e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended
March 31, 2007
|
Or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number:
001-31719
Molina Healthcare,
Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
13-4204626
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
One Golden Shore Drive,
Long Beach, California
(Address of principal
executive offices)
|
|
90802
(Zip Code)
|
(562) 435-3666
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
Large
accelerated filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares of the issuers Common Stock, par
value $0.001 per share, outstanding as of May 6, 2007,
was 28,224,855.
MOLINA
HEALTHCARE, INC.
Index
2
PART I
FINANCIAL INFORMATION
Item 1: Financial
Statements.
MOLINA
HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
419,967
|
|
|
$
|
403,650
|
|
Investments
|
|
|
83,090
|
|
|
|
81,481
|
|
Receivables
|
|
|
107,993
|
|
|
|
110,835
|
|
Income tax receivable
|
|
|
3,400
|
|
|
|
7,960
|
|
Deferred income taxes
|
|
|
720
|
|
|
|
313
|
|
Prepaid expenses and other current
assets
|
|
|
11,512
|
|
|
|
9,263
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
626,682
|
|
|
|
613,502
|
|
Property and equipment, net
|
|
|
42,465
|
|
|
|
41,903
|
|
Goodwill and intangible assets, net
|
|
|
139,877
|
|
|
|
143,139
|
|
Restricted investments
|
|
|
23,354
|
|
|
|
20,154
|
|
Receivable for ceded life and
annuity contracts
|
|
|
32,138
|
|
|
|
32,923
|
|
Other assets
|
|
|
12,521
|
|
|
|
12,854
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
877,037
|
|
|
$
|
864,475
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Medical claims and benefits payable
|
|
$
|
280,188
|
|
|
$
|
290,048
|
|
Deferred revenue
|
|
|
35,339
|
|
|
|
18,120
|
|
Accounts payable and accrued
liabilities
|
|
|
55,538
|
|
|
|
46,725
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
371,065
|
|
|
|
354,893
|
|
Long-term debt
|
|
|
30,000
|
|
|
|
45,000
|
|
Deferred income taxes
|
|
|
3,303
|
|
|
|
6,700
|
|
Liability for ceded life and
annuity contracts
|
|
|
32,138
|
|
|
|
32,923
|
|
Other long-term liabilities
|
|
|
8,416
|
|
|
|
4,793
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
444,922
|
|
|
|
444,309
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value; 80,000,000 shares authorized; issued and
outstanding: 28,198,876 shares at March 31, 2007 and
28,119,026 shares at December 31, 2006
|
|
|
28
|
|
|
|
28
|
|
Preferred stock, $0.001 par
value; 20,000,000 shares authorized, no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
176,675
|
|
|
|
173,990
|
|
Accumulated other comprehensive loss
|
|
|
(219
|
)
|
|
|
(337
|
)
|
Retained earnings
|
|
|
276,021
|
|
|
|
266,875
|
|
Treasury stock
(1,201,174 shares, at cost)
|
|
|
(20,390
|
)
|
|
|
(20,390
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
432,115
|
|
|
|
420,166
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
877,037
|
|
|
$
|
864,475
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
$
|
556,235
|
|
|
$
|
449,294
|
|
Investment income
|
|
|
6,668
|
|
|
|
4,082
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
562,903
|
|
|
|
453,376
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Medical care costs:
|
|
|
|
|
|
|
|
|
Medical services
|
|
|
110,891
|
|
|
|
74,858
|
|
Hospital and specialty services
|
|
|
308,142
|
|
|
|
262,870
|
|
Pharmacy
|
|
|
57,444
|
|
|
|
45,519
|
|
|
|
|
|
|
|
|
|
|
Total medical care costs
|
|
|
476,477
|
|
|
|
383,247
|
|
General and administrative expenses
|
|
|
63,388
|
|
|
|
51,213
|
|
Depreciation and amortization
|
|
|
6,443
|
|
|
|
4,762
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
546,308
|
|
|
|
439,222
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
16,595
|
|
|
|
14,154
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,125
|
)
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(1,125
|
)
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,470
|
|
|
|
13,740
|
|
Income tax expense
|
|
|
5,878
|
|
|
|
5,150
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,592
|
|
|
$
|
8,590
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,152
|
|
|
|
27,855
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,275
|
|
|
|
28,141
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,592
|
|
|
$
|
8,590
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,443
|
|
|
|
4,762
|
|
Amortization of capitalized credit
facility fees
|
|
|
251
|
|
|
|
211
|
|
Deferred income taxes
|
|
|
(2,999
|
)
|
|
|
(1,835
|
)
|
Stock-based compensation
|
|
|
1,867
|
|
|
|
1,227
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,842
|
|
|
|
(3,352
|
)
|
Prepaid expenses and other current
assets
|
|
|
(2,249
|
)
|
|
|
706
|
|
Medical claims and benefits payable
|
|
|
(9,860
|
)
|
|
|
18,225
|
|
Deferred revenue
|
|
|
17,219
|
|
|
|
5,445
|
|
Accounts payable and accrued
liabilities
|
|
|
8,452
|
|
|
|
391
|
|
Income taxes
|
|
|
4,346
|
|
|
|
6,602
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
35,904
|
|
|
|
40,972
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchases of equipment
|
|
|
(3,645
|
)
|
|
|
(3,663
|
)
|
Purchases of investments
|
|
|
(12,825
|
)
|
|
|
(34,015
|
)
|
Sales and maturities of investments
|
|
|
11,402
|
|
|
|
35,739
|
|
(Increase) decrease in restricted
cash
|
|
|
(3,200
|
)
|
|
|
37
|
|
Increase (decrease) in other
long-term liabilities
|
|
|
3,177
|
|
|
|
(66
|
)
|
Increase in other assets
|
|
|
(314
|
)
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(5,405
|
)
|
|
|
(2,965
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Repayment of amounts borrowed under
credit facility
|
|
|
(15,000
|
)
|
|
|
|
|
Tax benefit from exercise of
employee stock options recorded as additional paid-in capital
|
|
|
428
|
|
|
|
467
|
|
Proceeds from exercise of stock
options and employee stock purchases
|
|
|
390
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(14,182
|
)
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
16,317
|
|
|
|
39,144
|
|
Cash and cash equivalents at
beginning of period
|
|
|
403,650
|
|
|
|
249,203
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
419,967
|
|
|
$
|
288,347
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
553
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,203
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash investing and
financing activities:
|
|
|
|
|
|
|
|
|
Change in unrealized loss (gain) on
investments
|
|
$
|
186
|
|
|
$
|
(23
|
)
|
Deferred taxes
|
|
|
(68
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized loss
(gain) on investments
|
|
$
|
118
|
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Value of stock issued for employee
compensation earned in previous year
|
|
$
|
|
|
|
$
|
2,178
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of
Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes
|
|
$
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset related to
business purchase
|
|
$
|
873
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
(Unaudited)
March 31, 2007
Molina Healthcare, Inc. (the Company) is a multi-state managed
care organization that arranges for the delivery of health care
services to persons eligible for Medicaid and other
government-sponsored programs for low-income families and
individuals. Beginning in January 1, 2006, we began to
serve a very small number of our members who are eligible to
receive health care benefits under both the Medicaid and the
Medicare programs members who are commonly known as
dual eligibles. We operate our business through
wholly owned subsidiaries licensed as health maintenance
organizations, or HMOs, in the states of California, Indiana
(through December 31, 2006), Michigan, New Mexico, Ohio,
Texas, Utah, and Washington.
Our Texas HMO began serving members in September 2006. The
Medicaid contract of our Indiana HMO expired without renewal on
December 31, 2006, and that health plan is currently
winding up its operations.
On May 18, 2006, we completed our acquisition of HCLB, Inc.
HCLB is the parent company of Cape Health Plan, Inc., a Michigan
corporation based in Southfield, Michigan. At the time of the
acquisition, Cape served approximately 90,000 Medicaid members
primarily in Southeast Michigan. The acquisition was deemed
effective May 15, 2006 for accounting purposes.
Accordingly, the results of operations for Cape are included in
the consolidated financial statements for the periods following
May 15, 2006. Effective December 31, 2006, we merged
Cape into Molina Healthcare of Michigan, Inc., our Michigan HMO.
The unaudited condensed consolidated interim financial
statements have been prepared under the assumption that users of
the interim financial data have either read or have access to
our audited consolidated financial statements for the fiscal
year ended December 31, 2006. Accordingly, certain
disclosures that would substantially duplicate the disclosures
contained in the December 31, 2006 audited consolidated
financial statements have been omitted. These unaudited
condensed consolidated interim financial statements should be
read in conjunction with our December 31, 2006 audited
financial statements.
