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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements regarding
our business, financial condition, and results of operations within the meaning
of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E
of the Securities Exchange Act of 1934, or Securities Exchange Act. Many of the
forward-looking statements are located under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. Forward-looking statements can also be
identified by words such as "guidance," "future," "anticipates," "believes,"
"estimates," "expects," "growth," "intends," "plans," "predicts," "projects,"
"will," "would," "could," "can," "may," and similar terms. Readers are cautioned
not to place undue reliance on any forward-looking statements, as
forward-looking statements are not guarantees of future performance and the
Company's actual results may differ significantly due to numerous known and
unknown risks and uncertainties. Those known risks and uncertainties include,
but are not limited to, the risk factors identified in the section titled "Risk
Factors" in our 2021 Annual Report on Form 10-K, including without limitation
the following:
•the impact of the COVID-19 pandemic and its associated or indirect effects on
our business, operations, and financial results, including without limitation
the duration of the Public Health Emergency Declaration ("PHE") and associated
suspension in redeterminations, and the potential impact on our workforce or
contractors of federal or state vaccine mandates;
•significant budget pressures on state governments from diminished tax revenues
incidental to the COVID-19 pandemic and their efforts to reduce rates or limit
rate increases, to impose profit caps or risk corridors, or to recoup previously
paid premium amounts on a retroactive basis;
•the numerous political, judicial, and market-based uncertainties associated
with the Affordable Care Act (the "ACA");
•the market dynamics surrounding the ACA Marketplaces, including issues
impacting enrollment, risk adjustment estimates and results, the potential for
disproportionate enrollment of higher acuity members, and the discontinuation of
premium tax credits;
•the outcome of the legal proceedings in Kentucky with regard to the Medicaid
contract award to our Kentucky health plan and our acquisition of certain assets
of Passport;
•the success of our efforts to retain existing or awarded government contracts,
and the success of any bid submissions in response to requests for proposal,
including our contracts in California and Texas ;
•subsequent adjustments to reported premium revenue based upon subsequent
developments or new information, including changes to estimated amounts payable
or receivable related to Marketplace risk adjustment;
•our ability to consummate, integrate, and realize benefits from acquisitions,
including the completed acquisitions of Magellan Complete Care, Passport,
Affinity, and the Medicaid assets of Cigna in Texas , and the announced
acquisition of AgeWell New York;
•effective management of our medical costs;
•our ability to predict with a reasonable degree of accuracy utilization rates,
including utilization rates associated with COVID-19;
•cyber-attacks, ransomware attacks, or other privacy or data security incidents
resulting in an inadvertent unauthorized disclosure of protected information;
•the ability to manage our operations, including maintaining and creating
adequate internal systems and controls relating to authorizations, approvals,
provider payments, and the overall success of our care management initiatives;
•our receipt of adequate premium rates to support increasing pharmacy costs,
including costs associated with specialty drugs and costs resulting from
formulary changes that allow the option of higher-priced non-generic drugs;
•our ability to operate profitably in an environment where the trend in premium
rate increases lags behind the trend in increasing medical costs;
•the interpretation and implementation of federal or state medical cost
expenditure floors, administrative cost and profit ceilings, premium
stabilization programs, profit-sharing arrangements, and risk adjustment
provisions and requirements;
•our estimates of amounts owed for such cost expenditure floors, administrative
cost and profit ceilings, premium stabilization programs, profit-sharing
arrangements, and risk adjustment provisions and requirements;
Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 19
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•the Medicaid expansion medical cost corridor, and any other retroactive
adjustment to revenue where methodologies and procedures are subject to
interpretation or dependent upon information about the health status of
participants other than Molina members;
•the interpretation and implementation of at-risk premium rules and state
contract performance requirements regarding the achievement of certain quality
measures, and our ability to recognize revenue amounts associated therewith;
•the success and renewal of our duals demonstration programs in California ,
Illinois , Michigan , Ohio , South Carolina , and Texas ;
•the accurate estimation of incurred but not reported or paid medical costs
across our health plans;
•efforts by states to recoup previously paid and recognized premium amounts;
•changes in our annual effective tax rate, due to federal and/or state
legislation, or changes in our mix of earnings and other factors;
•complications, member confusion, eligibility redeterminations, or enrollment
backlogs related to the renewal of Medicaid coverage;
•fraud, waste and abuse matters, government audits or reviews, comment letters,
or potential investigations, and any fine, sanction, enrollment freeze,
corrective action plan, monitoring program, or premium recovery that may result
therefrom;
