Molina Healthcare Reports Fourth Quarter and Year-End 2009 Results

LONG BEACH, Calif.--(BUSINESS WIRE)-- Molina Healthcare, Inc. (NYSE: MOH):

• Earnings per diluted share for 2009 down 45% from 2008
• Annual premium revenues of $3.7 billion, up 18% over 2008
• Aggregate membership up 16% over 2008

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the fourth quarter and year ended December 31, 2009.

Net loss for the quarter ended December 31, 2009, was $4.5 million, or $0.18 per diluted share, compared with net income of $14.8 million, or $0.55 per diluted share, for the quarter ended December 31, 2008. Net income for the year ended December 31, 2009, was $30.9 million, or $1.19 per diluted share, compared with net income of $59.6 million, or $2.15 per diluted share, for the year ended December 31, 2008.

“Despite an extremely difficult environment in 2009, particularly in the fourth quarter, our company weathered the conditions and remained profitable,” said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. “Our strong growth in enrollment and premium revenues during the year, combined with our resolve and long-term view developed over thirty years of providing care to low-income populations, positions us well for greater success in 2010 and in the years ahead.”

Fiscal Year 2010 Guidance

The Company confirms its guidance issued on January 26, 2010, for fiscal year 2010 earnings per diluted share of $1.50, with revenue of approximately $3.9 billion, a medical care ratio of approximately 86%, an administrative expense ratio of approximately 11%, and net income of $39 million. The Company expects its effective tax rate to be approximately 45% and its shares outstanding, for the purpose of calculating diluted EPS, to be approximately 26 million for the year ending December 31, 2010. The Company’s guidance does not include any effect of the previously announced acquisition of the Unisys Health Information Management (HIM) business, which is expected to close in the first half of 2010. The Company expects the acquisition of the HIM business to be dilutive to earnings in 2010. The Company will provide additional information regarding the expected financial impact of the acquisition of the HIM business at the time of closing.

Overview of Financial Results

Operating results for the fourth quarter and full year 2009 were most significantly impacted by the following:

• Higher utilization due to widespread influenza-related illness across the Company’s health plans
• Margin compression related to state budget shortfalls
• Enrollment growth and the higher costs associated with new members
• Higher emergency room costs

Fourth Quarter 2009 Compared with Fourth Quarter 2008

Net loss for the fourth quarter of 2009 was $4.5 million compared with net income of $14.8 million in the fourth quarter of 2008.

Premium revenue grew 19% in the fourth quarter of 2009 compared with the fourth quarter of 2008. During 2009, membership grew 16% overall, with Florida, California, Washington, and Ohio gaining the most members. On a per-member per-month, or PMPM, basis, consolidated premium revenue increased 3.5%. Increased membership contributed 82% of the growth in premium revenue in the fourth quarter of 2009 compared with the fourth quarter of 2008, and increases in PMPM revenue, as a result of both rate changes and shifts in member mix, contributed the remaining 18%.

Although premium revenue PMPM grew 3.5% in the fourth quarter of 2009 compared with the fourth quarter of 2008, the Company nevertheless experienced significant margin compression. Net of increases in premium taxes, PMPM premium revenue grew only 2.6% in the fourth quarter. Additionally, that portion of the fourth quarter increase in Ohio PMPM premium revenue not linked to higher premium taxes was absorbed by an increase in Medicaid fee schedules. Excluding all of the Ohio premium increase and the premium tax increases in other states, the Company’s consolidated PMPM premium revenue increase in the fourth quarter was only 1.6%. This small increase in PMPM premium revenue was more than offset by higher medical costs.

The Company received PMPM premium reductions in 2009 that were in many cases correlated with reductions in the Medicaid fee schedule that also reduced the Company’s medical costs. However, PMPM premium reductions in Washington and Missouri in 2009 were not fully commensurate with changes in the Medicaid fee schedule in those states, and thus decreases in premium were not matched by lower medical costs. In Washington, premium reductions not linked to decreases in the Medicaid fee schedule lowered medical margin by approximately $3.4 million in the fourth quarter. In Missouri, the retention of the pharmacy benefit by the state effective October 1, 2009, reduced medical margin by approximately $1.2 million in the fourth quarter.

Investment income for the fourth quarter of 2009 decreased 50% from the $3.6 million in investment income earned in the fourth quarter of 2008. This decline was due primarily to lower interest rates. The Company’s annualized portfolio yield for the quarter ended December 31, 2009, decreased to 0.8% compared with 2.1% for the same period in 2008.