The condensed consolidated financial statements include the
accounts of the Company and all majority owned subsidiaries. In
the opinion of management, all adjustments considered necessary
for a fair presentation of the results as of the date and for
the interim periods presented, which consist solely of normal
recurring adjustments, have been included. All significant
inter-company balances and transactions have been eliminated in
consolidation. The condensed consolidated results of income for
the current interim period are not necessarily indicative of the
results for the entire year ending December 31, 2007.
Stock-Based
Compensation
At March 31, 2007, we had two stock-based employee
compensation plans: the 2000 Omnibus Stock and Incentive Plan
and the 2002 Equity Incentive Plan. The 2000 Omnibus Stock and
Incentive Plan is frozen. The Company accounts for stock-based
compensation in accordance with SFAS No. 123R,
Share-Based Payment, which was adopted
January 1, 2006, utilizing the modified prospective method.
6
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The related
expenses for the fair value of stock grants were charged to
general and administrative expenses. Total stock-based
compensation expense (net of tax) for the three months ended
March 31, 2007 and 2006 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Stock options (including shares
issued under our employee stock purchase plan)
|
|
$
|
519
|
|
|
$
|
509
|
|
Stock grants
|
|
|
639
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense, net of tax
|
|
$
|
1,158
|
|
|
$
|
766
|
|
|
|
|
|
|
|
|
|
|
Stock option activity during the three months ended
March 31, 2007 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Term
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
(Years)
|
|
|
Outstanding as of
December 31, 2006
|
|
|
789,965
|
|
|
$
|
25.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
220,350
|
|
|
|
31.34
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(60,000
|
)
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(34,017
|
)
|
|
|
29.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31,
2007
|
|
|
916,298
|
|
|
$
|
28.26
|
|
|
$
|
3,815
|
|
|
|
8.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31,
2007
|
|
|
430,169
|
|
|
$
|
23.93
|
|
|
$
|
3,447
|
|
|
|
6.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model based on
the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Expected volatility
|
|
|
48.8
|
%
|
|
|
53.2
|
%
|
Expected option life (in years)
|
|
|
6.12
|
|
|
|
6.00
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
The risk-free interest rate is based on the implied yield
currently available on U.S. Treasury zero coupon issues.
The expected volatility is primarily based on historical
volatility levels along with the implied volatility of exchange
traded options to purchase our common stock. The expected option
life of each award granted was calculated using the
simplified method in accordance with Staff
Accounting Bulletin No. 107. There were no material
changes made to the methodology used to determine the
assumptions during the first quarter of 2007.
The weighted-average fair value of options granted during the
three months ended March 31, 2007 and 2006 were $16.51 and
$12.72, respectively. The total intrinsic value of stock options
exercised during the three months ended March 31, 2007 and
2006 amounted to $1,515 and $1,255, respectively.
7
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total fair value of restricted shares granted during the
three months ended March 31, 2007 and 2006 was $4,629 and
$207, respectively. The total fair value of restricted shares
vested during the three months ended March 31, 2007 and
2006 was $611 and $111, respectively. Non-vested restricted
stock and restricted stock unit activity for the three months
ended March 31, 2007 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested balance as of
December 31, 2006
|
|
|
101,758
|
|
|
$
|
39.10
|
|
Granted
|
|
|
147,750
|
|
|
|
31.33
|
|
Vested
|
|
|
(19,850
|
)
|
|
|
37.01
|
|
Forfeited
|
|
|
(2,360
|
)
|
|
|
44.29
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance as of
March 31, 2007
|
|
|
227,298
|
|
|
$
|
34.18
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was $13,813 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted-average period of two
years.
Earnings
Per Share
The denominators for the computation of basic and diluted
earnings per share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Shares outstanding at the
beginning of the period
|
|
|
28,119,000
|
|
|
|
27,792,000
|
|
Weighted average number of shares
issued for stock options, stock grants and employee stock
purchases
|
|
|
33,000
|
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share
|
|
|
28,152,000
|
|
|
|
27,855,000
|
|
Dilutive effect of employee stock
options and restricted stock
|
|
|
123,000
|
|
|
|
286,000
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share
|
|
|
28,275,000
|
|
|
|
28,141,000
|
|
|
|
|
|
|
|
|
|
|
New
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB)
ratified the Emerging Issues Task Force (EITF) consensus on EITF
Issue
No. 06-3
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation) (EITF
06-3). The
scope of EITF
06-3
includes any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a
seller and a customer, and provides that a company may adopt a
policy of presenting taxes either gross within revenue or on a
net basis. For any such taxes that are reported on a gross
basis, a company should disclose the amounts of those taxes for
each period for which an income statement is presented if those
amounts are significant. This statement is effective to
financial reports for interim and annual reporting periods
beginning after December 15, 2006. The Company adopted EITF
06-3 on
January 1, 2007. The Company collects premium taxes from
various states on premium revenue, which are accounted for on a
gross basis. Premium taxes included in premium revenue totaled
$19.1 million and $12.8 million for the three months
ended March 31, 2007 and 2006, respectively. Premium taxes
are included in General and administrative expense
in our Condensed Consolidated Statements of Income.
On July 13, 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarifies the accounting and disclosure for
8
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
uncertainty in income taxes recognized in an entitys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes and
prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the
impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
tax authority. An uncertain income tax position will not be
recognized if it has less than 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation the
Company recognized a $446 increase to liabilities for uncertain
tax positions of which the entire increase was accounted for as
an adjustment to the beginning balance of retained earnings.
Including the cumulative effect increase, at the beginning of
2007, the Company had $4,355 of total gross unrecognized tax
benefits including accrued interest. Of this total, $1,524 (net
of federal benefit of state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in any future period. As of
March 31, 2007, the Company had $4,142 of total gross
unrecognized tax benefits of which $1,524 (net of federal
benefit of state issues) represents the amount of unrecognized
tax benefits that, if recognized, could favorably affect the
effective income tax rate in any future period.
The Companys continuing practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31, 2006 and March 31, 2007, the
Company had accrued cumulative $384 and $397 (before federal and
state tax benefit), respectively, for the payment of interest
and penalties.
During the three months ended March 31, 2007, the Company
settled an examination by the Internal Revenue Service
(IRS) in connection with certain tax positions taken
by a subsidiary that was acquired in 2006. As the result of this
audit, the Company reduced its FIN 48 liability by $213
which included interest of $33.
The Company was previously audited in a state jurisdiction for
certain refund claims filed based on additional state tax
credits identified for years between 1998 and 2001. The audit is
currently under state administrative review and the Company
believes that the audit is going to be settled within the next
12 months. If the audit is finalized, the Company believes
that the settlement will result in reduction of credits between
$300 to $400. The Company has previously reserved for the
estimated amount of reduction.
The Company is subject to taxation in the United States and
various states. With few exceptions, the Company is no longer
subject to U.S. federal, state, and local income tax
examination by tax authorities for tax years before 2002.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the
SEC did not have, nor are believed by management will have, a
material impact on our present or future consolidated financial
statements.
9
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Receivables consist primarily of amounts due from the various
states in which we operate. Accounts receivable by operating
subsidiary for the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
California HMO
|
|
$
|
24,346
|
|
|
$
|
32,404
|
|
Utah HMO
|
|
|
46,041
|
|
|
|
46,570
|
|
Ohio HMO
|
|
|
22,333
|
|
|
|
11,611
|
|
Washington HMO
|
|
|
6,504
|
|
|
|
7,447
|
|
Others
|
|
|
8,769
|
|
|
|
12,803
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
107,993
|
|
|
$
|
110,835
|
|
|
|
|
|
|
|
|
|
|
Substantially all receivables due our California HMO at
March 31, 2007 and December 31, 2006 were collected in
April 2007 and January of 2007, respectively.
Our agreement with the state of Utah calls for the reimbursement
of our Utah HMO for medical costs incurred in serving our
members, plus an administrative fee of 9% of such medical costs,
plus a portion of any cost savings realized, if any, as measured
against a fee for service Medicaid model. Our Utah HMO bills the
state of Utah monthly for actual paid health care claims plus
administrative fees. Our receivable balance from the state of
Utah includes: 1) amounts billed to the state for actual
paid health care claims plus administrative fees;
2) amounts estimated to be due under the savings sharing
provision of the agreement; and 3) amounts estimated for
incurred but not reported claims, which, along with the related
administrative fees, are not billable to the state of Utah until
such claims are actually paid.
The receivable due our Ohio HMO is primarily related to payments
for medical services paid on behalf of a capitated provider
group. Our agreement with that group calls for us to pay for
certain medical services incurred by the groups members,
and then to deduct the amount of such payments from the monthly
capitation paid to the group. This receivable also includes an
estimate of our liability for claims incurred by members of this
group for which we have not made payment. The offsetting
liability for the amount of this receivable established for
claims incurred but not paid is included in Medical claims
and benefits payable in our Condensed Consolidated Balance
Sheets.