•our exit from Puerto Rico , including the payment in full of our outstanding
accounts receivable, the effective run-out of claims, the return of our capital,
and the outcome of the claims filed against our Puerto Rico health plan and us
by the Puerto Rico Health Insurance Administration , or ASES;
•changes with respect to our provider contracts and the loss of providers;
•approval by state regulators of dividends and distributions by our health plan
subsidiaries;
•changes in funding under our contracts as a result of regulatory changes,
programmatic adjustments, or other reforms;
•high dollar claims related to catastrophic illness;
•the resolution, favorable or unfavorable, of litigation, arbitration, or
administrative proceedings;
•the relatively small number of states in which we operate health plans,
including the greater scale and revenues of our California , Ohio , Texas , and
Washington health plans;
•the failure to comply with the financial or other covenants in our credit
agreement or the indentures governing our outstanding notes;
•the availability of adequate financing on acceptable terms to fund and
capitalize our expansion and growth, repay our outstanding indebtedness at
maturity, and meet our general liquidity needs;
•the sufficiency of funds on hand to pay the amounts due upon maturity of our
outstanding notes;
•the failure of a state in which we operate to renew its federal Medicaid
waiver;
•changes generally affecting the managed care industry;
•increases in government surcharges, taxes, and assessments;
•the unexpected loss of the leadership of one or more of our senior executives;
and
•increasing competition and consolidation in the Medicaid industry.
Each of the terms "Molina Healthcare, Inc. " "Molina Healthcare ," "Company,"
"we," "our," and "us," as used herein, refers collectively to Molina Healthcare,
Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company
assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law.
Readers should refer to the section entitled "Risk Factors" in our 2021 Annual
Report on Form 10-K, for a discussion of certain risk factors that could
materially affect our business, financial condition, cash flows, or results of
operations. Given these risks and uncertainties, we can give no assurance that
any results or events projected or contemplated by our forward-looking
statements will in fact occur.
This Quarterly Report on Form 10-Q and the following discussion of our financial
condition and results of operations should be read in conjunction with the
accompanying consolidated financial statements and the notes to those statements
appearing elsewhere in this report, and the audited financial statements and
Management's Discussion and Analysis appearing in our 2021 Annual Report on Form
10-K.
Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 20
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OVERVIEW
managed healthcare services under the Medicaid and Medicare programs, and
through the state insurance marketplaces (the "Marketplace"). We served
approximately 5.1 million members as of
states.
FIRST QUARTER 2022 HIGHLIGHTS
We reported net income of
first quarter of 2022, which reflected the following:
•Membership increase of 480,000, or 10%, compared withMarch 31, 2021 , and a 114,000 sequential decrease compared toDecember 31, 2021 ; •Premium revenue of$7.5 billion increased 19% compared with the first quarter of 2021, reflecting increased organic membership in Medicaid and Medicare, along with the impact of acquisitions, partially offset by the decline in Marketplace membership; •Consolidated medical care ratio ("MCR") was 87.1%, compared with 86.8% for the first quarter of 2021, and increased due to the net effect of COVID, which increased the MCR by 50 basis points in the first quarter of 2022, but was negligible in the first quarter of 2021; •General and administrative expense ("G&A") ratio of 7.4%, which compared with 7.3% in the first quarter of 2021, reflecting temporary labor costs challenges, certain non-recurring costs and appropriate investments to accommodate growth, partially offset by the benefits of scale produced by our increase in revenue; and •After-tax margin of 3.3%, which was in line with our expectations.
We note the following factors impacting the 2022 first quarter financial
results:
•We estimate that the net effect of COVID decreased net income by approximately$0.57 per diluted share in the first quarter of 2022. The net effect of COVID had a negligible impact on the first quarter of 2021. •The net effect of COVID reflects higher COVID inpatient costs, lower COVID-related utilization curtailment and the impact of the COVID risk-sharing corridors, and impacted all of our segments during the first quarter of 2022.Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 21 --------------------------------------------------------------------------------
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CONSOLIDATED FINANCIAL SUMMARY
Three Months Ended March 31,
2022 2021
(In millions, except per-share amounts)
Premium revenue $ 7,531 $ 6,306
Less: medical care costs 6,563 5,474
Medical margin 968 832
MCR (1) 87.1 % 86.8 %
Other revenues:
Premium tax revenue 208 187
Investment income 11 9
Other revenue 20 20
General and administrative expenses 571 473
G&A ratio (2) 7.4 % 7.3 %
Premium tax expenses 208 187
Depreciation and amortization 40 33
Other 16 20
Operating income 372 335
Interest expense 28 30
Income before income tax expense 344 305
Income tax expense 86 77
Net income $ 258 $ 228
Net income per share - Diluted $ 4.39 $ 3.89
Diluted weighted average shares outstanding 58.7 58.6
Other Key Statistics
Ending membership 5.1 4.6
Effective income tax rate 25.0 % 25.2 %
After-tax margin (3) 3.3 % 3.5 %
________________________
(1) MCR represents medical care costs as a percentage of premium revenue.