Medical care costs, in the aggregate, increased approximately 7% on a PMPM basis in the fourth quarter of 2009 compared with the fourth quarter of 2008. Medical care costs as a percentage of premium revenue (the medical care ratio) were 87.5% for the fourth quarter of 2009 compared with 84.7% for the fourth quarter of 2008. Medical care costs trends were consistent with those identified by the Company in its earnings releases for the second and third quarters of 2009. Specifically, increased expenses were generally the result of higher utilization rather than higher unit costs (except in the case of outpatient costs, where both utilization and unit costs increased) and were most pronounced in connection with physician and outpatient costs. Influenza-related illnesses and the costs associated with more recently enrolled members were key factors in the higher utilization. The Company estimates that the incremental costs associated with influenza-related illnesses were approximately $19 million, or $0.47 per diluted share, in the fourth quarter of 2009 compared with the fourth quarter of 2008.¹

Physician and outpatient costs exhibited the most significant unfavorable cost trend in the fourth quarter of 2009. Together, these costs increased 14% on a PMPM basis compared with the fourth quarter of 2008. The primary driver of the increased costs was emergency room utilization, which was up approximately 23%.

Inpatient facility costs decreased approximately 4% PMPM compared with the fourth quarter of 2008, despite increased utilization.

Pharmacy costs (including the benefit of rebates) increased 8% on a PMPM basis compared with the fourth quarter of 2008, excluding the Missouri health plan, where the pharmacy benefit was retained by the state of Missouri effective October 1, 2009. Pharmacy utilization increased approximately 8% compared with the fourth quarter of 2008, while unit costs (excluding rebates) decreased approximately 2% quarter-over-quarter.

Capitated costs increased 10% on a PMPM basis compared with the fourth quarter of 2008 as a result of rate increases received for members capitated on a percentage of premium basis at the New Mexico health plan and the transition of members into capitated arrangements at the California health plan.

Days in medical claims and benefits payable were 37 days at December 31, 2009, 37 days at September 30, 2009, and 41 days at December 31, 2008.

Core G&A expenses (defined as G&A expenses less premium taxes) were 8.0% of revenue in the fourth quarter of 2009 compared with 8.1% in the fourth quarter of 2008 and 7.5% in the third quarter of 2009. The sequential 0.5% increase from the third quarter in the core G&A ratio was due to expenses associated with several Company initiatives and programs that occurred in the fourth quarter of 2009. These initiatives and programs included the relocation of the Company’s data center to its new facility in New Mexico, Medicare 2010 open enrollment costs, acquisition costs relating to our recently announced purchase of HIM, growth of our New Mexico health plan’s third party administration business, and network development costs at our Texas health plan. On a PMPM basis, core G&A increased to $17.83 in the fourth quarter of 2009 compared with $17.44 in the fourth quarter of 2008 and $16.35 in the third quarter of 2009.

Interest expensefor both periods presented includes non-cash interest expense relating to the Company’s convertible senior notes, as a result of the adoption of FASB Accounting Standards Codification (ASC) Subtopic 470-20, Debt with Conversion and Other Options. The amounts recorded for this non-cash interest expense totaled $1.2 million for the fourth quarter of 2009 and $1.2 million for the fourth quarter of 2008.

Income tax (benefit) expense was recorded at an effective rate of (41.0%) in the fourth quarter of 2009 compared with 38.6% in the fourth quarter of 2008. The income tax benefit recorded during the fourth quarter of 2009 was primarily due to the Company’s pre-tax loss recognized during the quarter, and higher than previously estimated California enterprise zone tax credits.

Year Ended December 31, 2009 Compared with Year Ended December 31, 2008

Net income decreased 48% to $30.9 million for the year ended December 31, 2009, compared with net income of $59.6 million in the same period of 2008.

Premium revenue grew approximately 18% in the year ended December 31, 2009, compared with the same period in 2008. Consolidated premium revenue increased 5.3% on a PMPM basis. Increased membership contributed 71% of the growth in premium revenue.

Although premium revenue PMPM grew 5.3% in 2009 compared with 2008, the Company nevertheless experienced significant margin compression due to rising medical costs.

The Company received PMPM premium reductions in 2009 that were in many cases correlated with reductions in the Medicaid fee schedule that also reduced the Company’s medical costs. However, PMPM premium reductions in Washington and Missouri in 2009 were not fully commensurate with changes in the Medicaid fee schedule in those states, and thus decreases in premium were not matched by lower medical costs. In Washington, premium reductions not linked to decreases in the Medicaid fee schedule lowered medical margin by approximately $13 million in 2009. In Missouri, the retention of the pharmacy benefit by the state effective October 1, 2009 reduced medical margin by approximately $1.2 million in 2009.