Other assets include an investment in a vision services provider
(see 7. Related Party Transactions), deferred financing costs
associated with our secured credit agreement, and certain
investments held in connection with our deferred employee
compensation program. A liability approximately equal to the
assets held in connection with our deferred employee
compensation program is included in other long-term liabilities.
On March 9, 2005, we entered into an amended and restated
secured credit agreement with a syndicate of lenders providing
for a $180,000 revolving credit facility with a five-year
maturity. The credit facility is used for working capital and
general corporate purposes. Subject to obtaining commitments
from existing or new lenders and satisfaction of other specified
conditions, we may increase the credit facility to up to
$200,000.
Borrowings under the credit facility are based, at our election,
on the London interbank offered rate, or LIBOR, or the base rate
plus an applicable margin. The base rate will equal the higher
of Bank of Americas prime rate or 0.5% above the federal
funds rate. We also pay a commitment fee on the total unused
commitments of the lenders under the credit facility. The
applicable margins and commitment fee are based on our ratio of
consolidated funded
10
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
debt to consolidated EBITDA. The applicable margins range
between 1.00% and 1.75% for LIBOR loans and between 0% and 0.75%
for base rate loans. The commitment fee ranges between 0.375%
and 0.500%. In addition, we are required to pay a fee for each
letter of credit issued under the credit facility equal to the
applicable margin for LIBOR loans and a customary fronting fee.
Our obligations under the credit facility are secured by a lien
on substantially all of our assets and by a pledge of the
capital stock of our Michigan, New Mexico, Ohio, Utah, and
Washington HMO subsidiaries.
The amended credit agreement 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, investments, and our fixed
charge coverage ratio. The credit agreement also requires us to
maintain a ratio of total consolidated debt to total
consolidated EBITDA of not more than 2.00 to 1.00 at any time.
At March 31, 2007, we were in compliance with all financial
covenants in the credit agreement.
During the first quarter of 2007, we repaid $15,000 of our
borrowings under the credit facility. At March 31, 2007 and
December 31, 2006, the amounts outstanding under the credit
facility were $30,000 and $45,000, respectively.
|
|
6.
|
Commitments
and Contingencies
|
Legal
The health care industry is subject to numerous federal, state,
and local laws and regulations. Compliance with these laws and
regulations can be subject to government review and
interpretation, as well as regulatory actions unknown and
unasserted at this time. Violations of these laws and
regulations can result in significant fines and penalties,
exclusion from participating in publicly-funded programs, and
the repayment of previously billed and collected revenues.
Derivative Action. On August 8, 2005, a
shareholder derivative complaint was filed in the Superior Court
of the State of California for the County of Los Angeles, Case
No. BC 337912 (the Derivative Action). The
Derivative Action purports to allege claims on behalf of Molina
Healthcare, Inc. against certain current and former officers and
directors for breach of fiduciary duty, breach of the duty of
loyalty, gross negligence, and violation of California
Corporations Code Section 25402, arising out of the
Companys announcement of its guidance for the 2005 fiscal
year. On February 7, 2006, the Superior Court ordered that
the Derivative Action be stayed pending the outcome of the
securities class action lawsuit that had been filed against the
Company in late July 2005 in the United States District Court
for the Central District of California, Case No. CV
05-5460 GPS
(SHx), which lawsuit also arose out of the Companys
announcement of its guidance for the 2005 fiscal year (the
Federal Class Action). The Federal
Class Action was dismissed with prejudice and without
liability in November 2006. As a result of the final disposition
of the Federal Class Action, the Los Angeles Superior Court
scheduled a hearing for April 24, 2007 on the Demurrer
filed by the Company, which hearing was later re-scheduled to
June 21, 2007. Discovery in the Derivative Action is stayed
pending the courts ruling on the Companys Demurrer.
No prediction can be made at this time as to the outcome of the
Derivative Action.
Malpractice Action. On February 1, 2007,
a complaint was filed in the Superior Court of the State of
California for the County of Riverside by plaintiff Staci Robyn
Ward through her guardian ad litem, Case No. 465374. The
complaint purports to allege claims for medical malpractice
against Molina Medical Centers and one of its physician
employees, as well as three hospitals, two physician groups, and
three doctors. The plaintiff alleges that the defendants failed
to properly diagnose her medical condition which has resulted in
her severe and permanent disability. The proceeding is in the
early stages, and no prediction can be made as to the outcome.
Starko. Our New Mexico HMO is named as a
defendant in a class action lawsuit brought by New Mexico
pharmacies and pharmacists, Starko, Inc., et al. v.
NMHSD, et al.,
No. CV-97-06599,
Second Judicial District Court, State of New Mexico. The lawsuit
was originally filed in August 1997 against the New Mexico Human
Services
11
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Department (NMHSD). In February 2001, the plaintiffs
named health maintenance organizations participating in the New
Mexico Medicaid program as defendants, including Cimarron Health
Plan, the predecessor of our New Mexico HMO. The plaintiffs
assert that NMHSD and the defendant HMOs failed to pay pharmacy
dispensing fees under an alleged New Mexico statutory mandate.
Discovery is currently underway. It is not currently possible to
assess the amount or range of potential loss or probability of a
favorable or unfavorable outcome. Under the terms of the stock
purchase agreement pursuant to which we acquired Health Care
Horizons, Inc., the parent company to our New Mexico HMO, an
indemnification escrow account was established and funded with
$6,000 in order to indemnify our New Mexico HMO against the
costs of such litigation and any eventual liability or
settlement costs. Currently, approximately $4,100 remains in the
indemnification escrow fund.
We are involved in other legal actions in the normal course of
business, some of which seek monetary damages, including claims
for punitive damages, which are not covered by insurance. These
actions, when finally concluded and determined, are not likely,
in our opinion, to have a material adverse effect on our
consolidated financial position, results of operations, or cash
flows.
Provider
Claims
Many of our medical contracts are complex in nature and may be
subject to differing interpretations regarding amounts due for
the provision of various services. Such differing
interpretations may lead medical providers to pursue us for
additional compensation. The claims made by providers in such
circumstances often involve issues of contract compliance,
interpretation, payment methodology, and intent. These claims
often extend to services provided by the providers over a number
of years.
Various providers have contacted us seeking additional
compensation for claims that we believe to have been settled.
These matters, when finally concluded and determined, will not,
in our opinion, have a material adverse effect on our
consolidated financial position, results of operations, or cash
flows.
Regulatory
Capital and Dividend Restrictions
Our principal operations are conducted through our HMO
subsidiaries operating in California, Michigan, New Mexico,
Ohio, Texas, Washington, and Utah. Our HMOs are subject to state
regulations that, among other things, require the maintenance of
minimum levels of statutory capital, as defined by each state,
and restrict the timing, payment, and amount of dividends and
other distributions that may be paid to us as the sole
stockholder. To the extent the 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 cash dividends, loans, or advances, was
$232,600 at March 31, 2007 and $236,800 at
December 31, 2006. The National Association of Insurance
Commissioners, or NAIC, adopted model rules effective
December 31, 1998, which, if implemented by a state, set
new minimum capitalization requirements for insurance companies,
HMOs, and other entities bearing risk for health care coverage.
The requirements take the form of risk-based capital, or RBC,
rules. Indiana, Michigan, New Mexico, Ohio, Texas, Utah, and
Washington have adopted these rules, although the rules as
adopted may vary somewhat from state to state. California has
not yet adopted NAIC risk-based capital requirements for HMOs
and has not formally given notice of its intention to do so.
Such requirements, if adopted by California, may increase the
minimum capital required for that state.
As of March 31, 2007, our HMOs had aggregate statutory
capital and surplus of approximately $250,477, compared to the
required minimum aggregate statutory capital and surplus of
approximately $146,100. All of our HMOs were in compliance with
the minimum capital requirements at March 31, 2007. We have
the ability and commitment to provide additional capital to each
of our HMOs when necessary to ensure that they continue to meet
statutory and regulatory capital requirements.
12
MOLINA
HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Related
Party Transactions
|
Effective March 1, 2006, we assumed an office lease from
Millworks Capital Ventures with a remaining term of
52 months. Millworks Capital Ventures is owned by John C.
Molina, our chief financial officer, and his wife. The monthly
base lease payment is approximately $18 and is subject to an
annual increase. Based on a market report prepared by an
independent realtor, we believe the terms and conditions of the
assumed lease are at fair market value. We are currently using
the office space under the lease for an office expansion.
Payment made under this lease totaled $75 and $0 for the three
months ended March 31, 2007 and March 31, 2006,
respectively.
We are a party to a fee for service agreement with Pacific
Hospital of Long Beach. Pacific Hospital is owned by Abrazos
Healthcare, Inc., the shares of which are held as community
property by Dr. Martha Bernadett, our Executive Vice
President, Research and Development, and her husband. We believe
that the claims submitted to us by Pacific Hospital were
reimbursed at prevailing market rates. Effective June 1,
2006, the Company entered into an additional agreement with
Pacific Hospital as part of a capitation arrangement. Under this
arrangement, Pacific Hospital receives a fixed fee from us based
on member type. Amounts paid under the terms of both agreements
were $1,114 and $136 for the three months ended March 31,
2007 and March 31, 2006, respectively.
