MOH-2014.09.30-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 001-31719
 
 
 
 
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-4204626
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
200 Oceangate, Suite 100
Long Beach, California
 
90802
(Address of principal executive offices)
 
(Zip Code)
(562) 435-3666
(Registrant’s telephone number, including area code)
 
 
 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes  ¨ No  ý
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of October 24, 2014, was approximately 48,397,000.


Table of Contents

MOLINA HEALTHCARE, INC.
Form 10-Q

For the Quarterly Period Ended September 30, 2014
TABLE OF CONTENTS
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
 
September 30,
2014
 
December 31,
2013
 
(Amounts in thousands,
except per-share data)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
1,598,596

 
$
935,895

Investments
842,683

 
703,052

Receivables
425,683

 
298,935

Income taxes refundable
7,679

 
32,742

Deferred income taxes
30,817

 
26,556

Prepaid expenses and other current assets
82,062

 
42,484

Total current assets
2,987,520

 
2,039,664

Property, equipment, and capitalized software, net
328,547

 
292,083

Deferred contract costs
51,179

 
45,675

Intangible assets, net
85,035

 
98,871

Goodwill
236,635

 
230,738

Restricted investments
93,119

 
63,093

Derivative asset
222,997

 
186,351

Other assets
51,108

 
46,462

 
$
4,056,140

 
$
3,002,937

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
1,123,846

 
$
669,787

Accounts payable and accrued liabilities
609,444

 
319,965

Deferred revenue
190,856

 
122,216

Current maturities of long-term debt
11,927

 
182,008

Total current liabilities
1,936,073

 
1,293,976

Convertible senior notes
697,210

 
416,368

Lease financing obligations
160,412

 
159,394

Lease financing obligations – related party
39,258

 
27,092

Deferred income taxes
7,719

 
580

Derivative liability
222,877

 
186,239

Other long-term liabilities
28,300

 
26,351

Total liabilities
3,091,849

 
2,110,000

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 150,000 shares authorized; outstanding: 48,279 shares at September 30, 2014 and 45,871 shares at December 31, 2013
48

 
46

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding

 

Additional paid-in capital
383,300

 
340,848

Accumulated other comprehensive loss
(617
)
 
(1,086
)
Retained earnings
581,560

 
553,129

Total stockholders’ equity
964,291

 
892,937

 
$
4,056,140

 
$
3,002,937

See accompanying notes.

1

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands, except net income per share)
(Unaudited)
Revenue:
 
 
 
 
 
 
 
Premium revenue
$
2,316,759

 
$
1,584,656

 
$
6,424,238

 
$
4,583,818

Service revenue
52,557

 
51,100

 
156,419

 
150,528

Premium tax revenue
81,240

 
43,723

 
203,053

 
127,606

Health insurer fee revenue
29,427

 

 
67,785

 

Investment income
2,041

 
1,740

 
5,615

 
4,884

Other revenue
2,327

 
5,860

 
8,523

 
16,476

Total revenue
2,484,351

 
1,687,079

 
6,865,633

 
4,883,312

Operating expenses:
 
 
 
 
 
 
 
Medical care costs
2,097,836

 
1,383,213

 
5,753,793

 
3,965,834

Cost of service revenue
40,067

 
40,113

 
117,831

 
119,188

General and administrative expenses
178,879

 
176,233

 
560,205

 
478,990

Premium tax expenses
81,240

 
43,723

 
203,053

 
127,606

Health insurer fee expenses
22,308

 

 
66,443

 

Depreciation and amortization
24,242

 
18,871

 
67,835

 
52,449

Total operating expenses
2,444,572

 
1,662,153

 
6,769,160

 
4,744,067

Operating income
39,779

 
24,926

 
96,473

 
139,245

Other expenses, net:
 
 
 
 
 
 
 
Interest expense
14,419

 
13,532

 
42,234

 
38,236

Other expense (income), net
863

 
(24
)
 
810

 
3,347

Total other expenses, net
15,282

 
13,508

 
43,044

 
41,583

Income from continuing operations before income tax expense
24,497

 
11,418

 
53,429

 
97,662

Income tax expense
8,427

 
3,865

 
24,784

 
43,791

Income from continuing operations
16,070

 
7,553

 
28,645

 
53,871

Income (loss) from discontinued operations, net of tax
52

 
16

 
(214
)
 
8,184

Net income
$
16,122

 
$
7,569

 
$
28,431

 
$
62,055

 
 
 
 
 
 
 
 
Basic net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.34

 
$
0.17

 
$
0.62

 
$
1.18

Discontinued operations

 

 
(0.01
)
 
0.18

Basic net income per share
$
0.34

 
$
0.17

 
$
0.61

 
$
1.36

 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.33

 
$
0.16

 
$
0.60

 
$
1.15

Discontinued operations

 

 
(0.01
)
 
0.18

Diluted net income per share
$
0.33

 
$
0.16

 
$
0.59

 
$
1.33

See accompanying notes.

