 1,700 264,900 252,600 192,800 177,700 March 31,
2013 December 31,
2012 March 31,
2012Total Ending Membership by Health Plan: California 332,000 336,000 351,000 Florida 75,000 73,000 69,000 Michigan 217,000 220,000 222,000 Missouri (1) — — 81,000 New Mexico 91,000 91,000 89,000 Ohio 242,000 244,000 249,000 Texas 274,000 282,000 280,000 Utah 87,000 87,000 86,000 Washington 416,000 418,000 356,000 Wisconsin 86,000 46,000 42,000 Total 1,820,000 1,797,000 1,825,000 Total Ending Membership for our Medicare Advantage Plans: California 7,700 7,700 6,900 Florida 600 900 800 Michigan 9,200 9,700 8,500 New Mexico 900 900 900 Ohio 300 300 200 Texas 1,900 1,500 800 Utah 7,600 8,200 8,100 Washington 6,100 6,500 5,200 Total 34,300 35,700 31,400 Total Ending Membership for our Aged, Blind or Disabled Population: California 44,600 44,700 37,300 Florida 10,400 10,300 10,500 Michigan 44,000 41,900 38,800 New Mexico 5,800 5,700 5,600 Ohio 28,200 28,200 29,700 Texas 94,200 95,900 109,000 Utah 9,200 9,000 8,700 Washington 31,300 30,000 4,700 Wisconsin 1,600 1,700 1,700 Total 269,300 267,400 246,000 (1) Our contract with the state of Missouri expired without renewal on June 30, 2012. •Fee-for-service — Expenses paid for specific encounters or episodes of care according to a fee schedule or other basis established by the state or by contract with the provider.•Capitation — Expenses for PMPM payments to the provider without regard to the frequency, extent, or nature of the medical services actually furnished.•Pharmacy — Expenses for all drug, injectible, and immunization costs paid through our pharmacy benefit manager.•Other — Expenses for medically related administrative costs of approximately $94.6 million, and $76.3 million, for the nine months ended September 30, 2012 and 2011, respectively, as well as certain provider incentive costs, reinsurance, costs to operate our medical clinics, and other medical expenses.Thirdsummarizessummarize our financial and operating performance for the three and nine months ended September 30, 2012. Comparable metrics for the third quarter of 2011 are also shown.March 31, 2013 and 2012. All ratios, with the exception of the medical care ratio and the premium tax ratio, are shown as a percentage of total revenue. The medical care ratio and the premium tax ratio are computed as a percentage of premium revenue because there are direct relationships between premium revenue earned, and the cost of health care and premium taxes. Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 (Dollar amounts in thousands, except per share data) $ 0.07 $ 0.41 $ (0.34 ) $ 1.16 $ 1,488,718 $ 1,138,230 $ 4,308,439 $ 3,348,438 $ 48,422 $ 37,728 $ 132,351 $ 111,290 $ 7,187 $ 33,566 $ (18,660 ) $ 96,276 $ 3,364 $ 18,950 $ (15,853 ) $ 53,778 1,826,000 1,678,000 1,826,000 1,678,000 96.7 % 96.7 % 96.8 % 96.7 % 3.1 3.2 3.0 3.2 0.1 0.1 0.1 0.1 0.1 — 0.1 — 100.0 % 100.0 % 100.0 % 100.0 % 88.3 % 84.3 % 88.7 % 84.3 % 8.3 % 8.5 % 8.5 % 8.4 % 2.5 % 3.2 % 2.8 % 3.3 % 0.5 % 2.9 % (0.4 )% 2.8 % 0.2 % 1.6 % (0.4 )% 1.6 % (17.1 )% 35.1 % 49.0 % 36.4 % Three Months Ended March 31, 2013 2012 (Dollar amounts in thousands, except per share data) Net income per diluted share $ 0.64 $ 0.39 Premium revenue $ 1,534,608 $ 1,325,406 Service revenue $ 49,756 $ 42,205 Operating income $ 67,091 $ 33,420 Net income $ 29,915 $ 18,089 Total ending membership 1,820,000 1,825,000 Premium revenue 96.5 % 96.5 % Service revenue 3.1 % 3.1 % Investment income 0.1 % 0.1 % Rental and other income 0.3 % 0.3 % Total revenue 100.0 % 100.0 % Medical care ratio 86.1 % 88.1 % General and administrative expense ratio 8.9 % 8.8 % Premium tax ratio 2.4 % 3.2 % Operating income 4.2 % 2.4 % Net income 1.9 % 1.3 % Effective tax rate 44.8 % 37.9 % ThirdWe calculate a non-GAAP measure, EBITDA, which management uses as a supplemental metric in evaluating our financial performance, in evaluating financing and business development decisions, and in forecasting and analyzing future periods. For these reasons, management believes that EBITDA is a useful supplemental measure to investors in evaluating our performance and the performance of other companies in our industry. The reconciliation of this non-GAAP to GAAP financial measure is as follows (GAAP stands for U.S. generally accepted accounting principles): Three Months Ended March 31, 2013 2012 (In thousands) Net income $ 29,915 $ 18,089 Add back: Depreciation and amortization reported in the consolidated statements of cash flows 21,799 18,339 Interest expense 13,037 4,298 Income tax expense 24,270 11,033 EBITDA (1) $ 89,021 $ 51,759 (1) EBITDA is not prepared in conformity with GAAP because it excludes depreciation and amortization, as well as interest expense, and the provision for income taxes. This non-GAAP financial measure should not be considered as an alternative to the GAAP measures of net income, operating income, operating margin, or cash provided by operating activities; nor should EBITDA be considered in isolation from these GAAP measures of operating performance. 20122013 Overviewthirdfirst quarter of 2012,2013, net income was $3.4$29.9 million, or $0.07$0.64 per diluted share, compared with net income of $19.0$18.1 million, or $0.41$0.39 per diluted share, for the thirdfirst quarter of 2011.2012.thirdfirst quarter of 20122013 improved substantially over the secondfirst quarter of 2012. Among the key developments affecting first quarter2013 performance were the following:dueand 2011. Net of related expenses, the rate increases resulted in an increase of approximately $19 million to pretax income; $18 million (approximately $0.24 per diluted share) of which related to 2012 and 2011. The adjustment to premium rates resulted from the receipt of new rate sheets from the state of California that restored the rates that had existed prior to the cuts that had been taken effective July 1, 2011, and a significant improvement inmodest increase to rates for our ABD membership retroactive to July 1, 2011. The new premium rates are expected to increase premium revenue at the profitabilityCalifornia health plan going forward by approximately $400,000 per month;plan. Revenue was consistent betweenplan related to 2012. The Texas health plan recently received notice from the secondTexas Department of Health and third quartersHuman Services that a specific measure is being removed from the calculation of performance revenue for all contracted health plans for 2012. As of December 31, 2012, as a 30% increase inthe Texas health plan had not recognized approximately $6 million of revenue related to this performance measure;WashingtonFlorida, Texas, Ohio and Wisconsin health plan offsetplans; andterminationfees associated with that issuance will be expensed over the seven-year life of our Missouri enrollment and a slight decline in Texas enrollment.September 30, 2012March 31, 2013 Compared with the Three Months Ended September 30, 2011thirdfirst quarter of 20122013 increased 30.8%16% (or 17%, net of premium taxes) over the thirdfirst quarter of 2011,2012, primarily due primarily to an increase in membership, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and benefit expansions.. Medicare premium revenue was $116.1$118.4 million for the thirdfirst quarter of 20122013 compared with $101.5$109.8 million for the thirdfirst quarter of 2011.Membership at the Texas health plan nearly doubled year over year, while also growing significantly in Ohio and Washington. 