Other assets at March 31, 2007 included an equity
investment of approximately $1,400 in a vision services provider
that provides medical services to the Companys members.
Payments to the vision services provider were $2,799 and $1,463
for the three months ended March 31, 2007 and
March 31, 2006, respectively.
13
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Forward
Looking Statements
The information made available below and elsewhere in this
quarterly report on
Form 10-Q
contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often
accompanied by words such as believe,
anticipate, plan, expect,
estimate, intend, seek,
goal, may, will and similar
expressions. These statements include, without limitation,
statements about our anticipated financial performance, our
market opportunity, our growth strategy, competition, expected
activities, future acquisitions and investments, and the
adequacy of our available cash resources. Forward-looking
statements involve known and unknown risks and uncertainties
that may cause our actual results in future periods to differ
materially from those projected or contemplated in the
forward-looking statements as a result of, but not limited to,
the following factors:
|
|
|
|
|
Uncertainty regarding our ability to control our medical costs
and other operating expenses.
|
|
|
|
Uncertainty regarding our ability to accurately estimate
incurred but not reported medical care costs.
|
|
|
|
Our dependence upon a relatively small number of government
contracts and subcontracts for our revenue.
|
|
|
|
Uncertainty regarding our ability to renew our government
contracts.
|
|
|
|
Government efforts to limit Medicaid and SCHIP expenditures.
|
|
|
|
Uncertainty regarding high dollar or catastrophic
claims.
|
|
|
|
Changes to government laws and regulations or in the
interpretation and enforcement of those laws and regulations,
including the recently enacted citizenship certification
requirements.
|
|
|
|
Difficulties we encounter in managing, integrating, and securing
our information systems.
|
|
|
|
Difficulties we encounter in executing our acquisition strategy,
including obtaining the necessary government approvals and
integrating our acquisitions.
|
|
|
|
Ineffective management of our growth.
|
|
|
|
The superior financial resources of our competitors,
particularly those which also provide commercial health
insurance.
|
|
|
|
Restrictions and covenants in our credit facility that may
impede our ability to make or finance acquisitions and declare
dividends.
|
|
|
|
The implementation of rate increases.
|
|
|
|
Uncertainty regarding our ability to enter into more favorable
provider contracts.
|
|
|
|
Risks associated with our
start-up
health plans, in particular our rapidly growing Ohio and Texas
HMOs and our Medicare Advantage special needs plans.
|
|
|
|
Uncertainty regarding membership eligibility processes and
methodologies.
|
|
|
|
Our dependence upon key employees.
|
|
|
|
Our increased exposure to malpractice and other litigation risks
as a result of the operation of our primary care clinics in
California.
|
|
|
|
The existence of state regulations that impair our ability to
upstream cash from our subsidiaries.
|
|
|
|
Demographic changes or unexpected changes in utilization
patterns.
|
|
|
|
Inherent uncertainties involving pending legal or administrative
proceedings.
|
|
|
|
Difficulties in determining the appropriate premium rates for
populations transitioning from
fee-for-service
programs into managed care.
|
14
|
|
|
|
|
Uncertainties in realizing the expected cost savings of
transitioning
fee-for-service
members into managed care due to difficulties in educating
members and providers about appropriate managed care practices.
|
|
|
|
Previously unmet needs of members transitioning from fee for
service into managed care.
|
|
|
|
Administrative costs incurred at our
start-up
health plans prior to the full assignment of membership to those
plans.
|
Investors should refer to our Annual Report on
Form 10-K
for the year ended December 31, 2006 for a discussion of
certain risk factors which could materially affect our business,
financial condition, or future results. Given these risks and
uncertainties, we can give no assurances that any results or
events projected or contemplated by our forward-looking
statements will in fact occur and we caution investors not to
place undue reliance on these statements.
This document and the following discussion of our financial
condition and results of operations should be read in
conjunction with the accompanying consolidated financial
statements and the notes to those statements appearing elsewhere
in this report and the audited financial statements and
Managements Discussion and Analysis appearing in our
Report on
Form 10-K
for the year ended December 31, 2006.
Overview
Our financial performance in the first quarter of 2007 as
compared to our financial performance in the first quarter of
2006 may be briefly summarized, respectively in each case, as
follows:
|
|
|
|
|
Earnings per diluted share of $0.34 as compared to $0.31;
|
|
|
|
Premium revenue of $556.2 million as compared to
$449.3 million;
|
|
|
|
Operating income of $16.6 million as compared to
$14.2 million;
|
|
|
|
Net income of $9.6 million as compared to $8.6 million;
|
|
|
|
Medical care ratio of 85.7% as compared to 85.3%;
|
|
|
|
G&A expenses as a percentage of total revenue of 11.3% as
compared to 11.3%; and
|
|
|
|
Total membership at quarter-end of 1,074,000 members as compared
to 918,000.
|
Revenue
Premium revenue is fixed in advance of the periods covered and
is not generally subject to significant accounting estimates.
For the three months ended March 31, 2007, we received
approximately 90.9% of our premium revenue as a fixed amount per
member per month, or PMPM, pursuant to our contracts with state
Medicaid agencies and other managed care organizations for whom
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 periodically
adjust premium rates. The amount of these premiums may vary
substantially between states and among various government
programs. PMPM premiums for members of the State Childrens
Health Insurance Program, or SCHIP, are generally among the
Companys lowest, with rates as low as approximately $75
PMPM in California and Utah. Premium revenues for Medicaid
members are generally higher. Among the Temporary Aid for Needy
Families (TANF) Medicaid population the Medicaid
group that includes most mothers and children PMPM
premiums range between approximately $90 in California to a high
of approximately $200 in Ohio. Among our Medicaid Aged, Blind
and Disabled (ABD) membership, PMPM premiums range from
approximately $320 in California to over $1,000 in New Mexico.
Medicare revenue is approximately $1,200 PMPM. Approximately
4.1% of our premium revenue in the three months ended
March 31, 2007 was realized under a Medicaid cost plus
reimbursement agreement that our Utah plan has with that state.
We also received approximately 4.9% of our premium revenue for
the three months ended March 31, 2007 in the form of birth
income (a one-time payment for the delivery of a child) from the
Medicaid programs in Michigan, Ohio, Texas, and Washington. Such
payments are recognized as revenue in the month the birth
occurs. Other revenues from savings sharing and
fee-for-service
clinic income contributed the remaining 0.1% of our premium
revenue.
15
Certain components of premium revenue are subject to accounting
estimates. Chief among these are Utah savings share revenue and
premium revenue that must be returned to the State of New Mexico
if we fail to spend a minimum percentage of premium revenue on
certain defined medical care costs.
We have estimated the amount that we believe we will recover
under our savings share plan with the State of Utah based on the
information we have to date and our interpretation of our
contract with the state. The state may not agree with our
interpretation of the contract language, and the ultimate amount
of savings share revenue that we realize may be subject to
negotiation with the state. At March 31, 2007, we have
recorded approximately $4.3 million in receivables
associated with the Utah savings share plan. When additional
information is known, or agreement is reached with the state
regarding the appropriate savings share payment amount, we will
adjust the amount of savings share revenue recorded in our
financial statements.
Our contract with the state of New Mexico requires that we spend
a minimum percentage of premium revenue on certain defined
medical care costs. At March 31, 2007, we have recorded a
payable to the state of approximately $11.5 million under
our interpretation the terms of this contract provision. Any
change to the terms of this provision, including revisions to
the definitions of premium revenue or medical care costs, the
period of time over which the minimum percentage is measured, or
the percentage of revenue required to be spent on the defined
medical care costs, may trigger a change in this amount.