(2) G&A ratio represents general and administrative expenses as a percentage of
total revenue.
(3) After-tax margin represents net income as a percentage of total revenue.
CONSOLIDATED RESULTS
NET INCOME AND OPERATING INCOME
Net income in the first quarter of 2022 amounted to$258 million , or$4.39 per diluted share, compared with$228 million , or$3.89 per diluted share, in the first quarter of 2021. The 13% increase in net income is consistent with the improvement in operating income, which increased to$372 million in the first quarter of 2022, compared with$335 million in the first quarter of 2021.
The improvement in operating income was mainly due to membership growth and
higher premium revenues, partially offset by an increase in the MCR.
PREMIUM REVENUE
Premium revenue increased$1.2 billion , or 19%, in the first quarter of 2022, when compared with the first quarter of 2021. The higher premium revenue reflects increased organic membership in the Medicaid and Medicare segments and the impact of acquisitions, partially offset by a decline in the Marketplace segment. The increase in premiumMolina Healthcare, Inc. March 31, 2022 Form 10-Q | 22 --------------------------------------------------------------------------------
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revenue was partially attributable to a reduced impact of COVID-related risk corridors that were enacted in several states beginning in the second quarter of 2020. MEDICAL CARE RATIO The consolidated MCR in the first quarter of 2022 was 87.1%, compared with 86.8% in the first quarter of 2021. The Medicaid and Marketplace MCRs increased in the first quarter of 2022, while the Medicare MCR decreased. The net effect of COVID increased the consolidated MCR in the first quarter of 2022 by approximately 50 basis points and impacted all segments in the first quarter of 2022. The net effect of COVID had a negligible impact on the first quarter of 2021. The impacts were varied by segment in both periods. The prior year reserve development in the first quarter of 2022 was modestly favorable, but its impact on earnings was absorbed by the COVID-related risk corridors.
PREMIUM TAX REVENUE AND EXPENSES
The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) was 2.7% and 2.9% for the first quarter of 2022 and 2021, respectively. The current year ratio decrease was mainly due to changes in business mix. INVESTMENT INCOME Investment income increased to$11 million in the first quarter of 2022, compared with$9 million in the first quarter of 2021, mainly due to an increase in interest rates and higher levels of invested assets. Investment yields were lower in the first quarter of 2021 due to a temporary allocation in shorter-term invested assets due to the COVID-19 pandemic, until it was rescinded in the second quarter of 2021.
OTHER REVENUE
Other revenue was consistent at$20 million in the first quarter of 2022 and 2021. Other revenue mainly includes service revenue associated with long-term services and supports consultative services we provide inWisconsin .
G&A EXPENSES
The G&A expense ratio was 7.4% in the first quarter of 2022, compared with 7.3% in the first quarter of 2021, mainly reflecting temporary labor cost challenges, certain non-recurring costs and appropriate investments to accommodate growth, partially offset by the benefits of scale produced by our increase in revenue. We expect our full year 2022 G&A ratio to be consistent with our long term targets.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to$40 million in the first quarter of 2022, compared with$33 million in the first quarter of 2021, due primarily to amortization associated with recent acquisitions completed in the fourth quarter of 2021 and the first quarter of 2022.
OTHER OPERATING EXPENSES
Other operating expenses totaled$16 million in the first quarter of 2022, compared with$20 million in the first quarter of 2021. Other operating expenses mainly includes service costs associated with long-term services and supports consultative services we provide inWisconsin , as noted above.
INTEREST EXPENSE
Interest expense decreased to$28 million in the first quarter of 2022, compared with$30 million in the first quarter of 2021. The decrease resulted from our early redemption of$700 million aggregate principal amount of our 5.375% senior notes due 2022 in the fourth quarter of 2021, partially offset by interest related to the private offering of the 3.875% Notes due 2032 in the same period.