Investment income for the year ended December 31, 2009, was $9.1 million, a $12 million decrease from the $21.1 million earned in the same period in 2008. This decline was primarily due to lower interest rates in 2009. The Company’s annualized portfolio yield for the year ended December 31, 2009, decreased to 1.2% compared with 3.0% for the same period in 2008.

Medical care costs, in the aggregate, increased 8% on a PMPM basis for the year ended December 31, 2009, compared with the same period in 2008. The medical care ratio was 86.8% for the year ended December 31, 2009, compared with 84.8% for the same period in 2008. Increased expenses were generally the result of higher utilization rather than higher unit costs (except in the case of outpatient costs, where both utilization and unit costs increased) and were most pronounced in connection with physician and outpatient costs. Influenza-related illnesses and the costs associated with more recently enrolled members were key factors in the higher utilization. The Company estimates that the incremental costs associated with influenza-related illnesses were approximately $35 million, or $0.83 per diluted share, in the year ended December 31, 2009 compared with the year ended December 31, 2008.

Physician and outpatient costs exhibited the most significant unfavorable cost trend in the year ended December 31, 2009. Together, these costs increased approximately 13% on a PMPM basis compared with the same period in 2008. Consistent with the Company’s experience throughout 2009, emergency room utilization (up approximately 9%) and cost per visit (up approximately 8%) were the primary drivers of increased cost in the year ended December 31, 2009.

The Company continues to observe hospitals billing for more intensive levels of care than in the same period in 2008. The billing codes for emergency room level of care – with Level 1 reflecting the least intensive care and Level 5 reflecting the most intensive care – changed significantly in the year ended December 31, 2009, compared with the same period in 2008. Level 1 and Level 2 visits decreased by 9% and 6%, respectively, while Level 3, Level 4, and Level 5 visits increased by 20%, 18%, and 20%, respectively.

Inpatient costs were flat on a PMPM basis year-over-year despite increased utilization.

Pharmacy costs (including the benefit of rebates) increased 6% on a PMPM basis year-over-year, excluding the Missouri health plan, where the pharmacy benefit was retained by the state of Missouri effective October 1, 2009. Pharmacy utilization increased approximately 6% year-over-year, while unit costs (excluding rebates) were flat.

Capitated costs increased approximately 10% PMPM year-over-year, primarily as a result of rate increases received for members capitated on a percentage of premium basis at the New Mexico health plan, and the transition of members into capitated arrangements in California.

Core G&A expenses were 7.5% of revenue in the year ended December 31, 2009, compared with 8.0% in the same period in 2008. Year-over-year, premium revenue grew faster than administrative costs, causing administrative costs, as a percentage of revenue, to decrease. On a PMPM basis, core G&A decreased to $16.76 for the year ended December 31, 2009, from $17.04 for the same period in 2008.

Interest expensefor both years includes non-cash interest expense relating to the Company’s convertible senior notes, as a result of the adoption of ASC Subtopic 470-20. The amounts recorded for this non-cash interest expense totaled $4.8 million for the year ended December 31, 2009 and $4.7 million for the year ended December 31, 2008.

Income taxeswere recorded at an effective rate of 29.2% for the year ended December 31, 2009, compared with 40.0% for the same period in 2008. The decrease was primarily due to discrete tax benefits recognized during the year relating to settling tax examinations, and higher than previously estimated California enterprise zone tax credits. As indicated above, the Company expects its effective tax rate to increase to approximately 45% for the year ending December 31, 2010.

Cash Flow

Cash provided by operating activities for the year ended December 31, 2009, was $155 million compared with $40 million for 2008, an increase of $115 million.

Significant components of cash provided by operating activities during 2009 included the following items:

• Net income, which decreased $29 million between 2008 and 2009.
• Deferred revenue, which contributed $114 million to the increase in cash provided by operating activities between 2008 and 2009. Deferred revenue increased substantially at the Ohio health plan between the years ended 2008 and 2009.
• Medical claims and benefits payable, which contributed $43 million to the increase in cash provided by operating activities between 2008 and 2009.

Cash provided by operating activities for the quarter ended December 31, 2009, was $25 million compared with $61 million for the fourth quarter of 2008, a decrease of $36 million.

Significant components of cash provided by operating activities during the fourth quarter of 2009 included the following items:

• Net loss, which resulted in a $19 million decrease year over year.
• Receivables, which reduced cash provided by operating activities $34 million year over year, primarily due to significant collections of receivables at the California health plan in the fourth quarter of 2008.