2012.2013. ABD membership, as a percent of total membership, has increased approximately 37%10% year over year. Premium revenue PMPM also increased in the thirdfirst quarter of 2012 2013as a result of the inclusion of revenue fromfor pharmacy benefits for the pharmacy benefit for our OhioUtah health plan effective OctoberJanuary 1, 2011,2013, and as a result of the inclusion of revenue from thefor inpatient facility and pharmacy benefits across all of ourthe Texas health planplan’s membership effective March 1, 2012. Three Months Ended September 30, 2012 2011 % of % of Amount PMPM Total Amount PMPM Total $ 908,201 $ 165.97 69.1 % $ 698,995 $ 140.55 72.9 % 219,823 40.17 16.7 89,191 17.93 9.3 142,714 26.08 10.9 129,315 26.00 13.5 43,833 8.03 3.3 41,657 8.39 4.3 $ 1,314,571 $ 240.25 100.0 % $ 959,158 $ 192.87 100.0 % Three Months Ended March 31, 2013 2012 Amount PMPM Amount PMPM Fee for service $ 867,648 $ 160.18 67.3 % $ 777,267 $ 148.81 68.7 % Pharmacy 231,838 42.80 18.0 % 173,237 33.17 15.3 % Capitation 140,324 25.91 10.9 % 136,038 26.04 12.0 % Other 48,944 9.04 3.8 % 44,446 8.51 4.0 % Total $ 1,288,754 $ 237.93 100.0 % $ 1,130,988 $ 216.53 100.0 % thirdfirst quarter of 2012 2013primarily due to the same shifts in member mix and the benefit expansions that led to increased premium revenue. Medical care costs as a percentage of premium revenue, (theparticularly in California, Texas and Washington. Our consolidated medical care ratio) also increasedratio, however, decreased to 86.1% in the thirdfirst quarter of 2012 when compared with2013, from 88.1% in the thirdfirst quarter of 2011 because2012. Retroactive rate increases for the California health plan and increased margins at the Texas health plan were the primary drivers of the lower medical care ratio in premium rates have not kept pace with increasesthe first quarter of 2013. Stable inpatient utilization and lower pharmacy unit costs also contributed to the lower medical care ratio in medical costs.Texasmedical care ratio at the California health plan’s financial performance improved dramaticallyplan decreased to 85.1% in the thirdfirst quarter of 2013 from 88.7% in the secondfirst quarter of 2012. The lower medical care ratio was primarily the result of the recognition of retroactive premium rate changes that contributed approximately $19 million to pretax income for the first quarter of 2012. 2013, of which approximately $18 million (after related expenses) related to 2012 and 2011.90.3%80.9% in the thirdfirst quarter of 2013 compared with 92.3% in the first quarter of 2012. We previously reported on the financial challenges faced by the Texas health plan. Although first quarter results show considerable improvement over the results reported for the first quarter of 2012, compared with 109.4% inmanagement cautions investors regarding the secondfollowing points:93.7% in2013. third quarter of 2011. The medical care ratio for the Texas health plan’s ABD membership declined to 94%plan in the thirdfirst quarter of 2013. Absent the previously described $6 million out-of-period benefit related to 2012 performance revenue, and a $13.5 million benefit from 119% infavorable development of the second quarter. We received a blended rate increase in Texas of approximately 4%, or $4.5 million per month, effective September 1, 2012. The loss before taxesclaims liability established for the health plan at December 31, 2012, the Texas health plan was approximately $5 million for the third quarter of 2012, compared with approximately $68 million for the second quarter of 2012 (which included a premium deficiency reserve charge of $10 million). In our Quarterly Report on Form 10-Q for the period ended June 30, 2012, we discussed the steps we are taking to return the Texas health plan to profitability. We confirm the previously disclosed expectation that the Texas health plan will be operating at financial break even on a go forward basis by December 2012.The medical care ratio at the California health plan increased to 96.1% in the third quarter of 2012 from 88.8% in the third quarter of 2011. The higher medical care ratio was primarily the result of a shift in member mix to include more ABD members. Theplan's medical care ratio for the California health plan’s ABD membership was 110% in the thirdfirst quarter of 2012, 100% for2013 would have been approximately 86.6% rather than the nine months ended September 30, 2012, and 84% for the third quarter of 2011. The California Department of Health Care Services has recently solicited health plan input as to whether to conduct a review of the adequacy of ABD premium rates in California. The California health plan, which believes the ABD premium rates to be inadequate, has provided input supporting such a review. During the fourth quarter of 2012, we intend to exit an unprofitable service area in California, reducing enrollment by approximately 6,000 members.The California health plan’s medical care ratio also increased by 1.4% in the third quarter of 2012 due to reductions to premium revenue of $2.4 million related to the expected reduction in premium rates of 2.35% for the elimination of the gross premium tax effective July 1, 2012. The reduction in premium was offset by an equivalent decrease in premium tax of $2.4 million. Although the state has not yet reduced the premium rates, we believe that both premium taxes and premium rates will be reduced equivalently retroactive to July 1, 2012.Thereported medical care ratio of 80.9%.Floridafinancial performance of the Texas health plan, decreasedmanagement also believes that increased payments to 84.0%certain providers are necessary. Specifically, the health plan intends to increase provider reimbursement for personal attendant services and day activity and health services effective July 1, 2013. We anticipate that this increase in provider payments alone will add approximately $10 million to medical expense in the third quartersecond half of 2012, from 89.2% in the third quarter of 2011 due to a premium rate increase effective September 1, 2011, the re-contracting of portions of the health plan’s specialty care network, lower inpatient utilization and lower pharmacy costs.The medical care ratio of the Michigan health plan increased to 89.3% in the third quarter of 2012, from 82.0% in the third quarter of 2011. The primary reason for the increase in the medical care ratio in 2012 was a reduction to premium rates linked to a decrease in premium taxes, in which both premium taxes and premium revenue were reduced equivalently effective April 1, 2012. The result was a higher medical care ratio in 2012, but there was no impact on profitability as premium tax expense was reduced by the same amount as premium revenue. The remainder of the deterioration in the Michigan plan’s medical care ratio was the result of higher pharmacy and fee for service costs. We expect to receive a blended rate increase in Michigan of approximately 2%, effective October 1, 2012.The medical care ratio of the New Mexico health plan increased to 86.9% in the third quarter of 2012, from 84.2% in the third quarter of 2011, primarily as a result of higher inpatient facility costs.The medical care ratio of the Ohio health plan increased to 82.7% for the third quarter of 2012 from 78.4% for the third quarter of 2011. The increase in the Ohio health plan’s medical care ratio was primarily the result of a 2% rate reduction effective January 1, 2012, together with the assumption of the lower margin pharmacy benefit effective October 1, 2011. Although the Ohio health plan’s medical care ratio increased in 2012, the medical margin (measured as total premium revenue less total medical care costs) increased to $52.9 million in the third quarter of 2012, from $50.2 million in the third quarter of 2011.85.2%86.8% in the thirdfirst quarter of 20122013, from 79.3%77.0% in the thirdfirst quarter of 2011. The Utah health plan received2012 primarily due to a Medicaid premium rate reduction of approximately 2%16% (exclusive of the pharmacy benefit added) effective January 1, 2013.The addition of ABD members to the Washington health plan effective July 1, 2012 increased its medical care ratio to 86.4% in the third quarter of 2012 compared with 82.8% in the third quarter of 2011. The higher premium revenue PMPM associated with the ABD membership, however, offset the increased medical care ratio, so that income from operations was consistent between the third quartersexcess of 2012 and 2011. Thepremium revenue over medical care ratiocosts increased to $42.3 million for the Washington health plan’s new ABD membership was 93% in the thirdfirst quarter of 2012.The Wisconsin