INCOME TAXES
Income tax expense amounted to
25.0% of pretax income, compared with income tax expense of
25.2% of pretax income in the first quarter of 2021. The difference in the
effective tax rate is primarily due to the impact of certain discrete tax
benefits recognized in the three months ended
Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 23
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As the COVID-19 pandemic continues to evolve, its ongoing impact to our
business, results of operations, financial condition, and cash flows is
uncertain and difficult to predict. Specific trends and uncertainties related to
our Medicaid, Medicare, and Marketplace segments follow.
Federal Economic Stabilization and Other Programs
Effective
related PHE, which, among other things, continued the suspension in state
Medicaid eligibility redeterminations for 90 days until
Effective
90 days and it will remain in effect until
Due to the uncertainty as to the duration and breadth of the pandemic, we are unable to reasonably estimate the ultimate impact of the economic stabilization and other programs to our business, financial condition, and operating results.
Operations
Enrollment and Premium Revenue
Excluding acquisitions and our exit fromPuerto Rico , we added over 750,000 new Medicaid members sinceMarch 31, 2020 , when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations for Medicaid eligibility. We expect Medicaid enrollment to continue to benefit from the extension of the PHE period, and the associated pause on membership redeterminations, at least throughmid-July 2022 . Beginning in 2020, various states enacted temporary risk corridors in response to the reduced demand for medical services stemming from COVID-19, which have resulted in a reduction of our medical margin. The current rate environment is stable and rational. We continue to believe that the risk-sharing corridors previously introduced are related to the declared PHE and will likely be eliminated as the COVID pandemic subsides. However, the risk corridors continue to contribute an added level of variability to our results of operations. In the three months endedMarch 31, 2022 , we recognized approximately$28 million , for the impact of these risk corridors, compared to$110 million recognized in the three months endedMarch 31, 2021 . The decrease is due to the elimination of several of the COVID-19 risk corridors. It is possible that certain states could change the structure of existing risk corridors, implement new risk corridors in the future or discontinue existing risk corridors. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Medical Care Costs
We expect continued uncertainty regarding utilization trends as the pandemic continues. The speed and extent to which utilization rebounds will be greatly impacted by the economy and consumer behavior, provider capacity, and the potential resurgence of COVID-19 infection rates. We believe that some portion of the utilization curtailment experienced in the three months endedMarch 31, 2022 is likely the result of service deferrals, and so these services will likely be provided to members over the remainder of the year.
Capital and Financial Resources
We continue to monitor and assess the estimated operating and financial impact of the COVID-19 pandemic, and as it evolves, we continue to process, assemble, and assess member utilization information. We believe that our cash resources, borrowing capacity available under the Credit Agreement, and cash flow generated from operations will be sufficient to withstand the financial impact of the pandemic, and will enable us to continue to support our operations, regulatory requirements, debt repayment obligations, and capital expenditures for the foreseeable future. Refer to "Liquidity and Financial Condition" below for further discussion of our capital and financial resources.
OTHER RECENT DEVELOPMENTS
California Procurement-Medicaid. InApril 2022 , we submitted our RFP response. We expect the award to be announced in earlyAugust 2022 , with an effective date ofJanuary 2024 .Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 24
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Texas Procurement-Medicaid. InMarch 2022 , theTexas Health and Human Services Commission posted the ABD program (known inTexas as STAR+PLUS) RFP, with awards estimated to be announced in the fourth quarter of 2022, and start of operations inSeptember 2023 . Texas Acquisition-Medicaid and Medicare. OnJanuary 1, 2022 , we closed on our acquisition of Cigna Corporation's Texas Medicaid and Medicare-Medicaid Plan ("MMP") contracts, along with certain operating assets.
Nevada Procurement-Medicaid. Our new contract in
commenced on
Medicaid Expansion beneficiaries. The four year contract with a possible
two-year extension was ratified in
Marketplace Enrollment. We now expect to end 2022 with approximately 270,000 members, reflecting normal attrition over the remainder of the year and limited special enrollment period growth based on revised eligibility rules and our product design and distribution strategy. This represents an increase compared to our previous estimate of 250,000 members by the end of 2022, resulting from stronger final enrollment and grace period membership.
For a discussion of additional segment trends, uncertainties and other
developments, refer to our 2021 Annual Report on Form 10-K, "Item 1.
Business-Our Business," and "-Legislative and Political Environment."
REPORTABLE SEGMENTS
As ofMarch 31, 2022 , we served approximately 5.1 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs for low-income families and individuals, including Marketplace members, most of whom receive government premium subsidies.
We currently have 4 reportable segments consisting of: 1) Medicaid; 2) Medicare;
3) Marketplace; and 4) Other.