At December 31, 2009, the Company had cash and investments (not including restricted investments) of $704.0 million, including non-current auction rate securities with a fair value of $59.7 million. At December 31, 2009, the parent company had unrestricted cash and investments of $45.6 million, including auction rate securities with a fair value of $16.5 million.

Stock Repurchases

During 2009, the Company purchased approximately 1.4 million shares of its common stock for $27.7 million (average cost of $20.49 per share). These purchases increased diluted earnings per share for the year ended December 31, 2009, by $0.04.

Conference Call

The Company’s management will host a conference call and webcast to discuss its fourth quarter and year-end results at 5:00 p.m. Eastern Time on Thursday, February 11, 2010. The number to call for the interactive teleconference is (212) 231-2929. A telephonic replay of the conference call will be available from 7:00 p.m. Eastern time on Thursday, February 11, 2010, through 6:00 p.m. on Friday, February 12, 2010, by dialing (800) 633-8284 and entering confirmation number 21451098. A live webcast of the call can be accessed on the Company’s website at www.molinahealthcare.com, or at www.earnings.com. An online replay will be available beginning about one hour following the conclusion of the call and webcast.

About Molina Healthcare

Molina Healthcare, Inc. is a multi-state managed care organization that arranges for the delivery of healthcare services to persons eligible for Medicaid, Medicare, and other government-sponsored programs for low-income families and individuals. Molina Healthcare’s licensed health plan subsidiaries in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington currently serve approximately 1.45 million members. More information about Molina Healthcare can be obtained at www.molinahealthcare.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains “forward-looking statements” regarding the Company’s expected results for fiscal year 2010, the Company’s pending acquisition of the HIM business of Unisys, and other plans, expectations, and anticipated future events.All of our forward-looking statements are based on our current expectations and assumptions.Actual results could differ materially due to numerous known and unknown risks and uncertainties, including, without limitation, risk factors related to the following:

• budgetary pressures on the federal and state governments and their resulting inability to fully fund Medicaid, Medicare, or CHIP, or to maintain current membership eligibility thresholds and criteria;
• unexpected rate reductions or the rescission of expected rate increases;
• the enactment of federal health care and/or insurance reform and uncertainty regarding the likely impact of particular reform measures;
• management of our medical costs, including flu-like illness levels and rates of utilization that are consistent with our expectations;
• the accurate estimation of incurred but not reported medical costs across our health plans;
• the continuation and renewal of the government contracts of our health plans;
• the timely closing of the HIM business acquisition, including the need to obtain regulatory approvals, customer consents, and to satisfy other closing conditions;
• the integration of the HIM business and its operations, as well as the integration of any other acquisitions we may undertake;
• the retention and renewal of the HIM business’s state government contracts on terms consistent with our expectations;
• the accuracy of our operating cost and capital outlay projections for the HIM business;
• the availability of financing under our credit facility to acquire the HIM business and to meet our liquidity needs;
• the establishment by a state of a medical cost expenditure floor as a percentage of the premiums we receive, including, without limitation, the establishment of an 86% medical cost expenditure floor in the state of Washington;
• the required establishment of a premium deficiency reserve in any of the states in which we operate;
• up-coding by providers or billing in a manner at material variance with historic patterns;
• the carving out by a state of particular benefits, such as pharmacy benefits, which have historically produced a profit;
• the transition from a non-risk to a risk-based capitation contract by our Utah health plan;
• approval by state regulators of dividends and distributions by our subsidiaries;
• changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
• high dollar claims related to catastrophic illness;
• the favorable resolution of litigation or arbitration matters;

and numerous other risk factors, including those discussed in our periodic reports and filings with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of our Company website or on the SEC’s website at www.sec.gov.Given these risks and uncertainties, we can give no assurances that our forward-looking statements will prove to be accurate, or that any other 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. All forward-looking statements in this release represent our judgment as of February 11, 2010, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in our expectations.

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¹ Estimates of utilization and unit costs included in this release may not match changes in reported costs due to the impact of shifts in case mix between the periods presented, prior period development, the existence of pass-through contracts in which third parties assume medical risk, and other factors. Additionally, estimates of utilization for the three months and year ended December 31, 2009, exclude the month of December 2009 due to the substantial incompleteness of claims payment data for that month.

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Molina Healthcare, Inc.
Juan José Orellana, Investor Relations
562-435-3666, ext. 111143

Source: Molina Healthcare, Inc.