2

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(Amounts in thousands)
(Unaudited)
Net income
$
16,122

 
$
7,569

 
$
28,431

 
$
62,055

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized investment (loss) gain
(1,061
)
 
2,087

 
756

 
(1,539
)
Effect of income taxes
(404
)
 
793

 
287

 
(585
)
Other comprehensive (loss) income, net of tax
(657
)
 
1,294

 
469

 
(954
)
Comprehensive income
$
15,465

 
$
8,863

 
$
28,900

 
$
61,101


See accompanying notes.


3

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
(Amounts in thousands)
(Unaudited)
Operating activities:
 
 
 
Net income
$
28,431

 
$
62,055

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
99,464

 
68,035

Deferred income taxes
(10,705
)
 
(38,442
)
Stock–based compensation
16,115

 
20,654

Amortization of convertible senior notes and lease financing obligations
20,195

 
16,128

Other, net
3,875

 
14,406

Changes in operating assets and liabilities:
 
 
 
Receivables
(126,748
)
 
(144,285
)
Prepaid expenses and other assets
(51,582
)
 
(27,552
)
Medical claims and benefits payable
454,059

 
138,176

Accounts payable and accrued liabilities
314,391

 
20,991

Deferred revenue
68,640

 
(17,410
)
Income taxes
25,063

 
(1,012
)
Net cash provided by operating activities
841,198

 
111,744

Investing activities:
 
 
 
Purchases of investments
(616,324
)
 
(627,953
)
Proceeds from sales and maturities of investments
473,836

 
227,800

Purchases of equipment
(71,771
)
 
(64,426
)
Increase in restricted investments
(24,301
)
 
(21,124
)
Net cash paid in business combinations
(7,500
)
 
(57,684
)
Other, net
(15,220
)
 
1,971

Net cash used in investing activities
(261,280
)
 
(541,416
)
Financing activities:
 
 
 
Proceeds from issuance of convertible senior notes, net of deferred financing costs
123,387

 
537,973

Proceeds from sale-leaseback transactions

 
158,694

Purchase of call option

 
(149,331
)
Proceeds from issuance of warrants

 
75,074

Treasury stock purchases

 
(50,000
)
Principal payments on term loan

 
(47,471
)
Repayment of amounts borrowed under credit facility

 
(40,000
)
Contingent consideration liabilities settled
(50,349
)
 

Proceeds from employee stock plans
7,628

 
5,156

Other, net
2,117

 
363

Net cash provided by financing activities
82,783

 
490,458

Net increase in cash and cash equivalents
662,701

 
60,786

Cash and cash equivalents at beginning of period
935,895

 
795,770

Cash and cash equivalents at end of period
$
1,598,596

 
$
856,556


4

Table of Contents

MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
(Amounts in thousands)
(Unaudited)
Supplemental cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
7,991

 
$
72,156

Interest
$
24,384

 
$
28,035

 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
3.75% Notes exchanged for 1.625% Notes
$
176,551

 
$

Retirement of treasury stock
$

 
$
53,000

Increase in non-cash lease financing obligation – related party
$
13,841

 
$
19,222

Common stock used for stock-based compensation
$
8,595

 
$
6,667

 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
Gain on 1.125% Call Option
$
36,646

 
$
42,332

Loss on 1.125% Notes Conversion Option
(36,638
)
 
(42,225
)
Loss on 1.125% Warrants

 
(3,923
)
Gain on interest rate swap

 
433

Change in fair value of derivatives, net
$
8

 
$
(3,383
)
 
 
 
 
Details of business combinations:
 
 
 
Fair value of assets acquired
$
7,500

 
$
121,845

Fair value of contingent consideration liabilities incurred

 
(59,947
)
Payable to seller

 
(3,882
)
Escrow deposit

 
(332
)
Net cash paid in business combinations
$
7,500

 
$
57,684


See accompanying notes.