Membership growth has been the primary reason for our increasing
revenues. We have increased our membership through both internal
growth and acquisitions. The following table sets forth the
approximate number of members by state as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
Market
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
California
|
|
|
294,000
|
|
|
|
300,000
|
|
|
|
312,000
|
|
Michigan
|
|
|
221,000
|
|
|
|
228,000
|
|
|
|
143,000
|
|
New Mexico
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
59,000
|
|
Ohio
|
|
|
127,000
|
|
|
|
76,000
|
|
|
|
27,000
|
|
Texas
|
|
|
31,000
|
|
|
|
19,000
|
|
|
|
N/A
|
(2)
|
Utah
|
|
|
49,000
|
|
|
|
52,000
|
|
|
|
61,000
|
|
Washington
|
|
|
287,000
|
|
|
|
281,000
|
|
|
|
288,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,074,000
|
|
|
|
1,021,000
|
|
|
|
890,000
|
|
Indiana
|
|
|
N/A
|
(1)
|
|
|
56,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,074,000
|
|
|
|
1,077,000
|
|
|
|
918,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys Indiana health plan ceased serving members
effective January 1, 2007. |
|
(2) |
|
The Companys Texas health plan commenced operations in
September 2006. |
16
The following table details member months (defined as the
aggregation of each months ending membership for the
period) by state for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
% of Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
California
|
|
|
886,000
|
|
|
|
947,000
|
|
|
|
(6.4
|
)%
|
Michigan
|
|
|
669,000
|
|
|
|
431,000
|
|
|
|
55.2
|
%
|
New Mexico
|
|
|
192,000
|
|
|
|
178,000
|
|
|
|
7.9
|
%
|
Ohio
|
|
|
340,000
|
|
|
|
48,000
|
|
|
|
608.3
|
%
|
Texas
|
|
|
66,000
|
|
|
|
N/A
|
(2)
|
|
|
N/A
|
|
Utah
|
|
|
151,000
|
|
|
|
181,000
|
|
|
|
(16.6
|
)%
|
Washington
|
|
|
856,000
|
|
|
|
868,000
|
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,160,000
|
|
|
|
2,653,000
|
|
|
|
19.1
|
%
|
Indiana
|
|
|
N/A
|
(1)
|
|
|
79,000
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,160,000
|
|
|
|
2,732,000
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys Indiana health plan ceased serving members
effective January 1, 2007. |
|
(2) |
|
The Companys Texas health plan commenced operations in
September 2006. |
Expenses
Our operating expenses include expenses related to the provision
of medical care services and general and administrative, or
G&A, costs. Our results of operations are impacted by our
ability to manage effectively expenses related to health care
services and to predict accurately costs incurred.
Expenses related to medical care services include two
components: direct medical expenses and medically-related
administrative costs. Direct medical expenses include, for
example, payments to physicians, hospitals, and providers of
ancillary medical services, such as pharmacy, laboratory, and
radiology services. Medically-related administrative costs
include, for example, expenses relating to health education,
quality assurance, case management, disease management,
24-hour
on-call nurses, member services, and compliance. Salary and
benefit costs are a substantial portion of these expenses. For
the three months ended March 31, 2007 and March 31,
2006, medically-related administrative costs, included in
Medical services in our Condensed Consolidated
Statements of Income, constituted approximately 3% of premium
revenue. Approximately one-third of medically related
administrative costs are reported as expenses of our corporate
parent, Molina Healthcare, Inc.
Many of our primary care physicians and a small portion of our
specialists and hospitals are paid on a capitation basis. Under
capitation contracts, we typically pay a fixed PMPM payment to
the provider without regard to the frequency, extent, or nature
of the medical services actually furnished. Under capitated
contracts, we remain liable for the provision of certain health
care services. Certain of our capitated contracts also contain
incentive programs based on service delivery, quality of care,
utilization management, and other criteria. Capitation payments
are fixed in advance of the periods covered and are not subject
to significant accounting estimates. These payments are expensed
in the period the providers are obligated to provide services.
All capitation expenses are recorded as Medical
services in our Condensed Consolidated Statements of
Income.
Those primary care physicians and specialists not paid on a
capitation basis are paid on a
fee-for-service
basis. In addition, specialists and hospitals are paid for the
most part on a
fee-for-service
basis. Physician providers paid on a
fee-for-service
basis are paid according to a fee schedule set by the state or
by our contracts with these providers. We pay hospitals in a
variety of ways, including per diem amounts, on the basis of
diagnostic-related groups or DRGs, percent of billed charges,
case rates, and capitation. We also have stop-loss agreements
with the hospitals with which we contract. Under
fee-for-service
arrangements, we retain the financial responsibility for medical
care provided at discounted payment rates. Expenses related to
fee-for-service
contracts are recorded in the period in which the related
services are dispensed. For the three months ended
March 31, 2007, approximately
17
81.0% of our direct medical expenses were related to fees paid
to providers on a
fee-for-service
basis, with the balance paid on a capitation basis.
Medical care costs and medical claims and benefits payable are
based upon actual historical experience and estimates of medical
expenses incurred but not reported, or IBNR. We estimate our
IBNR monthly based on a number of factors, including prior
claims experience, health care service utilization data, cost
trends, product mix, seasonality, prior authorization of medical
services, and other factors. As part of this review, we also
consider uncertainties related to fluctuations in provider
billing patterns, claims payment patterns, membership, and
medical cost trends. We include loss adjustment expenses in the
recorded claims liability. We continually review and update the
estimation methods and the resulting reserves. Many of our
medical contracts are complex in nature and may be subject to
differing interpretations regarding amounts due for the
provision of various services. Such differing interpretations
may not come to light until a substantial period of time has
passed following the contract implementation, leading to
potential misstatement of some costs in the period in which they
are first recorded. Estimates are adjusted monthly as more
information becomes available. Any adjustments to reserves are
reflected in current operations. We employ our own actuaries and
engage the service of independent actuaries as needed. We
believe that our process for estimating IBNR is adequate, but
all estimates are subject to uncertainties and, on occasion in
the past, our actual medical care costs have exceeded such
estimates. If our estimated IBNR is less than our actual medical
care costs in the future, our results of operations would be
negatively impacted. Additionally, if we are unable to
accurately estimate IBNR, our ability to take timely corrective
actions may be affected, further exacerbating the extent of the
negative impact on our results of operations.
G&A costs are largely comprised of wage and benefit costs
related to our employee base, premium taxes, and other
administrative expenses. Some G&A services are provided
locally, while others are delivered to our health plans from a
centralized location. The major centralized functions are claims
processing, information systems, finance and accounting
services, and legal and regulatory services. Locally-provided
functions include marketing (to the extent permitted by law and
regulation), plan administration, and provider relations.
Included in G&A expenses are premium taxes for the
California HMO (beginning July 2005), the Michigan HMO, the New
Mexico HMO, the Ohio HMO, the Texas HMO (beginning September
2006), and the Washington HMO.
Results
of Operations
The following table sets forth selected operating ratios. All
ratios with the exception of the medical care ratio are shown as
a percentage of total revenue. The medical care ratio is shown
as a percentage of premium revenue because there is a direct
relationship between the premium revenue earned and the cost of
health care.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Premium revenue
|
|
|
98.8
|
%
|
|
|
99.1
|
%
|
Investment income
|
|
|
1.2
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Medical care ratio
|
|
|
85.7
|
%
|
|
|
85.3
|
%
|
General and administrative expense
ratio, excluding premium taxes
|
|
|
7.9
|
%
|
|
|
8.5
|
%
|
Premium taxes included in general
and administrative expenses
|
|
|
3.4
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
Total general and administrative
expense ratio
|
|
|
11.3
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2.9
|
%
|
|
|
3.1
|
%
|
Net income
|
|
|
1.7
|
%
|
|
|
1.9
|
%
|
18
The following summarizes premium revenue, medical care costs,
medical care ratio and premium taxes by health plan for the
three months ended March 31, 2007 and March 31, 2006
(PMPM amounts are in whole dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
Premium Revenue
|
|
|
Medical Care Costs
|
|
|
Medical
|
|
|
Premium Tax
|
|
|
|
Total
|
|
|
PMPM
|
|
|
Total
|
|
|
PMPM
|
|
|
Care Ratio
|
|
|
Total
|
|
|
California
|
|
$
|
92,932
|
|
|
$
|
104.89
|
|
|
$
|
76,324
|
|
|
$
|
86.14
|
|
|
|
82.1
|
%
|
|
$
|
3,030
|
|
Michigan
|
|
|
123,766
|
|
|
|
185.06
|
|
|
|
104,601
|
|
|
|
156.40
|
|
|
|
84.5
|
%
|
|
|
7,509
|
|
New Mexico
|
|
|
57,193
|
|
|
|
297.61
|
|
|
|
49,219
|
|
|
|
256.12
|
|
|
|
86.1
|
%
|
|
|
2,216
|
|
Ohio
|
|
|
74,944
|
|
|
|
220.37
|
|
|
|
69,262
|
|
|
|
203.66
|
|
|
|
92.4
|
%
|
|
|
3,372
|
|
Texas
|
|
|
14,456
|
|
|
|
218.47
|
|
|
|
13,348
|
|
|
|
201.73
|
|
|
|
92.3
|
%
|
|
|
257
|
|
Utah
|
|
|
30,927
|
|
|
|
205.63
|
|
|
|
28,466
|
|
|
|
189.27
|
|
|
|
92.0
|
%
|
|
|
|
|
Washington
|
|
|
161,982
|
|
|
|
189.20
|
|
|
|
131,259
|
|
|
|
153.32
|
|
|
|
81.0
|
%
|
|
|
2,684
|
|
Other
|
|
|
35
|
|
|
|
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
556,235
|
|
|
$
|
176.04
|
|
|
$
|
476,477
|
|
|
$
|
150.80
|
|
|
|
85.7
|
%
|
|
$
|
19,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
Premium Revenue
|
|
|
Medical Care Costs
|
|
|
Medical
|
|
|
Premium Tax
|
|
|
|
Total
|
|
|
PMPM
|
|
|
Total
|
|
|
PMPM
|
|
|
Care Ratio
|
|
|
Total
|
|
|
California
|
|
$
|
93,539
|
|
|
$
|
98.73
|
|
|
$
|
78,062
|
|
|
$
|
82.39
|
|
|
|
83.5
|
%
|
|
$
|
3,027
|
|
Michigan
|
|
|
77,708
|
|
|
|
180.29
|
|
|
|
59,902
|
|
|
|
138.98
|
|
|
|
77.1
|
%
|
|
|
4,741
|
|
New Mexico
|
|
|
55,580
|
|
|
|
312.27
|
|
|
|
47,638
|
|
|
|
267.65
|
|
|
|
85.7
|
%
|
|
|
1,877
|
|
Ohio
|
|
|
10,111
|
|
|
|
211.23
|
|
|
|
9,037
|
|
|
|
188.79
|
|
|
|
89.4
|
%
|
|
|
456
|
|
Utah
|
|
|
43,847
|
|
|
|
242.13
|
|
|
|
39,805
|
|
|
|
219.81
|
|
|
|
90.8
|
%
|
|
|
|
|
Washington
|
|
|
154,908
|
|
|
|
178.48
|
|
|
|
132,144
|
|
|
|
152.26
|
|
|
|
85.3
|
%
|
|
|
2,704
|
|
Indiana
|
|
|
13,551
|
|
|
|
172.50
|
|
|
|
12,032
|
|
|
|
153.17
|
|
|
|
88.8
|
%
|
|
|
|
|
Other
|
|
|
50
|
|
|
|
|
|
|
|
4,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
449,294
|
|
|
$
|
164.46
|
|
|
$
|
383,247
|
|
|
$
|
140.29
|
|
|
|
85.3
|
%
|
|
$
|
12,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2007 Compared to Three Months Ended
March 31, 2006
Net
Income
Net income for the quarter ended March 31, 2007 was
$9.6 million, or $0.34 per diluted share, compared to net
income of $8.6 million, or $0.31 per diluted share,
for the quarter ended March 31, 2006.