health plan reported a medical care ratio of 93.5%2013, compared with $34.2 million for the thirdfirst quarter of 2012 compared with 79.1% for the third quarter of 2011. We believe that the state’s premium rates in effect through December 31, 2012 are not adequate to cover the costs of servicing that contract. Accordingly, we recorded a premium deficiency reserve for the Wisconsin health plan at June 30, 2012 of $3.0 million. One-half of that reserve was reversed during the third quarter corresponding with the reduction in the number of months remaining in the rating period. Absent the $1.5 million partial reversal of the premium deficiency reserve, the2012.would have been approximately 102.6% for the third quarter of 2012. Inpatient costsdecreased to 87.2% in the TANF program are the primary driverfirst quarter of the increased costs2013, compared with 98.5% in the thirdfirst quarter of 2012 when compared with the third quarter 2011.. The Wisconsin health plan will receive new premium rates effective January 1, 2013. Company management believes that premiums remain too low to cover medical costs and is working with the state and CMS to achieve actuarially sound rates. Additionally, our Wisconsin plan has implemented provider contracting initiatives and new utilization management techniques as a part of its efforts to improve profitability. If we are unable to achieve rates that are actuarially sound, it may no longer be feasible for us to continue as aprofitability, including in-sourcing the management of behavioral health services. The health plan received a 3% premium rate increase effective January 1, 2013. Additionally, the health plan gained 40,000 members in February and March due to another health plan's recent exit from the state. Three Months Ended September 30, 2012 Premium Revenue Medical Care Costs MCR
Excluding Member
Months (1) Total PMPM Total Expense Medical
Care Ratio Premium Tax
Expense Premium Tax
Expense (4) 1,041 $ 162,389 $ 156.00 $ 156,106 $ 149.96 96.1 % $ — 96.1 % 214 57,429 268.56 48,250 225.64 84.0 (5 ) 84.0 656 160,637 244.91 143,513 218.80 89.3 1,046 89.9 — — — — — — — — 269 84,797 315.49 73,721 274.28 86.9 1,761 88.8 805 306,314 380.20 253,447 314.58 82.7 23,824 89.7 890 350,810 394.10 316,716 355.80 90.3 6,289 91.9 256 73,484 287.21 62,630 244.79 85.2 — 85.2 1,217 �� 274,079 225.29 236,928 194.76 86.4 4,888 88.0 124 16,279 131.21 15,217 122.65 93.5 — 93.5 — 2,500 — 8,043 — — 91 — 5,472 $ 1,488,718 $ 272.08 $ 1,314,571 $ 240.25 88.3 % $ 37,894 90.6 % Three Months Ended September 30, 2011 Premium Revenue Medical Care Costs MCR
Excluding Member
Months (1) Total PMPM Total Expense Medical
Care Ratio Premium Tax
Expense Premium Tax
Expense (4) 1,049 $ 144,888 $ 138.11 $ 128,596 $ 122.58 88.8 % $ 1,114 89.4 % 199 51,569 258.96 46,009 231.04 89.2 (17 ) 89.2 656 165,636 252.46 135,899 207.13 82.0 9,644 87.1 234 58,196 248.80 45,428 194.22 78.1 — 78.1 267 79,644 297.82 67,043 250.70 84.2 2,084 86.4 745 232,616 312.55 182,363 245.02 78.4 18,072 85.0 414 105,577 255.25 98,954 239.24 93.7 1,613 95.2 243 69,763 286.47 55,293 227.05 79.3 — 79.3 1,043 211,131 202.49 174,912 167.76 82.8 3,776 84.4 123 17,269 139.95 13,656 110.67 79.1 — 79.1 — 1,941 — 11,005 — — 88 — 4,973 $ 1,138,230 $ 228.88 $ 959,158 $ 192.87 84.3 % $ 36,374 87.0 % Three Months Ended March 31, 2013 Premium Revenue Medical Care Costs MCR (2) Total PMPM Total PMPM California 1,001 $ 187,880 $ 187.64 $ 159,763 $ 159.56 $ 92 85.1 % Florida 223 58,167 260.15 49,404 220.95 3 84.9 Michigan 652 167,676 257.24 146,748 225.13 1,119 88.1 New Mexico 274 85,798 313.54 72,149 263.66 1,798 85.9 Ohio 726 291,518 401.73 227,454 313.45 22,710 84.6 Texas 832 335,296 402.99 266,449 320.24 5,845 80.9 Utah 259 74,956 289.59 65,029 251.24 — 86.8 Washington 1,250 303,719 243.05 261,397 209.18 5,433 87.6 Wisconsin 200 27,124 135.53 23,664 118.24 — 87.2 — 2,474 — 16,697 — — — 5,417 $ 1,534,608 $ 283.32 $ 1,288,754 $ 237.93 $ 37,000 86.1 % Three Months Ended March 31, 2012 Premium Revenue Medical Care Costs MCR (2) Total PMPM Total PMPM California 1,059 $ 161,685 $ 152.65 $ 141,349 $ 133.45 $ 2,309 88.7 % Florida 208 56,190 269.87 49,569 238.07 7 88.2 Michigan 665 167,906 252.49 134,211 201.82 8,040 84.0 243 56,613 233.32 53,120 218.93 — 93.8 New Mexico 266 81,226 305.63 67,111 252.52 1,953 84.7 Ohio 746 293,525 393.73 236,701 317.51 22,853 87.4 Texas 592 198,236 334.61 180,089 303.97 3,197 92.3 Utah 252 75,138 297.59 57,881 229.24 — 77.0 Washington 1,067 215,610 202.08 181,425 170.04 3,816 85.7 Wisconsin 125 17,142 136.97 16,886 134.92 — 98.5 — 2,135 — 12,646 — 11 — 5,223 $ 1,325,406 $ 253.75 $ 1,130,988 $ 216.53 $ 42,186 88.1 % (1) A member month is defined as the aggregate of each month’s ending membership for the period presented. (2) Our contract with the stateThe MCR represents medical costs as a percentage of Missouri expired without renewal on June 30, 2012. The Missouri health plan’s claims run-out activity subsequent to June 30, 2012,premium revenues, where premium revenue is reported in “Other.”reduced by premium tax expense.(3) “Other” medical care costs also include medically related administrative costs at the parent company. (4)The MCR Excluding Premium Tax Expense represents medical costs as a percentage of premium revenues, where premium revenue is reduced by premium tax expense.Molina Medicaid Solutions SegmentPerformance of the Molina Medicaid Solutions segment was as follows: Three Months Ended September 30, 2012 2011 (In thousands) $ 48,958 $ 39,273 (536 ) (1,545 ) 48,422 37,728 37,004 34,584 1,980 2,069 1,282 1,282 $ 8,156 $ (207 ) Operating income for our Molina Medicaid Solutions segment improved $8.4 million for the three months ended September 30, 2012, compared with the same prior year period. This improvement was primarily the result of stabilization of our newest Medicaid Management Information Systems, or MMIS, in Idaho and Maine. As discussed earlier, our Idaho MMIS has received full federal certification. Among the reasons cited by the Company for purchasing Molina Medicaid Solutions effective May 1, 2010, was the benefit of reducing our reliance on health plan operations. For the quarter ended September 30, 2012, the Molina Medicaid Solutions segment gross margin rate was 23.6%, compared with 11.7% for the Health Plans segment.Nine Months Ended September 30, 2012 Compared with the Nine Months Ended September 30, 2011Health Plans SegmentPremium RevenueIn the nine months ended September 30, 2012, compared with the nine months ended September 30, 2011, premium revenue grew 28.7% primarily due to an increase in membership, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and benefit expansions. Medicare premium revenue was $346.6 million for the nine months ended September 30, 2012, compared with $282.3 million for the nine months ended September 30, 2011.Growth in our ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a percent of total membership, has increased approximately 37% year over year. Premium revenue PMPM also increased in the nine months ended September 30, 2012, as a result of the inclusion of revenue from the pharmacy benefit for our Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue from the inpatient facility and pharmacy benefits across all of our Texas health plan membership effective March 1, 2012.Medical Care CostsThe following table provides the details of consolidated medical care costs for the periods indicated (dollars in thousands except PMPM amounts): Nine Months Ended September 30, 2012 2011 Amount PMPM % of
Total Amount PMPM % of
Total $ 2,666,470 $ 164.09 69.8 % $ 2,050,430 $ 138.40 72.7 % 606,004 37.29 15.9 268,637 18.13 9.5 417,643 25.70 10.9 383,955 25.92 13.6 133,019 8.19 3.4 119,027 8.03 4.2 $ 3,823,136 $ 235.27 100.0 % $ 2,822,049 $ 190.48 100.0 % Our medical care ratio and medical margin deteriorated in the nine months ended September 30, 2012, when compared with the nine months ended September 30, 2011, for the same reasons described above in the “Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011.”