The Medicaid, Medicare, and Marketplace segments represent the government-funded or sponsored programs under which we offer managed healthcare services. The Other segment, which is insignificant to our consolidated results of operations, includes certain corporate amounts not associated with or allocated to the Medicaid, Medicare, or Marketplace segments. Additionally, the Other segment includes service revenues and service costs associated with the long-term services and supports consultative services we provide inWisconsin .
HOW WE ASSESS PERFORMANCE
We derive our revenues primarily from health insurance premiums. Our primary
customers are state Medicaid agencies and the federal government.
The key metrics used to assess the performance of our Medicaid, Medicare, and
Marketplace segments are premium revenue, medical margin and medical care ratio
("MCR"). MCR represents the amount of medical care costs as a percentage of
premium revenue. Therefore, the underlying medical margin, or the amount earned
by the Medicaid, Medicare, and Marketplace segments after medical costs are
deducted from premium revenue, represents the most important measure of earnings
reviewed by management, and is used by our chief executive officer to review
results, assess performance, and allocate resources. The key metric used to
assess the performance of our Other segment is service margin. The service
margin is equal to service revenue minus cost of service revenue.
Management's discussion and analysis of the change in medical margin is
discussed below under "Segment Financial Performance." For more information, see
Notes to Consolidated Financial Statements, Note 10, "Segments."
SEGMENT MEMBERSHIP
The following table sets forth our membership by segment as of the dates
indicated:
March 31, December 31, March 31,
2022 2021 2021
Medicaid 4,566,000 4,329,000 3,859,000
Medicare 148,000 142,000 126,000
Marketplace 371,000 728,000 620,000
Total 5,085,000 5,199,000 4,605,000
Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 25
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The following table summarizes premium revenue, medical margin, and MCR by
segment for the periods indicated (dollars in millions):
Three Months Ended March 31,
2022 2021
Premium Medical Premium Medical
Revenue Margin MCR Revenue Margin MCR
Medicaid $ 5,980 $ 710 88.1 % $ 4,840 $ 604 87.5 %
Medicare 943 128 86.5 799 77 90.3
Marketplace 608 130 78.6 667 151 77.3
Total $ 7,531 $ 968 87.1 % $ 6,306 $ 832 86.8 %
Medicaid
Medicaid premium revenue increased $1.1 billion , or 24%, in the first quarter of
2022, when compared with the first quarter of 2021. The increase was mainly due
to organic membership growth, including Nevada , and the impact from the Affinity
and Cigna acquisitions that closed in the fourth quarter of 2021 and in January
2022 , respectively. Excluding the acquisitions, membership growth was across
several states and was mainly driven by the extension of the PHE period and the
associated suspension of membership redeterminations due to COVID-19. The
increase was partially attributable to a reduced impact of state risk corridors
stemming from COVID-19.
As described above in "Trends and Uncertainties," we recognized approximately
$28 million in the first quarter of 2022, for the impact of risk corridors
enacted in several states beginning in the second quarter of 2020, in response
to the lower utilization of medical services resulting from COVID-19. We
recognized approximately $110 million for the impact of such risk corridors in
the first quarter of 2021. The decrease is due to the elimination of most of the
COVID-19 risk corridors.
The medical margin in our Medicaid program increased $106 million , or 18%, in
the first quarter of 2022 when compared with the first quarter of 2021. The
increase was driven by increased premium revenues and margin associated with the
membership growth discussed above, partially offset by an increase in the MCR.
The Medicaid MCR increased to 88.1% in the first quarter of 2022, from 87.5% in
the first quarter of 2021, or 60 basis points. The increase was mainly
attributable to a year-over-year increase in the net effect of COVID, partially
offset by improved operations, including medical cost management. The
year-over-year change in the net effect of COVID reflects an increase in
COVID-related inpatient costs, and lower COVID-related utilization curtailment,
partially offset by the decrease in COVID-related risk corridors. The Medicaid
MCR is consistent with our long-term target despite the net effect of COVID.
Medicare
Medicare premium revenue increased$144 million , or 18%, in the first quarter of 2022, primarily due to the impact of product expansion and organic membership growth in existing states, partially offset by lower premium revenue PMPM from the change in business mix. The medical margin for Medicare increased$51 million , in the first quarter of 2022, when compared with the first quarter of 2021, mainly due to the increase in premium revenues and the improvement in the MCR discussed below. The Medicare MCR decreased to 86.5% in the first quarter of 2022, from 90.3% in the first quarter of 2021, or 380 basis points. The improvement was primarily driven by a lower net effect of COVID, improved operating performance, including higher risk scores that more closely reflect the acuity of our membership, and the change in business mix. The Medicare MCR is lower than our long-term target.