Premium
Revenue
Premium revenue in the first quarter of 2007 was
$556.2 million, an increase of $106.9 million, or
23.8%, over premium revenue in the first quarter of 2006 of
$449.3 million. The increase in premium revenue in the
first quarter of 2007 was driven by increased membership in our
Ohio and Texas
start-up
health plans and by the acquisition of Cape Health Plan in
Michigan effective May 15, 2006. Our Ohio health plan
contributed $74.9 million in premium revenue in the first
quarter of 2007, an increase of $64.8 million from a year
ago. Our Texas health plan, which commenced operations in
September 2006, contributed $14.5 million in premium
revenue in the first quarter of 2007. The premium revenue from
our Michigan health plan increased $46.1 million due
primarily to the acquisition of Cape Health Plan. Our Indiana
health plan, where we ceased serving members effective
January 1, 2007, contributed no premium revenue in the
first quarter of 2007 and $13.6 million in premium revenue
in the first quarter of 2006. Medicare revenue was
$9.0 million and $5.4 million for the quarters ended
March 31, 2007 and 2006, respectively.
19
Investment
Income
Investment income during the first quarter of 2007 totaled
$6.7 million as compared to $4.1 million in the first
quarter of 2006, an increase of $2.6 million as a result of
higher invested balances and higher rates of return.
Medical
Care Costs
Medical care costs as a percentage of premium revenue (the
medical care ratio) increased to 85.7% in the first quarter of
2007 from 85.3% in the first quarter of 2006. Sequentially, our
overall medical care ratio increased from 85.1% in the fourth
quarter of 2006, an increase that reflects the regular seasonal
fluctuation in medical care costs we have experienced in the
past and expected to occur in the quarter.
The medical care ratios reported by our Ohio and Texas
start-up
health plans in the first quarter of 2007 were 92.4% and 92.3%,
respectively. These medical care ratios, which are substantially
higher than those historically experienced by our Company as a
whole, were consistent with our expectations. We continue to
believe that the medical care ratio for our Ohio health plan
will decrease as a result of growth in membership in lower cost
regions of that state, and that the medical care ratio in Texas
will improve as members are more fully transitioned into a
managed care environment.
Excluding our Ohio and Texas
start-up
health plans and our now non-operating Indiana health plan, our
medical care ratio of 84.4% during the first quarter of 2007
represents a decrease from the medical care ratio of 85.1% in
the first quarter of 2006, and a slight increase from the
sequential medical care ratio of 84.1% in the fourth quarter of
2006.
Our health plans in California and Washington reported lower
medical care ratios in the first quarter of 2007 when compared
to the same period in 2006, while our Michigan health plan
reported an increase in its medical care ratio.
Our California health plans medical care ratio declined to
82.1% in the first quarter of 2007 compared to 83.5% in the
first quarter of 2006 and 89.3% in the fourth quarter of 2006.
Our California health plan benefited from a modest rate increase
of approximately 2.5% between the fourth quarter of 2006 and the
first quarter of 2007, and lower medical costs resulting from
efforts to renegotiate provider contracts that were undertaken
in the second half of 2006.
Our Washington health plan reported a decrease in its medical
care ratio to 81.0% in the first quarter of 2007 compared to
85.3% in the first quarter of 2006, principally due to lower
hospital and specialty costs. Our Washington health plans
medical care ratio increased from 79.5% in the fourth quarter of
2006, a pattern consistent with past seasonal fluctuations.
Our Michigan health plan reported an increase in its medical
care ratio to 84.5% in the first quarter of 2007 compared to
77.1% in the first quarter of 2006 and 78.7% for the fourth
quarter of 2006. The higher medical care ratio is due to the
inclusion of Cape Health Plan membership in the first quarter
results and higher primary care capitation rates.
Days in claims payable were 54 days at March 31, 2007,
57 days at December 31, 2006, and 57 days at
March 31, 2006. We have previously disclosed our
expectation that days in claims payable would decline as we
began paying claims associated with our Ohio and Texas
start-up
health plans that previously had been reported as part of our
incurred but not reported claims liability. Additionally, the
run out of our Indiana health plans claims liability and a
shift to capitation contracts (which constituted 18.5% of
medical costs in the first quarter of 2007 and 14.6% of medical
costs in the first quarter of 2006) also lowered days in
claims payable.
General
and Administrative Expenses
General and administrative expenses were $63.4 million in
the first quarter of 2007 as compared to $51.2 million in
the first quarter of 2006, representing 11.3% of total revenue
for both periods.
Core G&A expenses (defined as G&A expenses less
premium taxes) increased $5.9 million in the first quarter
of 2007 compared to the first quarter of 2006, but decreased as
a percentage of revenue to 7.9% from 8.5% in the
20
first quarter of 2006. The decline in Core G&A as a
percentage of total revenue is consistent with our previously
stated expectation that Core G&A would be flat in 2007 on a
per member per month basis but would decline as a percentage of
revenue.
Depreciation
and Amortization
Depreciation and amortization expense increased by
$1.7 million compared to the first quarter of 2006.
Depreciation expense increased by $0.7 million in the first
quarter of 2007 due to investments in infrastructure.
Amortization expense increased by $1.0 million in the first
quarter of 2007, primarily due to intangible assets associated
with the Cape Health Plan acquisition in Michigan.
Interest
Expense
Interest expense in the first quarter of 2007 increased by
$0.7 million compared to the first quarter of 2006
principally due to increased borrowings.
Income
Taxes
Income taxes were recognized in the first quarter of 2007 based
upon an effective tax rate of 38.0% as compared to an effective
tax rate of 37.5% in the first quarter of 2006. The increase in
the effective tax rate in the first quarter of 2007 was due to
an increase in that portion of our net income earned by
subsidiaries that are subject to state income tax, coupled with
the dilution of economic development credits in California due
to a larger pretax income in the first quarter of 2007.
Liquidity
and Capital Resources
We generate cash from premium revenue and investment income. Our
primary uses of cash include the payment of expenses related to
medical care services and G&A expenses. We generally
receive premium revenue in advance of payment of claims for
related health care services.
Our investment policies are designed to provide liquidity,
preserve capital, and maximize total return on invested assets.
At March 31, 2007, we invested a substantial portion of our
cash in a portfolio of highly liquid money market securities. At
March 31, 2007, our investments (all of which were
classified as current assets) consisted solely of investment
grade debt securities. Our investment policies require that all
of our investments have final maturities of ten years or less
(excluding auction rate securities and variable rate securities,
for which interest rates are periodically reset) and that the
average maturity be four years or less. Two professional
portfolio managers operating under documented investment
guidelines manage our investments. The average annualized
portfolio yield for the three months ended March 31, 2007
and 2006 was approximately 5.2% and 4.4%, respectively.