Health Plans Segment Operating Data
The following table summarizes member months, premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in thousands):
| Nine Months Ended September 30, 2012 | MCR Premium | |||||||||||||||||||||||||||||||
| Member | Premium Revenue | Medical Care Costs | Medical Care | Premium Tax | Tax | |||||||||||||||||||||||||||
| Months (1) | Total | PMPM | Total | PMPM | Ratio | Expense | Expense(4) | |||||||||||||||||||||||||
California | 3,156 | $ | 491,718 | $ | 155.80 | $ | 446,694 | $ | 141.53 | 90.8 | % | $ | 5,004 | 91.8 | % | |||||||||||||||||
Florida | 632 | 170,922 | 270.47 | 146,261 | 231.44 | 85.6 | (18 | ) | 85.6 | |||||||||||||||||||||||
Michigan | 1,983 | 491,301 | 247.78 | 419,406 | 211.52 | 85.4 | 11,203 | 87.4 | ||||||||||||||||||||||||
Missouri (2) | 483 | 113,818 | 235.63 | 113,101 | 234.15 | 99.4 | — | 99.4 | ||||||||||||||||||||||||
New Mexico | 801 | 253,418 | 316.56 | 208,668 | 260.66 | 82.3 | 5,971 | 84.3 | ||||||||||||||||||||||||
Ohio | 2,313 | 896,908 | 387.74 | 735,432 | 317.93 | 82.0 | 69,689 | 88.9 | ||||||||||||||||||||||||
Texas | 2,389 | 908,532 | 380.30 | 890,042 | 372.57 | 98.0 | 16,155 | 99.7 | ||||||||||||||||||||||||
Utah | 767 | 225,533 | 293.93 | 183,930 | 239.71 | 81.6 | — | 81.6 | ||||||||||||||||||||||||
Washington | 3,352 | 697,065 | 207.97 | 592,398 | 176.75 | 85.0 | 12,599 | 86.5 | ||||||||||||||||||||||||
Wisconsin | 374 | 52,209 | 139.46 | 54,861 | 146.54 | 105.1 | — | 105.1 | ||||||||||||||||||||||||
Other (3) | — | 7,015 | — | 32,343 | — | — | 350 | — | ||||||||||||||||||||||||
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| 16,250 | $ | 4,308,439 | $ | 265.14 | $ | 3,823,136 | $ | 235.27 | 88.7 | % | $ | 120,953 | 91.3 | % | ||||||||||||||||||
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| Nine Months Ended September 30, 2011 | MCR Premium | |||||||||||||||||||||||||||||||
| Member | Premium Revenue | Medical Care Costs | Medical Care | Premium Tax | Tax | |||||||||||||||||||||||||||
| Months (1) | Total | PMPM | Total | PMPM | Ratio | Expense | Expense(4) | |||||||||||||||||||||||||
California | 3,133 | $ | 418,961 | $ | 133.71 | $ | 359,844 | $ | 114.84 | 85.9 | % | $ | 4,937 | 86.9 | % | |||||||||||||||||
Florida | 588 | 150,561 | 256.13 | 141,872 | 241.35 | 94.2 | 34 | 94.3 | ||||||||||||||||||||||||
Michigan | 2,002 | 495,971 | 247.70 | 399,952 | 199.75 | 80.6 | 29,219 | 85.7 | ||||||||||||||||||||||||
Missouri (2) | 722 | 169,988 | 235.45 | 148,135 | 205.18 | 87.1 | — | 87.1 | ||||||||||||||||||||||||
New Mexico | 808 | 246,223 | 304.71 | 205,659 | 254.51 | 83.5 | 6,472 | 85.8 | ||||||||||||||||||||||||
Ohio | 2,218 | 693,829 | 312.86 | 533,216 | 240.44 | 76.9 | 53,629 | 83.3 | ||||||||||||||||||||||||
Texas | 1,154 | 290,787 | 252.06 | 271,723 | 235.54 | 93.4 | 5,016 | 95.1 | ||||||||||||||||||||||||
Utah | 723 | 215,205 | 297.62 | 167,605 | 231.79 | 77.9 | — | 77.9 | ||||||||||||||||||||||||
Washington | 3,104 | 608,998 | 196.25 | 515,769 | 166.20 | 84.7 | 11,099 | 86.3 | ||||||||||||||||||||||||
Wisconsin | 364 | 51,526 | 141.42 | 47,450 | 130.23 | 92.1 | 44 | 92.2 | ||||||||||||||||||||||||
Other (3) | — | 6,389 | — | 30,824 | — | — | 183 | — | ||||||||||||||||||||||||
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| 14,816 | $ | 3,348,438 | $ | 226.01 | $ | 2,822,049 | $ | 190.48 | 84.3 | % | $ | 110,633 | 87.2 | % | ||||||||||||||||||
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| Our contract with the state of Missouri expired without renewal on June 30, 2012. The Missouri health |
Service revenue before amortization Amortization recorded as reduction of service revenue Service revenue Cost of service revenue General and administrative costs Amortization of customer relationship intangibles recorded as amortization Operating income (loss) encounters than for fee-for-service claims) and changes to state contracts implemented during 2012. 2012. Amortization of purchased intangibles relating to customer relationships is reported as amortization within the heading “Depreciation and Amortization;” Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of “Service Revenue;” and Amortization of capitalized software is recorded within the heading “Cost of Service Revenue.” Nine Months Ended September 30, 2012 2011 (In thousands) $ 133,193 $ 116,567 (842 ) (5,277 ) 132,351 111,290 98,111 105,020 7,187 6,421 3,846 3,846 $ 23,207 $ (3,997 ) Three Months Ended March 31, 2013 2012 (In thousands) Service revenue before amortization $ 50,485 $ 42,358 Amortization recorded as reduction of service revenue (729 ) (153 ) Service revenue 49,756 42,205 Cost of service revenue 39,770 30,494 General and administrative costs 2,351 2,020 Amortization of customer relationship intangibles recorded as amortization 1,282 1,282 Operating income $ 6,353 $ 8,409 improved $27.2decreased $2.1 million for the ninethree months ended September 30, 2012,March 31, 2013, compared with the same prior year periodperiod. The decrease in operating income was primarily the result of a change in the mix of transactions processed from fee-for-service claims to managed care encounters (processing fees are lower for the reasons discussed above in “Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011.”General and administrative expenses decreased to 8.3% of total revenue for the three months ended September 30, 2012, compared with 8.5% of total revenue for the three months ended September 30, 2011. 8.5%8.9% of total revenue for the ninethree months ended September 30, 2012,March 31, 2013, compared with 8.4%8.8% of total revenue for the ninethree months ended September 30, 2011.March 31, 2012. The increased ratio of general and administrative expenses to total revenue for the ninethree months ended September 30, 2012,March 31, 2013, was primarily due to continuing investments in administrative infrastructure relating to our membership growth in Texas, and in anticipation of opportunities among the dual-eligible population.2.5%2.4% of premium revenue for the three months ended September 30, 2012,March 31, 2013, from 3.2% in the three months ended September 30, 2011, and decreased to 2.8% of premium revenue,March 31, 2012. The decrease in the nine months ended September 30, 2012, from 3.3% in the nine months ended September 30, 2011. The quarter and year-to-date decreases were2013 was primarily due to the reduction of premium taxes at the Michigan and California health plans effective in 2012, as discussed in “Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011,” above, and the growth in revenue at our Texas health plan, which is subject to a lower premium tax rate (measured as a percentage of premium revenue) than our consolidated average.