Marketplace
Marketplace premium revenue in the first quarter of 2022 decreased$59 million , compared with the first quarter of 2021, mainly due to a reduction in membership, partially offset by an increase in premium revenue PMPM. Our Marketplace membership as ofMarch 31, 2022 amounted to 371,000 members, representing a decline of 357,000 members compared toDecember 31, 2021 , which is in line with our product and pricing strategy to achieve our target margins in this business. The increase in premium revenue PMPM is consistent with the product and pricingMolina Healthcare, Inc. March 31, 2022 Form 10-Q | 26
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strategy, reflecting an increase of members in the silver metal tier and a
decrease of members in the bronze metal tier.
The Marketplace medical margin decreased
2022, when compared with the first quarter of 2021, primarily due to the
decrease in membership and premiums, and the increase in the MCR described
below.
The Marketplace MCR increased to 78.6% in the first quarter of 2022, from 77.3% in the first quarter of 2021, or 130 basis points. The increase resulted mainly from changes in membership mix discussed above. Silver metal tier products incur less MCR seasonality than bronze metal tier products due to lower deductibles. The Marketplace MCR is in line within our long-term target.
Other
The Other segment includes service revenues and costs associated with long-term services and supports consultative services we provide inWisconsin , and also includes certain corporate amounts not allocated to the Medicaid, Medicare, or Marketplace segments. Such amounts were immaterial to our consolidated results of operations in the first quarters of 2022 and 2021, respectively.
LIQUIDITY AND FINANCIAL CONDITION
LIQUIDITY
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy. We maintain liquidity at two levels: 1) the regulated health plan subsidiaries; and 2) the parent company. Our regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity. In the first quarter of 2022, we did not experience noticeable delays to, or changes in, the timing or level of premium receipts as a result of the COVID-19 pandemic, but there can be no assurances that we will not experience such delays in the future. See further discussion below in "Future Sources and Uses of Liquidity-Future Uses-Potential Impact of COVID-19 Pandemic." A majority of the assets held by our regulated health plan subsidiaries is in the form of cash, cash equivalents, and investments. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plan subsidiaries is generally paid in the form of dividends to our parent company to be used for general corporate purposes. In the three months endedMarch 31, 2022 , the parent company received$115 million , in dividends and return of capital from the regulated health plan subsidiaries. See further discussion of dividends below in "Future Sources and Uses of Liquidity-Future Sources." The parent company may also contribute capital to the regulated health plan subsidiaries to satisfy minimum statutory net worth requirements, including funding for newer health plans. In the three months endedMarch 31, 2022 , the parent company contributed capital of$19 million , to the regulated health plan subsidiaries. Cash, cash equivalents and investments at the parent company amounted to$250 million and$348 million as ofMarch 31, 2022 , andDecember 31, 2021 , respectively. The decrease as ofMarch 31, 2022 , was primarily due to the timing of corporate payments and capital contributions to regulated health plan subsidiaries, partially offset by dividends received from regulated health plan subsidiaries. Investments After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies which conform to applicable state laws and regulations. Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of less than 15 years, or less than 15 years average life for structured securities. Professional portfolio managers operating underMolina Healthcare, Inc. March 31, 2022 Form 10-Q | 27 --------------------------------------------------------------------------------
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documented guidelines manage our investments and a portion of our cash
equivalents. Our portfolio managers must obtain our prior approval before
selling investments where the loss position of those investments exceeds certain
levels.
We believe that the risks of the COVID-19 pandemic, as they relate to our investments, are minimal. The overall rating of our portfolio remains strong and is rated AA. Our investment policy has directives in conjunction with state guidelines to minimize risks and exposures in volatile markets. Additionally, our portfolio managers assist us in navigating the current volatility in the capital markets. Our restricted investments are invested principally in cash, cash equivalents, andU.S. Treasury securities; we have the ability to hold such restricted investments until maturity. All of our unrestricted investments are classified as current assets. Cash Flow Activities
Our cash flows are summarized as follows:
Three Months Ended March 31,
2022 2021 Change
(In millions)
Net cash provided by operating activities $ 363 $ 568 $ (205)
Net cash provided by (used in) investing activities 74 (87) 161
Net cash used in financing activities (77) (207) 130
Net increase in cash, cash equivalents, and
restricted cash and cash equivalents $ 360 $ 274 $ 86
Operating Activities
We typically receive capitation payments monthly, in advance of payments for
medical claims; however, government payors may adjust their payment schedules,
positively or negatively impacting our reported cash flows from operating
activities in any given period. For example, government payors may delay our
premium payments, or they may prepay the following month's premium payment.