5

Table of Contents

MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2014
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment.
Our Health Plans segment consists of health plans in 11 states, and includes our direct delivery business. As of September 30, 2014, these health plans served approximately 2.4 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve a small number of Health Insurance Marketplace (Marketplace) members, many of whom are eligible for government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the management of a hospital in southern California under a management services agreement, and the operation of primary care clinics in several states in which we operate.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
On October 15, 2014, the Puerto Rico Health Insurance Administration announced that it has selected Molina Healthcare of Puerto Rico to operate the Commonwealth’s Medicaid-funded Government Health Plan program in the East and Southwest regions. We expect to begin serving members in the second quarter of 2015.
In August 2014, we announced that our Florida health plan entered into an agreement with First Coast Advantage, LLC (FCA) to acquire certain assets related to FCA's Medicaid business. As part of the transaction, we will assume FCA's Medicaid contract and certain provider agreements for Region 4 of the Statewide Medicaid Managed Care Managed Medical Assistance Program in the state of Florida. We have received approval for the transaction from the Florida Agency for Health Care Administration, and expect to close in late 2014 or early 2015.
We previously reported that our Medicaid managed care contract with the state of Missouri expired without renewal in 2012, and effective June 2013 the transition obligations associated with that contract terminated. Therefore, beginning in the second quarter of 2013, we classified the operations for our Missouri health plan as discontinued operations for all periods presented in our consolidated financial statements.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries and variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such variable interest entities are insignificant to our consolidated financial position and results of operations. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2014.
The unaudited consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, 2013. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2013 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2013 audited consolidated financial statements.
Reclassifications
We have reclassified certain amounts in the 2013 consolidated balance sheet and statement of cash flows to conform to the 2014 presentation.

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Table of Contents

2. Significant Accounting Policies
Revenue Recognition
Premium Revenue – Health Plans Segment
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. Premium revenues are recognized in the month that members are entitled to receive health care services.
Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
(1)
Contractual provisions that may adjust or limit revenue or profit:
Health Plan Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums): A portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $272.6 million and $1.4 million at September 30, 2014, and December 31, 2013, respectively, to accounts payable and accrued liabilities. The increase is primarily driven by contractual provisions relating to the Medicaid expansion program, which began to phase in during January 2014. Beginning in 2014, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. In the aggregate, we recorded a receivable under the terms of such contract provisions of $3.6 million at September 30, 2014. Separately, in certain states we may be levied with non-monetary sanctions if certain minimum amounts are not spent on defined medical care costs, or if administrative costs exceed certain amounts.
Health Plan Profit Sharing and Profit Ceiling: Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage, in some cases in accordance with a tiered rebate schedule. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. As a result of profits in excess of the amount we are allowed to fully retain, we recorded a liability of $24.5 million and $2.5 million at September 30, 2014 and December 31, 2013, respectively.
Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to the Centers for Medicare and Medicaid Services (CMS), our Medicare premiums are subject to retroactive adjustment for both member risk scores and member pharmacy cost experience for up to two years after the original year of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was anticipated when premiums were originally set for that member. In the event that a member requires less acute medical care than was anticipated by the original premium amount, CMS may recover premium from us. In the event that a member requires more acute medical care than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health care utilization patterns and CMS practices. Based on our knowledge of member health care utilization patterns and expenses we have recorded a net receivable of $18.6 million and $20.8 million for anticipated Medicare risk adjustment premiums at September 30, 2014, and December 31, 2013, respectively.
(2)
Quality incentives:
At our California, Illinois, New Mexico, Ohio, Texas, Washington and Wisconsin health plans, revenue ranging from approximately 1% to 4% of health plan premiums is earned if certain performance measures are met.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and in prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of September 30, 2014 are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of September 30, 2014.