| Three Months Ended September 30, | ||||||||||||||||
| 2012 | 2011 | |||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
Depreciation, and amortization of capitalized software | $ | 11,201 | 0.7 | % | $ | 8,234 | 0.7 | % | ||||||||
Amortization of intangible assets | 4,833 | 0.3 | 5,196 | 0.4 | ||||||||||||
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Depreciation and amortization reported as such in the consolidated statements of income | 16,034 | 1.0 | 13,430 | 1.1 | ||||||||||||
Amortization recorded as reduction of service revenue | 536 | 0.1 | 1,545 | 0.1 | ||||||||||||
Amortization of capitalized software recorded as cost of service revenue | 3,709 | 0.2 | 2,837 | 0.2 | ||||||||||||
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Total | $ | 20,279 | 1.3 | % | $ | 17,812 | 1.4 | % | ||||||||
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| 2012 | 2011 | |||||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
Depreciation, and amortization of capitalized software | $ | 31,524 | 0.7 | % | $ | 22,859 | 0.7 | % | ||||||||
Amortization of intangible assets | 15,922 | 0.4 | 15,728 | 0.5 | ||||||||||||
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Depreciation and amortization reported as such in the consolidated statements of income | 47,446 | 1.1 | 38,587 | 1.2 | ||||||||||||
Amortization recorded as reduction of service revenue | 842 | — | 5,277 | 0.1 | ||||||||||||
Amortization of capitalized software recorded as cost of service revenue | 10,001 | 0.2 | 8,550 | 0.2 | ||||||||||||
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Total | $ | 58,289 | 1.3 | % | $ | 52,414 | 1.5 | % | ||||||||
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| Three Months Ended March 31, | |||||||||||||
| 2013 | 2012 | ||||||||||||
| Amount | % of Total Revenue | Amount | % of Total Revenue | ||||||||||
| (Dollar amounts in thousands) | |||||||||||||
| Depreciation, and amortization of capitalized software | $ | 12,447 | 0.8 | % | $ | 9,472 | 0.7 | % | |||||
| Amortization of intangible assets | 4,118 | 0.3 | 5,553 | 0.4 | |||||||||
| Depreciation and amortization reported as such in the consolidated statements of income | 16,565 | 1.1 | 15,025 | 1.1 | |||||||||
| Amortization recorded as reduction of service revenue | 729 | — | 153 | — | |||||||||
| Amortization of capitalized software recorded as cost of service revenue | 4,505 | 0.3 | 3,161 | 0.2 | |||||||||
| Total | $ | 21,799 | 1.4 | % | $ | 18,339 | 1.3 | % | |||||
Interest expense decreasedincreased to $4.3$13.0 million for the three months ended September 30, 2012,March 31, 2013, from $4.4$4.3 million for the three months ended September 30, 2011, and increased to $12.4 million for the nine months ended September 30,March 31, 2012 from $11.7 million for the nine months ended September 30, 2011, primarily due to interest expense associated with the long-term debt we incurred to purchase our corporate headquarters buildingissuance of the 1.125% Notes in December 2011.February 2013. Interest expense includes non-cash interest expense relating to our convertible senior notes, which amounted to $1.5$3.7 million and $1.4$1.4 million for the three months ended September 30, 2012,March 31, 2013, and 2011, respectively, and $4.42012, respectively. Interest expense in 2013 also included the immediate recognition of approximately $6 million and $4.1of interest expense relating to debt issuance costs. The remainder of the fees associated with that issuance, amounting to approximately $12 million, forwill be expensed over the nine months ended September 30, 2012, and 2011, respectively
seven-year life of the 1.125% Notes.
abandonment transaction is effected, and which amounts we intend to write off.
March 31, 2012
.Reconciliation of Non-GAAP(1)March 31, 2013 to GAAP Financial Measures
EBITDA(2)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net income (loss) | $ | 3,364 | $ | 18,950 | $ | (15,853 | ) | $ | 53,778 | |||||||
Add back: | ||||||||||||||||
Depreciation and amortization reported in the consolidated statements of cash flows | 20,279 | 17,812 | 58,289 | 52,414 | ||||||||||||
Interest expense | 4,315 | 4,380 | 12,421 | 11,666 | ||||||||||||
Income tax (benefit) expense | (492 | ) | 10,236 | (15,228 | ) | 30,832 | ||||||||||
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EBITDA | $ | 27,466 | $ | 51,378 | $ | 39,629 | $ | 148,690 | ||||||||
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Capital Resources
At September 30, 2012, the parent company — Molina Healthcare, Inc. — held cash and investments of approximately $41.0was $21.2 million compared with approximately $23.6$42.7 million for the
$75.1 million from the sale of warrants, partially offset by $149.3 million paid for the purchased call option relating to the 1.125% Notes, $50.0 million paid for repurchases of our common stock, and $40.0 million used to repay our Credit Facility.
Effective as of October 26, 2011, our board of directors authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior notes due 2014 (see discussion of “Convertible Senior Notes” below). This repurchase program expired October 25, 2012. No securities were purchased under this program in the nine months ended September 30, 2012.
We believe that our cash resources Credit Facility (as defined below) and internally generated funds will be sufficient to support our operations, regulatory requirements, and capital expenditures for at least the next 12 months.
On September 9, 2011, we entered into a credit agreement for a $170 $572.9 million revolving credit facility (the “Credit Facility”) with various lendersat March 31, 2013, and U.S. Bank$549.7 million at December 31, 2012. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $450.5 million and $46.9 million as of March 31, 2013, and December 31, 2012, respectively.
The Credit Facility has a termHMOs and have not formally given notice of five years under which all amounts outstanding will be duetheir intention to do so. Such requirements, if adopted by California and payable on September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, weFlorida, may increase the Credit Facility to up to $195 million. minimum capital required for those states.
| Total | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||||
| 1.125% Notes | $ | 550,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 550,000 | |||||||||||||
| 3.75% Notes | 187,000 | — | 187,000 | — | — | — | — | ||||||||||||||||||||
| Term loan | 47,179 | 863 | 1,206 | 1,259 | 1,309 | 1,372 | 41,170 | ||||||||||||||||||||
| $ | 784,179 | $ | 863 | $ | 188,206 | $ | 1,259 | $ | 1,309 | $ | 1,372 | $ | 591,170 | ||||||||||||||
Borrowings under1.125% Call Option, and will be entitled to receive from the Credit Facility bear interest based, at our election, on the base rate pluscounterparties an applicable margin or the Eurodollar rate. The base rate is, for any day, a rateamount of interest per annumcash, generally equal to the highestamount by which the market price per share of (i)common stock exceeds the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sumstrike price of the federal funds rate for such day plus 0.50% per annum and (iii)1.125% Call Options during the Eurodollar rate (without giving effectrelevant valuation period. The strike price under the 1.125% Call Option is initially equal to the applicable margin) for a one month interestconversion price of the 1.125% Notes. Additionally, if the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the 160 trading day measurement period on such day (or if such day is not a business day, the immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which Eurodollar deposits are offered in the interbank Eurodollar market plus an applicable margin. The applicable margins range between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon our leverage ratio. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility,1.125% Warrants, we are requiredwill be obligated to payissue to the counterparties a quarterly commitment feenumber of 0.25%shares equal in value to 0.50% (based upon our leverage ratio)the product of the unused amount by which such market value exceeds such strike price and 1/160th of the lenders’ commitments under the Credit Facility.
Our obligations under the Credit Facility are secured by a lien on substantially allaggregate number of shares of our assets,common stock underlying the 1.125% Warrants transactions and the additional 1.125% Warrants transactions, subject to a share delivery cap. We will not receive any additional proceeds if the 1.125% Warrants are exercised. Pursuant to the 1.125% Warrants transactions, we issued 13,490,236 warrants with strike price of $53.8475 per share. The number of warrants and the exceptionstrike price are subject to adjustment under certain circumstances. On April 22, 2013, in order to clarify certain accounting matters with respect to the 1.125% Warrants, we entered into amended and restated warrant confirmations with JPMorgan Chase Bank and Bank of certainAmerica, copies of our real estate assets, and by a pledge of the capital stock or membership interests of our operating subsidiaries and health plans (with the exception of the California health plan).
The Credit Facility includes usual and customary covenants for credit facilities ofwhich are filed as Exhibits 10.1 through 10.4 to this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain as of the end of any fiscal quarter (calculated for each four consecutive fiscal quarter period) a ratio of total consolidated debt to total consolidated EBITDA, as defined in the Credit Facility, of not more than 2.75 to 1.00, and a fixed charge coverage ratio of not less than 1.75 to 1.00. At September 30, 2012, we were in compliance with all financial covenants under the Credit Facility.