Net cash provided by operations for the three months ended March 31, 2022 was
$363 million , compared with $568 million in the three months ended March 31,
2021 . The $205 million decrease in cash flow was due to the net impact of timing
differences in government receivables and payables and partially offset by an
increase in net earnings.
Investing Activities
Net cash provided by investing activities was $74 million in the three months
ended March 31, 2022 , compared with $87 million used in investing activities in
the three months ended March 31, 2021 , an increase in cash flow of $161 million .
This increase in cash flow was primarily due to the net activity of proceeds and
purchases of investments in the three months ended March 31, 2022 .
Financing Activities
Net cash used in financing activities was$77 million in the three months endedMarch 31, 2022 , compared with$207 million used in the three months endedMarch 31, 2021 , an increase in cash flow of$130 million . In the three months endedMarch 31, 2022 , cash outflow included$52 million for common stock withheld to settle employee tax obligations. In the three months endedMarch 31, 2021 , financing cash outflows included common stock purchases of$128 million and$51 million for common stock withheld to settle employee tax obligations. Additionally, we paid$20 million each in the first quarters of 2022 and 2021 to settle contingent consideration liabilities relating to our Kentucky Passport acquisition that closed in 2020.
FINANCIAL CONDITION
We believe that our cash resources, borrowing capacity available under the
Credit Agreement as discussed further below in "Future Sources and Uses of
Liquidity-Future Sources," and internally generated funds will be sufficient to
support our operations, regulatory requirements, debt repayment obligations and
capital expenditures for at least the next 12 months.
Molina Healthcare, Inc. March 31, 2022 Form 10-Q | 28
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On a consolidated basis, atMarch 31, 2022 , our working capital was$3.1 billion , compared with$3.0 billion atDecember 31, 2021 . AtMarch 31, 2022 , our cash and investments amounted to$8.0 billion , compared with$7.9 billion atDecember 31, 2021 .
Each of our regulated, wholly owned subsidiaries must maintain a minimum amount of statutory capital determined by statute or regulations. Such statutes, regulations and capital requirements also restrict the timing, payment and amount of dividends and other distributions, loans or advances that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based upon current statutes and regulations, the minimum capital and surplus requirement for these subsidiaries was estimated to be approximately$2.1 billion at bothMarch 31, 2022 andDecember 31, 2021 . The aggregate capital and surplus of our wholly owned subsidiaries was in excess of these minimum capital requirements as of both dates. Under applicable regulatory requirements, the amount of dividends that may be paid by our wholly owned subsidiaries without prior approval by regulatory authorities as ofMarch 31, 2022 , was approximately$229 million in the aggregate. The subsidiaries may pay dividends over this amount, but only after approval is granted by the regulatory authorities. Based on our cash and investments balances as ofMarch 31, 2022 , management believes that our regulated, wholly owned subsidiaries remain well capitalized and exceed their regulatory minimum requirements. We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.
Debt Ratings
Each of our senior notes is rated "BB-" by
Moody's Investor Service, Inc. A downgrade in our ratings could adversely affect
our borrowing capacity and increase our future borrowing costs.
Financial Covenants
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. Such ratios are computed as defined by the terms of the Credit Agreement. In addition, the indentures governing each of our outstanding senior notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture. As ofMarch 31, 2022 , we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt.