The states in which we operate prescribe the types of
instruments in which our subsidiaries may invest their funds.
Our restricted investments are invested principally in
certificates of deposit and treasury securities.
Cash provided by operating activities for the quarter ended
March 31, 2007 was $35.9 million. For the same period
in 2006, cash provided by operating activities was
$41.0 million. Net income, increased deferred revenue at
the Companys Ohio health plan, and the timing of payments
for accrued liabilities were the primary sources of cash
provided by operating activities. Medical claims liabilities of
the Indiana health plan, which had no membership effective
January 1, 2007, declined by $15.9 million between
December 31, 2006 and March 31, 2007. Absent the
Indiana claims run-out, medical claims liabilities increased by
$6.1 million during the quarter.
During the first quarter of 2007, the Company repaid
$15.0 million owed under its $180 million credit
facility. At March 31, 2007, the Company owed
$30.0 million under the facility.
At March 31, 2007, we had working capital of
$255.6 million compared to $258.6 million at
December 31, 2006. At March 31, 2007 and
December 31, 2006, cash and cash equivalents were
$420.0 million and $403.7 million, respectively. At
March 31, 2007 and December 31, 2006, investments (all
classified as current assets) were $83.1 million and
$81.5 million, respectively. At March 31, 2007, the
parent company (Molina Healthcare, Inc.) had cash and
investments of approximately $21.0 million. We believe that
our cash resources and internally generated
21
funds will be sufficient to support our operations, regulatory
requirements, and capital expenditures for at least the next
12 months.
In November 2005, we filed a shelf registration statement on
Form S-3 with the Securities and Exchange Commission
covering the issuance of up to $300 million of securities,
including common stock and debt securities. No securities have
been issued under the shelf registration statement. We may
publicly offer securities from time to time at prices and terms
to be determined at the time of the offering.
Regulatory
Capital and Dividend Restrictions
Our principal operations are conducted through our seven HMO
subsidiaries operating in California, Michigan, New Mexico,
Ohio, Texas, Utah, and Washington. The HMOs are subject to state
laws that, among other things, require the maintenance of
minimum levels of statutory capital, as defined by each state,
and may restrict the timing, payment, and amount of dividends
and other distributions that may be paid to Molina Healthcare,
Inc. as the sole stockholder of each of our HMOs.
The National Association of Insurance Commissioners, or NAIC,
has established model rules which, if adopted by a particular
state, set minimum capitalization requirements for HMOs and
other insurance entities bearing risk for health care coverage.
The requirements take the form of risk-based capital, or RBC,
rules. These rules, which vary slightly from state to state,
have been adopted in Indiana, Michigan, New Mexico, Ohio, Texas,
Utah, and Washington. California has not adopted RBC rules and
has not given notice of any intention to do so. The RBC rules,
if adopted by California, may increase the minimum capital
required by that state.
At March 31, 2007, our HMOs had aggregate statutory capital
and surplus of approximately $250.5 million, compared to
the required minimum aggregate statutory capital and surplus of
approximately $146.1 million. All of our HMOs were in
compliance with the minimum capital requirements at
March 31, 2007. We have the ability and commitment to
provide additional working capital to each of our HMOs when
necessary to ensure that capital and surplus continue to meet
regulatory requirements. Barring any change in regulatory
requirements, we believe that we will continue to be in
compliance with these requirements through 2007.
Contractual
Obligations
In our Annual Report on
Form 10-K
for the year ended December 31, 2006, we reported on our
contractual obligations as of that date. There have been no
material changes to our contractual obligations since that
report other than the repayment of $15 million on our
credit facility during the first quarter of 2007.
Critical
Accounting Policies
When we prepare our consolidated financial statements, we use
estimates and assumptions that may affect reported amounts and
disclosures. The determination of our liability for claims and
medical benefits payable is particularly important to the
determination of our financial position and results of
operations and requires the application of significant judgment
by our management and, as a result, is subject to an inherent
degree of uncertainty.
Our medical care costs include amounts that have actually been
paid by us through the reporting date as well as estimated
liabilities for medical care costs incurred but not paid by us
as of the reporting date. Such medical care cost liabilities
include, among other items, capitation payments owed providers,
unpaid pharmacy invoices and various medically related
administrative costs that have been incurred but not paid. We
also record reserves for estimated referral claims related to
medical groups under contract with us that are financially
troubled or insolvent and that may not be able to honor their
obligations for the payment of medical services provided by
other providers. In these instances, we may be required to honor
these obligations for legal or business reasons. Based on our
current assessment of providers under contract with us, such
losses are not expected to be significant. In applying this
policy, we use judgment to determine the appropriate assumptions
for determining the required estimates. The most important part
in estimating our medical care costs, however, is our estimate
for
fee-for-service
claims which have been incurred but not paid by us.
These
fee-for-service
costs that have been incurred but are not paid at the reporting
date are collectively referred to as medical costs that are
Incurred But Not Reported, or IBNR. We estimate
these medical claims liabilities using actuarial methods based
upon historical claims payment data. We adjust that data to
account for
22
changes in payment patterns, cost trends, changes in product
mix, seasonality, changes in utilization of health care
services, information provided by our providers; and other
relevant factors. In assessing the adequacy of accruals for
medical claims liabilities, we consider our historical
experience, the terms of existing contracts, our knowledge of
trends in the industry, information provided by our customers,
and information available from other sources, as appropriate.
The estimation methods and the resulting reserves are frequently
reviewed and updated, and adjustments, if necessary, are
reflected in the period known.
While we believe our current estimates are adequate, we have in
the past been required to make a significant adjustment to these
estimates and it is possible that we will be required to make
significant adjustments or revisions to these estimates in the
future.
The most significant estimates involved in determining our IBNR
liability concern the determination of claims payment completion
factors and trended per member per month cost estimates.
For the fifth month of service prior to the reporting date and
earlier, we estimate our outstanding claims liability based upon
actual claims paid, adjusted for estimated completion factors.
Completion factors seek to measure the cumulative percentage of
claims expense that will have been paid for a given month of
service as of the reporting date based on historical payment
patterns.
The following table reflects the change in our estimate of
claims liability as of March 31, 2007 that would have
resulted had we changed our completion factors for the fifth
through the twelfth months preceding March 31, 2007 by the
percentages indicated. A reduction in the completion factor
results in an increase in medical claims liabilities. Our Utah
HMO is excluded from these calculations, as the majority of the
Utah business is conducted under a cost reimbursement contract.
Our acquisition of Cape Health Plan, effective May 15,
2006, is excluded from these calculations because our statements
of income only include Cape Health Plan since the acquisition
date. Dollar amounts are in thousands.
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
(Decrease) Increase in
|
|
Medical Claims and
|
|
Estimated Completion Factors
|
|
Benefits Payable
|
|
|
(3)%
|
|
$
|
18,810
|
|
(2)%
|
|
|
12,540
|
|
(1)%
|
|
|
6,270
|
|
1%
|
|
|
(6,270
|
)
|
2%
|
|
|
(12,540
|
)
|
3%
|
|
|
(18,810
|
)
|
For the four months of service immediately prior to the
reporting date, actual claims paid are not a reliable measure of
our ultimate liability, given the inherent delay between the
patient/physician encounter and the actual submission of a claim
for payment. For these months of service, we estimate our claims
liability based upon trended per member per month (PMPM) cost
estimates. These estimates are designed to reflect recent trends
in payments and expense, utilization patterns, authorized
services, and other relevant factors. The following table
reflects the change in our estimate of claims liability as of
March 31, 2007 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.
Our Utah HMO is excluded from these calculations, as the
majority of the Utah business is conducted under a cost
reimbursement contract. Cape Health Plan, which was acquired on
May 15, 2006, is included in these calculations. Dollar
amounts are in thousands.
|
|
|
|
|
(Decrease) Increase in
|
|
(Decrease) Increase in
|
|
Trended per Member
|
|
Medical Claims and
|
|
per Month Cost Estimates
|
|
Benefits Payable
|
|
|
(3)%
|
|
$
|
(10,431
|
)
|
(2)%
|
|
|
(6,954
|
)
|
(1)%
|
|
|
(3,477
|
)
|
1%
|
|
|
3,477
|
|
2%
|
|
|
6,954
|
|
3%
|
|
|
10,431
|
|
23
Assuming a hypothetical 1% change in completion factors from
those used in our calculation of IBNR at March 31, 2007,
net income for the three months ended March 31, 2007 would
increase or decrease by approximately $3.9 million, or
$0.14 per diluted share, net of tax. Assuming a
hypothetical 1% change in PMPM cost estimates from those used in
our calculation of IBNR at March 31, 2007, net income for
the three months ended March 31, 2007 would increase or
decrease by approximately $2.2 million, or $0.08 per
diluted share, net of tax.