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Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Maximum available quality incentive premium - current period
$
24,477

 
$
20,939

 
$
68,941

 
$
62,050

 
 
 
 
 
 
 
 
Amount of quality incentive premium revenue recognized in current period:
 
 
 
 


 
 
Earned current period
$
12,921

 
$
17,538

 
$
30,935

 
$
52,483

Earned prior periods
208

 
(50
)
 
3,412

 
7,759

Total
$
13,129

 
$
17,488

 
$
34,347

 
60,242

 
 
 
 
 
 
 
 
Total premium revenue recognized for state health plans with quality incentive premiums
$
1,818,375

 
$
771,615

 
$
5,005,444

 
$
2,192,249

(3)
California health plan rate settlement agreement:
In the fourth quarter of 2013, our California health plan entered into a settlement agreement with the California Department of Health Care Services (DHCS). The agreement settled rate disputes initiated by our California health plan dating back to 2003 with respect to its participation in Medi-Cal (California’s Medicaid program). Under the terms of the agreement, a settlement account (the Account) applicable to the California health plan’s managed care contracts has been established.
Effective January 1, 2014, the Account was established with an initial balance of zero, and will be settled after December 31, 2017. DHCS will make an interim partial settlement payment to us if it terminates early, without replacement, any of our managed care contracts. The Account will be adjusted annually to reflect a calendar year deficit or surplus, which is determined by comparing the California health plan’s pre-tax margin and a target margin established in the settlement agreement. Upon expiration of the settlement agreement, if the Account is in a deficit position, then DHCS will pay the amount of the deficit to us, subject to an alternative minimum payment amount. If the Account is in a surplus position, then no amount is owed to either party. The maximum amount that DHCS would pay to us under the terms of the settlement agreement is $40.0 million.
We estimate and recognize the retrospective adjustments to premium revenue based on our experience to date under the California health plan's managed care contracts. As of September 30, 2014, we recorded a deficit, or receivable, of $3.5 million, net of a valuation discount of $0.2 million, reflecting our estimated retrospective premium adjustment to the Account based on the California health plan's actual pretax margin for the nine months ended September 30, 2014.
In addition to the three categories of accounting estimates discussed above, our California health plan recognized a benefit of approximately $15 million in the second quarter of 2014 for certain premium revenue which related to the year ended December 31, 2013.
Service Revenue and Cost of Service Revenue – Molina Medicaid Solutions Segment
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of multiple services. The first of these is the design, development and implementation (DDI) of a Medicaid management information system (MMIS). An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing (BPO) arrangement. When providing BPO services (which include claims payment and eligibility processing) we also provide the state with other services including both hosting and support, and maintenance. Because we have determined the services provided under our Molina Medicaid Solutions contracts represent a single unit of accounting, we recognize revenue associated with such contracts on a straight-line basis over the contract term during which BPO, hosting, and support and maintenance services are delivered. There may be certain contractual provisions containing contingencies, however that require us to delay recognition of all or part of our service revenue until such contingencies have been removed.
Cost of service revenue consists primarily of the costs incurred to provide BPO and technology outsourcing services under our MMIS contracts. General and administrative costs consist primarily of indirect administrative costs and business development costs. In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are amortized on a straight-line basis over the contract term, consistent with the revenue recognition period.

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Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes, nondeductible health insurer fee expenses, nondeductible compensation and other general and administrative expenses. The effective tax rate may be subject to fluctuations during the year, particularly as a result of the mathematical impact of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.
During the third quarter of 2014, the Internal Revenue Service (IRS) issued final regulations related to compensation deduction limitations applicable to certain health insurance issuers. Pursuant to these final regulations, we recognized a tax benefit during the third quarter of 2014 of approximately $7 million, or $0.15 per diluted share, for periods prior to the third quarter of 2014.
The total amount of unrecognized tax benefits was $1.8 million and $8.0 million as of September 30, 2014 and December 31, 2013, respectively. The unrecognized tax benefits recorded at December 31, 2013 decreased by $6.2 million during the nine months ended September 30, 2014 as a result of the execution of a state settlement agreement and the expiration of statutes of limitation. This decrease had a nominal impact to the tax provision for the nine months ended September 30, 2014. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.6 million and $5.7 million as of September 30, 2014 and December 31, 2013, respectively. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $0.1 million due to the expiration of statute of limitations.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Amounts accrued for the payment of interest and penalties as of September 30, 2014 and December 31, 2013 were insignificant.
Income taxes relating to discontinued operations for the three months ended September 30, 2014 and 2013 were insignificant. During the nine months ended September 30, 2014 and 2013, we recognized tax benefits of $0.3 million and $10.0 million, respectively, related to discontinued operations.
New Accounting Standards
Health Insurer Fee. In the first quarter of 2014, we adopted the guidance of the Financial Accounting Standards Board (FASB) related to accounting for the fees to be paid by health insurers to the federal government under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the Affordable Care Act, or ACA). The ACA imposes an annual fee, or excise tax, on health insurers for each calendar year beginning on or after January 1, 2014. The health insurer fee (HIF) is imposed beginning in 2014, is based on a company's share of the industry's net premiums written during the preceding calendar year, and is payable on September 30 of each year.
Effective January 1, 2014, we recorded our estimate of the 2014 liability to accounts payable and accrued liabilities. During the third quarter of 2014 we paid our 2014 HIF assessment, which amounted to $88.6 million. This expense is being recognized on a straight-line basis in 2014; and is non-deductible for income tax purposes.
Because we primarily serve individuals in government-sponsored programs, we must secure additional reimbursement from our state partners for this added cost. We recognize HIF revenue when we have obtained a contractual commitment from a state to reimburse us for the health insurer fee. Such HIF revenue is recognized ratably throughout the year.
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09 - Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP). The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in the first quarter of 2017; early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.