FUTURE SOURCES AND USES OF LIQUIDITY
Future Sources
Our regulated subsidiaries generate significant cash flows from premium revenue, which is generally received a short time before related healthcare services are paid. Premium revenue is our primary source of liquidity. Thus, any decline in the receipt of premium revenue, and our profitability, could have a negative impact on our liquidity. Potential Impact of COVID-19 Pandemic. Excluding acquisitions and our exit fromPuerto Rico , we added over 750,000 new Medicaid members sinceMarch 31, 2020 , when we first began to report on the impacts of the pandemic. We believe this membership increase was mainly due to the suspension of redeterminations for Medicaid eligibility. We expect Medicaid enrollment to continue to benefit from the extension of the PHE period, and the associated pause on membership redeterminations, at least throughmid-July 2022 . Dividends from Subsidiaries. When available and as permitted by applicable regulations, cash in excess of the capital needs of our regulated health plans is generally paid in the form of dividends to our unregulated parent company to be used for general corporate purposes. As a result of the COVID-19 pandemic, state regulators could further restrict the ability of our regulated health plan subsidiaries to pay dividends to the parent company, which would reduce the liquidity of the parent company. Credit Agreement Borrowing Capacity. As ofMarch 31, 2022 , we had available borrowing capacity of$1 billion under the revolving credit facility of our Credit Agreement. In addition, the Credit Agreement provides for a$15 million swingline sub-facility and a$100 million letter of credit sub-facility, as well as incremental term loans available to finance certain acquisitions up to$500 million , plus an unlimited amount of such term loans as long asMolina Healthcare, Inc. March 31, 2022 Form 10-Q | 29 --------------------------------------------------------------------------------
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our consolidated net leverage ratio is not greater than a defined maximum. See further discussion in the Notes to Consolidated Financial Statements, Note 8, "Debt." Future Uses Common Stock Purchases. InSeptember 2021 , our board of directors authorized the purchase of up to$500 million , in the aggregate, of our common stock. This new program, which superseded the stock purchase program approved by our board of directors inSeptember 2020 , is funded with cash on hand and extends throughDecember 31, 2022 . The exact timing and amount of any repurchase is determined by management based on market conditions and share price, in addition to other factors, and subject to the restrictions relating to volume, price, and timing under applicable law. As ofApril 27, 2022 ,$472 million remained available to purchase our common stock under this program throughDecember 31, 2022 . Acquisitions. OnOctober 7, 2021 , we announced a definitive agreement to acquire the Medicaid Managed Long Term Care business of AgeWell New York. The purchase price for the transaction is approximately$106 million , net of certain tax benefits and target allocation of required regulatory capital, which we intend to fund with cash on hand. The transaction is subject to applicable federal and state regulatory approvals and the satisfaction of other customary closing conditions. We currently expect the transaction to close by the third quarter of 2022. Potential Impact of COVID-19 Pandemic. As described above in "Trends and Uncertainties," we have been subject to Medicaid risk corridors as a result of the pandemic. Beginning in 2020, various states enacted temporary risk corridors in response to the reduced demand for medical services stemming from COVID-19, which have resulted in a reduction of our medical margin. In some cases, these risk corridors were retroactive to earlier periods in 2020, or as early as the beginning of the states' fiscal years in 2019. Beginning in the second quarter of 2020, we have recognized risk corridors that we believe to be probable, and where the ultimate premium amount is reasonably estimable. For the three months endedMarch 31, 2022 , we recognized approximately$28 million related to such risk corridors, primarily in the Medicaid segment. It is possible that certain states could change the structure of existing risk corridors, implement new risk corridors in the future or discontinue existing risk corridors. Due to these uncertainties, the ultimate outcomes could differ materially from our estimates as a result of changes in facts or further developments, which could have an adverse effect on our consolidated financial position, results of operations, or cash flows.
Regulatory Capital Requirements. We have the ability, and have committed to
provide, additional capital to each of our health plans as necessary to ensure
compliance with statutory capital and surplus requirements.
CONTRACTUAL OBLIGATIONS
A summary of future obligations under our various contractual obligations and commitments as ofDecember 31, 2021 , was disclosed in our 2021 Annual Report on Form 10-K. There were no significant changes to our contractual obligations and commitments outside the ordinary course of business during the three months endedMarch 31, 2022 .
CRITICAL ACCOUNTING ESTIMATES
When we prepare our consolidated financial statements, we use estimates and
assumptions that may affect reported amounts and disclosures; actual results
could differ from these estimates. Our critical accounting estimates relate to:
•Medical claims and benefits payable. Refer to Notes to Consolidated Financial Statements, Note 7, "Medical Claims and Benefits Payable," for a table that presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, in the three months endedMarch 31, 2022 there were no significant changes to our disclosure reported in "Critical Accounting Estimates" in our 2021 Annual Report on Form 10-K.
•Contractual provisions that may adjust or limit revenue or profit. For a
discussion of this topic, including amounts recorded in our consolidated
financial statements, refer to Notes to Consolidated Financial Statements, Note
2, "Significant Accounting Policies."
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•Quality incentives. In the three months ended
significant changes to our disclosure reported in "Critical Accounting
Estimates" in our 2021 Annual Report on Form 10-K.
•Business combinations, goodwill, and intangible assets, net. In the three months endedMarch 31, 2022 , there were no significant changes to our disclosure reported in "Critical Accounting Estimates" in our 2021 Annual Report on Form 10-K.
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