The following table shows the components of the change in
medical claims and benefits payable for the three months ended
March 31, 2007 and 2006. Dollar amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balances at beginning of period
|
|
$
|
290,048
|
|
|
$
|
217,354
|
|
Components of medical care costs
related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
511,279
|
|
|
|
407,847
|
|
Prior years
|
|
|
(34,802
|
)
|
|
|
(24,600
|
)
|
|
|
|
|
|
|
|
|
|
Total medical care costs
|
|
|
476,477
|
|
|
|
383,247
|
|
Payments for medical care costs
related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
293,106
|
|
|
|
218,890
|
|
Prior years
|
|
|
193,231
|
|
|
|
146,132
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
486,337
|
|
|
|
365,022
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period
|
|
$
|
280,188
|
|
|
$
|
235,579
|
|
|
|
|
|
|
|
|
|
|
Days in claims payable
|
|
|
54
|
|
|
|
57
|
|
Number of members at end of period
|
|
|
1,074,000
|
|
|
|
918,000
|
|
Number of claims in inventory at
end of period
|
|
|
271,000
|
|
|
|
288,000
|
|
Billed charges of claims in
inventory at end of period
|
|
$
|
263,000
|
|
|
$
|
276,000
|
|
Claims in inventory per member at
end of period
|
|
|
0.25
|
|
|
|
0.31
|
|
Our claims liability includes an allowance for adverse claims
development based on historical experience and other factors
including, but not limited to, variation in claims payment
patterns, changes in utilization and cost trends, known
outbreaks of disease, and large claims. Accordingly, any benefit
recognized in medical care costs resulting from favorable
development of an estimated liability at the start of the period
(captured as a component of medical care costs related
to prior years) may be offset by the addition of an
allowance for adverse claims development when estimating the
liability at the end of the period (captured as a component of
medical care costs related to current year).
Inflation
We use various strategies to mitigate the negative effects of
health care cost inflation. Specifically, our health plans try
to control medical and hospital costs through contracts with
independent providers of health care services. Through these
contracted providers, our health plans emphasize preventive
health care and appropriate use of specialty and hospital
services. There can be no assurance, however, that our
strategies to mitigate health care cost inflation will be
successful. Competitive pressures, new health care and
pharmaceutical product introductions, demands from health care
providers and customers, applicable regulations, or other
factors may affect our ability to control health care costs.
Compliance
Costs
Our health plans are regulated by both state and federal
government agencies. Regulation of managed care products and
health care services is an evolving area of law that varies from
jurisdiction to jurisdiction. Regulatory agencies generally have
discretion to issue regulations and interpret and enforce laws
and rules. Changes in
24
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.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Concentrations
of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash and cash
equivalents, investments, receivables, and restricted
investments. We invest a substantial portion of our cash in the
CADRE Affinity Fund and CADRE Reserve Fund (CADRE Funds), a
portfolio of highly liquid money market securities. Two
professional portfolio managers operating under documented
investment guidelines manage our investments. Restricted
investments are invested principally in certificates of deposit
and treasury securities. Concentration of credit risk with
respect to accounts receivable is limited due to payors
consisting principally of the governments of each state in which
our HMO subsidiaries operate.
As of March 31, 2007, we had cash and cash equivalents of
$420.0 million, investments of $83.1 million, and
restricted investments of $23.4 million. Cash equivalents
consist of highly liquid securities with original maturities of
up to three months. At March 31, 2007, our investments (all
of which were classified as current assets) consisted solely of
investment grade debt securities. Our investment policies
require that all of our investments have final maturities of ten
years or less (excluding auction rate securities and variable
rate securities, for which interest rates are periodically
reset) and that the average maturity be four years or less. The
restricted investments consist of interest-bearing deposits
required by the respective states in which we operate. These
investments are subject to interest rate risk and will decrease
in value if market rates increase. All non-restricted
investments are maintained at fair market value on the condensed
consolidated balance sheet. Declines in interest rates over time
will reduce our investment income.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures: Our management, with the
participation of our Chief Executive Officer and our Chief
Financial Officer, has concluded, based upon its evaluation as
of the end of the period covered by this report, that the
Companys disclosure controls and procedures
(as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)) are effective to ensure that information required to
be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Changes in Internal Control Over Financial
Reporting: There has been no change in our
internal control over financial reporting during the three
months ended March 31, 2007 that has materially affected,
or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
The health care industry is subject to numerous laws and
regulations of federal, state, and local governments. Compliance
with these laws and regulations can be subject to government
review and interpretation, as well as regulatory actions unknown
and unasserted at this time. Violations of these laws and
regulations can result in significant fines and penalties,
exclusion from participating in publicly-funded programs, and
the repayment of previously billed and collected revenues.
Derivative Action. On August 8, 2005, a
shareholder derivative complaint was filed in the Superior Court
of the State of California for the County of Los Angeles, Case
No. BC 337912 (the Derivative Action). The
Derivative Action purports to allege claims on behalf of Molina
Healthcare, Inc. against certain current and former officers and
directors for breach of fiduciary duty, breach of the duty of
loyalty, gross negligence, and violation of California
Corporations Code Section 25402, arising out of the
Companys announcement of its guidance for the 2005 fiscal
year. On February 7, 2006, the Superior Court ordered that
the Derivative Action be stayed pending the
25
outcome of the securities class action lawsuit that had been
filed against the Company in late July 2005 in the United States
District Court for the Central District of California, Case
No. CV
05-5460 GPS
(SHx), which lawsuit also arose out of the Companys
announcement of its guidance for the 2005 fiscal year (the
Federal Class Action). The Federal
Class Action was dismissed with prejudice and without
liability in November 2006. As a result of the final disposition
of the Federal Class Action, the Los Angeles Superior Court
scheduled a hearing for April 24, 2007 on the Demurrer
filed by the Company, which hearing was later re-scheduled to
June 21, 2007. Discovery in the Derivative Action is stayed
pending the courts ruling on the Companys Demurrer.
No prediction can be made at this time as to the outcome of the
Derivative Action.
Malpractice Action. On February 1, 2007,
a complaint was filed in the Superior Court of the State of
California for the County of Riverside by plaintiff Staci Robyn
Ward through her guardian ad litem, Case No. 465374. The
complaint purports to allege claims for medical malpractice
against Molina Medical Centers and one of its physician
employees, as well as three hospitals, two physician groups, and
three doctors. The plaintiff alleges that the defendants failed
to properly diagnose her medical condition which has resulted in
her severe and permanent disability. The proceeding is in the
early stages, and no prediction can be made as to the outcome.
Starko. Our New Mexico HMO is named as a
defendant in a class action lawsuit brought by New Mexico
pharmacies and pharmacists, Starko, Inc., et al. v.
NMHSD, et al.,
No. CV-97-06599,
Second Judicial District Court, State of New Mexico. The lawsuit
was originally filed in August 1997 against the New Mexico Human
Services Department (NMHSD). In February 2001, the
plaintiffs named health maintenance organizations participating
in the New Mexico Medicaid program as defendants, including
Cimarron Health Plan, the predecessor of our New Mexico HMO. The
plaintiffs assert that NMHSD and the defendant HMOs failed to
pay pharmacy dispensing fees under an alleged New Mexico
statutory mandate. Discovery is currently underway. It is not
currently possible to assess the amount or range of potential
loss or probability of a favorable or unfavorable outcome. Under
the terms of the stock purchase agreement pursuant to which we
acquired Health Care Horizons, Inc., the parent company to the
New Mexico HMO, an indemnification escrow account was
established and funded with $6,000 in order to indemnify our New
Mexico HMO against the costs of such litigation and any eventual
liability or settlement costs. Currently, approximately $4,100
remains in the indemnification escrow fund.
We are involved in other legal actions in the normal course of
business, some of which seek monetary damages, including claims
for punitive damages, which are not covered by insurance. These
actions, when finally concluded and determined, are not likely,
in our opinion, to have a material adverse effect on our
consolidated financial position, results of operations, or cash
flows.
In addition to the other information set forth in this report,
you should carefully consider the risk factors discussed in
Part I, Item 1A Risk Factors, in our
Annual Report on
Form 10-K
for the year ended December 31, 2006. The risks described
in our Annual Report on
Form 10-K
and in our Quarterly Reports on
Form 10-Q
are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial may also materially adversely affect our
business, financial condition,
and/or
operating results.
|
|
|
|
|
Exhibit No.
|
|
Title
|
|
|
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.
|
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MOLINA HEALTHCARE, INC.
|
|
|
|
|
/s/ JOSEPH
M. MOLINA, M.D.
|
Joseph M. Molina, M.D.
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Dated: May 7, 2007
John C. Molina, J.D.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Dated: May 7, 2007
27
EXHIBIT
INDEX
|
|
|
|
|
Exhibit No.
|
|
Title
|
|
|
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.
|