In the event of a default, including cross-defaults relating to specified other debt in excess of $20.0 million, the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding, including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and all rights and remedies created under the Credit Facility or applicable law.
Quarterly Report.
As$187.0 million of September 30, 2012, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the “Notes”) remain outstanding.3.75% Notes) outstanding as of March 31, 2013 and December 31, 2012, respectively. The 3.75% Notes rank equally in right of payment with our existing and future senior indebtedness. The 3.75% Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 31.9601 shares of our common stock per $1,000one thousand dollar principal amount of the 3.75% Notes. This represents aan initial conversion price of approximately $31.29$31.29 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.
On
In May$40.0 million of the net proceeds from the offering of the 1.125% Notes to repay all of the outstanding indebtedness under our $170 million revolving Credit Facility, with various lenders and U.S. Bank National Association, as Line of Credit Issuer, Swing Line Lender, and Administrative Agent. As of December 31, 2012, we entered into a $42.5there was $40.0 million notional amount interest rate swap agreement, or Swap Agreement, outstanding under the Credit Facility.
Regulatory Capital and Dividend Restrictions
Our health plans are subject to state laws and regulations that, among other things, require
The National Association2014.
As of September 30, 2012, our health plans had aggregate statutory capital and surplus of approximately $525.4 million compared with the required minimum aggregate statutory capital and surplus of approximately $270.0 million. All of our health plans1.125% Notes, there were in compliance with the minimum capital requirements at September 30, 2012. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.
Contractual Obligations
In our Annual Report on Form 10-K for the year ended December 31, 2011, we reported on our contractual obligations as of that date. There have been no material changes to this previously filed information outside the ordinary course of business during the three months ended March 31, 2013. For further discussion and maturities of our contractual obligations since that report.
long-term debt, see Note 10 of Notes to the Consolidated Financial Statements.
Health plan contractual provisions that may limit revenue based upon the costs incurred or the profits realized under a specific contract;
Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
The recognition of revenue and costs associated with contracts held by our Molina Medicaid Solutions segment; and
The determination of medical claims and benefits payable.
. New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin New Mexico Ohio Texas Wisconsin Each contract calls for the provision of its own specific set of services. While all contracts support the system of record for state MMIS, the actual services we provide vary significantly between contracts; and The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our new contracts (commercial off-the-shelf technology solutions). Transaction processing costs Employee costs incurred in performing transaction services Vendor costs incurred in performing transaction services Costs incurred in performing required monitoring of and reporting on contract performance Costs incurred in maintaining and processing member and provider eligibility Costs incurred in communicating with members and providers assets Fee-for-service claims incurred but not paid (IBNP) Capitation payable Pharmacy Other (Decrease) Increase in Estimated Completion Factors (6%) (4%) (2%) 2% 4% 6% (Decrease) Increase in Trended Per member Per Month Cost Estimates (6%) (4%) (2%) 2% 4% 6% the ordinary. estimates. In estimating our claims liability at contract.contract:These are contractual provisions that require the health plan to return premiums to the extent that certain thresholds are not met. In some instances premiums are returned when medical costs fall below a certain percentage of gross premiums; or when administrative costs or profits exceed a certain percentage of gross premiums. In other instances, premiums are partially determined by the acuity of care provided to members (risk adjustment). To the extent that our expenses and profits change from the amounts previously reported (due to changes in estimates), our revenue earned for those periods willwillwould lead to changes in our estimates of revenue. In general, a change in estimate relating to expense or profit would offset any related change in estimate to premium, resulting in no or small impact to net income. The following contractual provisions fall into this category:$0.5 million and $1.0$0.3 million at September 30, 2012,both March 31, 2013, and December 31, 2011, respectively.2012September 30, 2012,March 31, 2013, and December 31, 2011,2012, we had not recorded any liability under the terms of this contract provision since behavioral health expenses are not less than the contractual floor.September 30, 2012,March 31, 2013, and December 31, 2011,2012, we had not recorded any liability under the terms of these contract provisions.$3.2$3.1 million and $0.7$3.2 million pursuant to our profit-sharing agreement with the state of Texas at September 30, 2012,March 31, 2013, and December 31, 2011,2012, respectively.both September 30, 2012, and December 31, 2011,2012, we had not recorded any liability under the terms of this contract provision since medical expenses arewere not less than the contractual floor.$1.7$0.3 million and $5.0 millionas of December 31, 2012 for anticipated Medicare risk adjustment premiums as of September 30, 2012, and December 31, 2011, respectively.premiums.met.met:These are contract provisions that allow us to earn additional premium revenue in certain states if we achieve certain quality-of-care or administrative measures. We estimate the amount of revenue that will ultimately be realized for the periods presented based on our experience and expertise in meeting the quality and administrative measures as well as our ongoing and current monitoring of our progress in meeting those measures. The amount of the revenue that we will realize under these contractual provisions is determinable based upon that experience. The following contractual provisions fall into this category:may beis earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures established by the state.effective beginning in 2011,incremental revenue of up to 3.25% of thetotal premium is withheld by the state. The withheld premiums canmay be earned by the health plan by meetingif certain performance measures.measures are met. These performance measures are generally linked to various quality-of-care measures dictated by the state.September 30, 2012March 31, 2013 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 September 30, 2012. Three Months Ended September 30, 2012 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 560 $ 532 $ — $ 532 $ 84,797 2,824 1,412 — 1,412 306,314 17,685 10,453 — 10,453 350,810 419 — 246 246 16,279 $ 21,488 $ 12,397 $ 246 $ 12,643 $ 758,200 Three Months Ended September 30, 2011 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 566 $ 345 $ 46 $ 391 $ 79,644 2,160 1,719 — 1,719 232,616 400 400 — 400 105,577 420 362 — 362 17,269 $ 3,546 $ 2,826 $ 46 $ 2,872 $ 435,106 Nine Months Ended September 30, 2012 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 1,676 $ 1,350 $ 658 $ 2,008 $ 253,418 8,222 6,810 966 7,776 896,908 41,687 30,487 — 30,487 908,532 1,284 — 492 492 52,209 $ 52,869 $ 38,647 $ 2,116 $ 40,763 $ 2,111,067 Nine Months Ended September 30, 2011 Maximum
Available Quality
Incentive
Premium -
Current Year Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year Total Quality
Incentive
Premium Revenue
Recognized Total Revenue
Recognized (In thousands) $ 1,712 $ 1,219 $ 364 $ 1,583 $ 246,223 7,472 6,152 3,501 9,653 693,829 1,560 1,560 — 1,560 290,787 1,292 362 — 362 51,526 $ 12,036 $ 9,293 $ 3,865 $ 13,158 $ 1,282,365 Three Months Ended March 31, 2013 (In thousands) New Mexico $ 585 $ 332 $ 108 $ 440 $ 85,798 Ohio 3,005 1,052 — 1,052 291,518 Texas 16,264 13,512 5,995 19,507 335,296 Wisconsin 761 — 609 609 27,124 $ 20,615 $ 14,896 $ 6,712 $ 21,608 $ 739,736 Three Months Ended March 31, 2012 (In thousands) New Mexico $ 555 $ 336 $ 28 $ 364 $ 81,226 Ohio 2,678 2,678 966 3,644 293,525 Texas 5,750 5,750 — 5,750 198,236 Wisconsin 416 — — — 17,142 $ 9,399 $ 8,764 $ 994 $ 9,758 $ 590,129 or DDI,(DDI) of a Medicaid Management Information System or MMIS.(MMIS). An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing or BPO(BPO) arrangement. While providing BPO services (which include claims payment and eligibility processing), we also provide the state with other services including both hosting and support and maintenance. Our Molina Medicaid Solutions contracts may extend over a number of years, particularly in circumstances where we are delivering extensive and complex DDI services, such as the initial design, development and implementation of a complete MMIS. For example, the terms of our most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in total, consisting of two years allocated for the delivery of DDI services, followed by five years for the performance of BPO services. We receive progress payments from the state during the performance of DDI services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts – which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system enhancements) – are shorter in duration than our Idaho and Maine contracts.arrangements under the scopearrangements.adopted a new accounting standard that amends the guidance on the accounting for multiple-element arrangements. Pursuant to the new standard,evaluate each required deliverable is evaluatedunder our multiple-element service arrangements to determine whether it qualifies as a separate unit of accounting whichaccounting. Such evaluation is generally based on whether the deliverable has standalone value to the customer. In addition to standalone value, previous guidance also required objective and reliable evidence of fair value of a deliverable in order to treat the deliverable as a separate unit of accounting. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent. We have adopted this guidance on a prospective basis for all new or materially modified revenue arrangements with multiple deliverables entered into on or after January 1, 2011. Our adoption of this guidance has not impacted the timing or pattern of our revenue recognition in 2011 or 2012. Also, there would have been no change in revenue recognized relating to multiple-element arrangements if we had adopted this guidance retrospectively for contracts entered into prior to January 1, 2011.For contracts entered into prior to January 1, 2011, objective and reliable evidence of fair value would be required, in addition to DDI standalone value which we do not have, in order to treat DDI as a separate unit of accounting. We lack objective and reliable evidence of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:assets. September 30,
2012 Dec. 31,
2011 September 30,
2011 (In thousands) $ 414,725 $ 301,020 $ 283,160 55,314 53,532 49,259 42,681 26,178 16,615 23,743 21,746 12,021 $ 536,463 $ 402,476 $ 361,055 March 31,
2013 December 31, 2012 March 31,
2012 (In thousands) Fee-for-service claims incurred but not paid (IBNP) $ 378,926 $ 377,614 $ 347,307 Capitation payable 45,048 49,066 37,289 Pharmacy 39,495 38,992 38,443 Other 27,676 28,858 32,794 $ 491,145 $ 494,530 $ 455,833 $414.7$378.9 million of our total medical claims and benefits payable of $536.5$491.1 million as of September 30, 2012.March 31, 2013. Excluding amounts that we anticipate paying on behalf of a capitated provider in Ohio (which we will subsequently withhold from that provider’s monthly capitation payment), our IBNP liability at September 30, 2012,March 31, 2013, was $408.3$372.0 million.September 30, 2012March 31, 2013 that would have resulted had we changed our completion factors for the fifth through the twelfth months preceding September 30, 2012,March 31, 2013, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in thousands. Increase (Decrease) in
Medical Claims and
Benefits Payable $ 144,100 96,067 48,033 (48,033 ) (96,067 ) (144,100 ) (Decrease) Increase in Estimated Completion Factors (6)% $ 156,550 (4)% 104,366 (2)% 52,183 2% (52,183 ) 4% (104,366 ) 6% (156,550 ) September 30, 2012March 31, 2013 that would have resulted had we altered our trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in thousands. Increase (Decrease) in
Medical Claims and
Benefits Payable $ (76,155 ) (50,770 ) (25,385 ) 25,385 50,770 76,155 (Decrease) Increase in Trended Per member Per Month Cost Estimates (6)% $ (76,431 ) (4)% (50,954 ) (2)% (25,477 ) 2% 25,477 4% 50,954 6% 76,431 46.346.4 million diluted shares outstanding for the ninethree months ended September 30, 2012.March 31, 2013. Assuming a hypothetical 1% change in completion factors from those used in our calculation of IBNP at September 30, 2012,March 31, 2013, net income for the ninethree months ended September 30, 2012March 31, 2013 would increase or decrease by approximately $15.0$16.3 million, or $0.32$0.35 per diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at September 30, 2012,March 31, 2013, net income for the ninethree months ended September 30, 2012March 31, 2013 would increase or decrease by approximately $7.9$8.0 million, or $0.17 per diluted share. The corresponding figures for a 5% change in completion factors and PMPM cost estimates would be $75.1$81.5 million, or $1.62$1.76 per diluted share, and $40.0$39.8 million, or $0.86 per diluted share, respectively.$15.0$16.3 million, it is likely that trended PMPM costs would be underestimated, resulting in an additional overstatement of net income.base reserves have been adequately set,our initial estimate of claims incurred but not paid (IBNP) is accurate, we believe that amounts ultimately paid out shouldwould generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion in that liability of the allowance for adverse claims development and the accrued cost of settling those claims. However,Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will not be higher or lower than this 8% to 10% range, as shown by our resultsrange. For example, for the yearthree months ended DecemberMarch 31, 2011, when 2012, the amounts ultimately paid out were less than the amount of the reserves we had established as of December 31, 2011 by9.1%. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the beginningreasons for a change in estimate - we only know when the circumstances for any one or more factors are out of that year by 14.6%.20122013 and 2011 2012were less than what we had expected when we had established our reserves. While many related factors working in conjunction with one another determine the specific reasons for the overestimationaccuracy of our liabilities were differentestimates, we are seldom able to quantify the impact that any single factor has on a change in eachestimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of the periods presented,individual factors on changes in general the overestimations were tied to our assessment of specific circumstances at our individual health plans which were unique to those reporting periods.$37.7$58.4 million for the ninethree months ended September 30, 2012.March 31, 2013. This amount represents our estimate as of September 30, 2012March 31, 2013 of the extent to which our initial estimate of medical claims and benefits payable at December 31, 20112012 was more than the amount that will ultimately be paid out in satisfaction of that liability. TheWe believe the overestimation of our claims liability at December 31, 20112012 was due primarily to the following factors:ForOffsetting somethe overestimation items described above,our liability for medical claims and benefits payable was partially offset by an underestimation of that liability at our Missouri health plan, reserves were underestimated as a result of the costs associated with an unusually large number of premature infants during the fourth quarter of 2011.We recognized favorable prior period claims development in the amount of $47.0 million for the three months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at June 30, 2012 was due primarily to the following factors:For our Texas health plan, we had only four months of paid claims data for the expansion regions that were added March 1, 2012. As a result, we overestimated the medical costs for those regions.Our contract with the state of Missouri expired without renewal on June 30, 2012; however we continue to be liable for services rendered to members who were admitted to the hospital on or before June 30, 2012, until the earlier of 90 days or their date of discharge. We overestimated the impact of 90 days of run-out claims for these members.For our Washington health plan, we overpaid certain outpatient claims during 2011 and early 2012, disrupting our payment patterns and leading to an overstatement of our liability at June 30, 2012.For our Michigan health plan, certain inpatient claims with an unusually long run-out were paid in late 2011 and early 2012, resulting in an artificial increase in the amount of time we typically apply for claims payments when estimating the reserve. In the process of developing the reserves as of June 30, 2012, an adjustment was applied to offset these late claim payments, but the adjustment did not completely remove the effect. As a result, reserves were overstated as of June 30, 2012.We recognized favorable prior period claims development in the amount of $49.5 million and $51.8 million for the nine months ended September 30, 2011, and the year ended December 31, 2011, respectively. This was primarily caused by the overestimation of our liability for claims and medical benefits payable at December 31, 2010, as a result of the following factors:We overestimated the impact of a buildup in claims inventory in Ohio.We overestimated the impact of the settlement of disputed provider claims in California.We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule reduction in New Mexico effective November 2010.September 30, 2012,March 31, 2013, we adjusted our base calculation to take account of the following factors which we believe are reasonably likely to change our final claims liability amount:
OurIn our Texas health plan, although the reduction in STAR+PLUS membership nearly doubled effectivehas leveled off in 2013, we have seen a reduction in per member per month (PMPM) cost for outpatient services and an increase in PMPM costs for inpatient services over the past six to nine months. We have estimated the impact of these shifts in cost in our March 1, 2012. In addition, effective March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not previously responsible. Reserves for new coverage and new regions are now based on the newly developing claims lag patterns and comparisons with similar coverage in other regions with more historical data. The lag patterns are still incomplete and therefore the true reserve liability is more uncertain than usual.
Our claims inventory had increased significantlydouble in size during the first quarterfour months of 2013. This new membership is transitioning to our health plan from a terminated health plan. We enrolled approximately 40,000 new members in February and March 2013.We have computed a separate reserve analysis for these members and have noted that paid claims are less than what we would expect for newly transitioned members. Therefore, we have increased the reserves for this membership, in anticipation of higher claims costs later than usual for these members.
respective periods generally offset the benefit from the prior period.
| Nine Months Ended September 30, | Three Months Ended September 30, | Year Ended | ||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Dec. 31, 2011 | ||||||||||||||||
| (Dollars in thousands, except per-member amounts) | ||||||||||||||||||||
Balances at beginning of period | $ | 402,476 | $ | 354,356 | $ | 525,538 | $ | 341,613 | $ | 354,356 | ||||||||||
Components of medical care costs related to: | ||||||||||||||||||||
Current period | 3,860,825 | 2,871,515 | 1,361,539 | 990,449 | 3,911,803 | |||||||||||||||
Prior periods | (37,689 | ) | (49,466 | ) | (46,968 | ) | (31,291 | ) | (51,809 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total medical care costs | 3,823,136 | 2,822,049 | 1,314,571 | 959,158 | 3,859,994 | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Payments for medical care costs related to: | ||||||||||||||||||||
Current period | 3,332,896 | 2,522,374 | 875,236 | 670,066 | 3,516,994 | |||||||||||||||
Prior periods | 356,253 | 292,976 | 428,410 | 269,650 | 294,880 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total paid | 3,689,149 | 2,815,350 | 1,303,646 | 939,716 | 3,811,874 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balances at end of period | $ | 536,463 | $ | 361,055 | $ | 536,463 | $ | 361,055 | $ | 402,476 | ||||||||||
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|
|
|
|
|
|
|
| |||||||||||
Benefit from prior period as a percentage of: | ||||||||||||||||||||
Balance at beginning of period | 9.4 | % | 14.0 | % | 8.9 | % | 9.2 | % | 14.6 | % | ||||||||||
Premium revenue | 0.9 | % | 1.5 | % | 3.2 | % | 2.7 | % | 1.1 | % | ||||||||||
Total medical care costs | 1.0 | % | 1.8 | % | 3.6 | % | 3.3 | % | 1.3 | % | ||||||||||
Claims Data: | ||||||||||||||||||||
Days in claims payable, fee for service | 45 | 39 | 45 | 39 | 40 | |||||||||||||||
Number of members at end of period | 1,826,000 | 1,678,000 | 1,826,000 | 1,678,000 | 1,697,000 | |||||||||||||||
Number of claims in inventory at end of period | 163,600 | 132,200 | 163,600 | 132,200 | 111,100 | |||||||||||||||
Billed charges of claims in inventory at end of period | $ | 304,600 | $ | 187,000 | $ | 304,600 | $ | 187,000 | $ | 207,600 | ||||||||||
Claims in inventory per member at end of period | 0.09 | 0.08 | 0.09 | 0.08 | 0.07 | |||||||||||||||
Billed charges of claims in inventory per member at end of period | $ | 166.81 | $ | 111.44 | $ | 166.81 | $ | 111.44 | $ | 122.33 | ||||||||||
Number of claims received during the period | 15,455,000 | 12,864,800 | 5,079,200 | 4,149,600 | 17,207,500 | |||||||||||||||
Billed charges of claims received during the period | $ | 14,339,700 | $ | 10,573,900 | $ | 4,951,000 | $ | 3,610,700 | $ | 14,306,500 | ||||||||||
| Three Months Ended March 31, | Year Ended December 31, 2012 | ||||||||||
| 2013 | 2012 | ||||||||||
| (Dollars in thousands, except per-member amounts) | |||||||||||
| Balances at beginning of period | $ | 494,530 | $ | 402,476 | $ | 402,476 | |||||
| Components of medical care costs related to: | |||||||||||
| Current period | 1,347,181 | 1,167,580 | 5,136,055 | ||||||||
| Prior periods | (58,427 | ) | (36,592 | ) | (39,295 | ) | |||||
| Total medical care costs | 1,288,754 | 1,130,988 | 5,096,760 | ||||||||
| Payments for medical care costs related to: | |||||||||||
| Current period | 916,426 | 750,994 | 4,649,363 | ||||||||
| Prior periods | 375,713 | 326,637 | 355,343 | ||||||||
| Total paid | 1,292,139 | 1,077,631 | 5,004,706 | ||||||||
| Balances at end of period | $ | 491,145 | $ | 455,833 | $ | 494,530 | |||||
| Benefit from prior period as a percentage of: | |||||||||||
| Balance at beginning of period | 11.8 | % | 9.1 | % | 9.8 | % | |||||
| Premium revenue | 3.8 | % | 2.8 | % | 0.7 | % | |||||
| Total medical care costs | 4.5 | % | 3.2 | % | 0.8 | % | |||||
| Claims Data: | |||||||||||
| Days in claims payable, fee for service | 38 | 44 | 40 | ||||||||
| Number of members at end of period | 1,820,000 | 1,825,000 | 1,797,000 | ||||||||
| Number of claims in inventory at end of period | 135,400 | 260,800 | 122,700 | ||||||||
| Billed charges of claims in inventory at end of period | $ | 236,700 | $ | 403,800 | $ | 255,200 | |||||
| Claims in inventory per member at end of period | 0.07 | 0.14 | 0.07 | ||||||||
| Billed charges of claims in inventory per member at end of period | $ | 130.05 | $ | 221.26 | $ | 142.01 | |||||
| Number of claims received during the period | 5,271,000 | 4,855,600 | 20,842,400 | ||||||||
| Billed charges of claims received during the period | $ | 5,170,700 | $ | 4,337,000 | $ | 19,429,300 | |||||
Compliance Costs
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
10-K.
We used a portion of the net proceeds in this offering to repurchase $50.0 million of our common stock in negotiated transactions with institutional investors in the offering, concurrently with the pricing of the offering. On February 12, 2013, we repurchased a total of 1,624,959 shares at $30.77 per share, which was our closing stock price on that date.
extends through December 31, 2014.
| Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
July 1—July 30 | 13,220 | $ | 26.48 | — | $ | — | ||||||||||
August 1—August 31 | 2,444 | $ | 24.44 | — | $ | — | ||||||||||
September 1—September 30 | 638 | $ | 24.24 | — | $ | — | ||||||||||
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| |||||||||||||
Total | 16,302 | $ | 26.09 | — | ||||||||||||
|
|
|
| |||||||||||||
Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
| January 1—January 31 | 3,445 | $ | 27.06 | — | $ | 75,000,000 | |||||||
| February 1—February 28 | 1,626,960 | $ | 30.77 | — | $ | 75,000,000 | |||||||
| March 1—March 31 | 140,641 | $ | 31.95 | — | $ | 75,000,000 | |||||||
| Total | 1,771,046 | $ | 30.85 | — | |||||||||
| (a) | During the three months ended |
Exhibit No. | Title | |
| 10.1 | Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch. | |
| 10.2 | Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | |
| 10.3 | Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch. | |
| 10.4 | Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 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. | |
| 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. | |
| 101.INS (1) | XBRL Taxonomy Instance Document. | |
| 101.SCH (1) | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL (1) | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF (1) | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB (1) | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE (1) | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| (1) | Pursuant to Rule 406T of Regulation S-T, XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
/s/ JOSEPH M. MOLINA, M.D. /s/ JOHN C. MOLINA, J.D. Exhibit No. Title MOLINA HEALTHCARE, INC. (Registrant) Dated: October 26, 2012May 2, 2013 Joseph M. Molina, M.D. Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) Dated: October 26, 2012May 2, 2013 John C. Molina, J.D. Chief Financial Officer and Treasurer (Principal Financial Officer) 10.1 Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch. 10.2 Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. 10.3 Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch. 10.4 Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. 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. 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. 101.INS (1) XBRL Taxonomy Instance Document. 101.SCH (1) XBRL Taxonomy Extension Schema Document. 101.CAL (1) XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF (1) XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB (1) XBRL Taxonomy Extension Label Linkbase Document. 101.PRE (1) XBRL Taxonomy Extension Presentation Linkbase Document. (1) Pursuant to Rule 406T of Regulation S-T, XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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