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Discontinued Operations. In April 2014, the FASB issued ASU 2014-08 - Reporting Discontinued Operations and Disclosures of Disposal of Components of an Entity, which raises the threshold for disposals to qualify as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. This ASU will be effective for us in the first quarter of 2015, and is applied prospectively. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. We are evaluating the potential effects of the adoption of the ASU on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.
3. Net Income per Share

The following table sets forth the calculation of the denominators used to compute basic and diluted net income per share:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Shares outstanding at the beginning of the period
46,494

 
45,683

 
45,871

 
46,762

Weighted-average number of shares:
 
 
 
 
 
 
 
Repurchased

 

 

 
(1,375
)
Issued, 3.75% Exchange (1)
460

 

 
155

 

Issued, stock-based compensation and other
37

 
16

 
409

 
321

Denominator for basic net income per share
46,991

 
45,699

 
46,435

 
45,708

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock-based compensation
365

 
453

 
441

 
532

3.75% Notes and 3.75% Exchange (1)
1,288

 
910

 
1,212

 
527

Denominator for diluted net income per share
48,644

 
47,062

 
48,088

 
46,767

 
 
 
 
 
 
 
 
Potentially dilutive common shares excluded from calculations (2):
 
 
 
 
 
 
 
Stock options

 
60

 

 
49

1.125% Warrants
13,490

 
13,490

 
13,490

 
11,464

______________________________
(1)
For more information regarding the 3.75% Exchange and 3.75% Notes, refer to Note 11, "Long-Term Debt."
(2)
Potentially dilutive shares issuable pursuant to certain of our employee stock options, 1.125% Warrants (defined in Note 12, "Derivative Financial Instruments"), and 1.625% Notes (defined in Note 11, "Long-Term Debt") were not included in the computation of diluted net income per share because to do so would have been anti-dilutive.
4. Business Combinations
Health Plans Segment
South Carolina. In July 2013, we entered into an agreement with Community Health Solutions of America, Inc. (CHS) to acquire certain assets, including the rights to convert certain of CHS’ Medicaid members covered by South Carolina’s full-risk Medicaid managed care program. The conversion conditions under the agreement were satisfied by January 1, 2014, and on that date such Medicaid members were converted to the managed care program and enrolled with our South Carolina health plan. Because the number of Medicaid members we would ultimately convert was unknown as of the acquisition date in 2013, we recorded a contingent consideration liability for such members to be settled when the final purchase price was known in the second quarter of 2014. The total purchase price for the converted Medicaid membership amounted to $57.2 million, of which $49.7 million was paid in the first half of 2014, and $7.5 million was paid when the agreement was executed in 2013. The total amount paid includes indemnification withhold funds transferred to restricted investments amounting to $5.7 million. Any unused and remaining portion of such indemnification funds will become unrestricted and released to CHS on the one-year anniversary date of the conversion, or January 1, 2015.

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As part of this transaction, we have also recorded a contingent consideration liability for dual-eligible members we expect to enroll in our Medicare-Medicaid Plan (MMP) implementation in South Carolina. The contingent consideration liability is remeasured to fair value at each quarter until the contingency is resolved with fair value adjustments, if any, recorded to operations. As of September 30, 2014, the fair value of the remaining contingent consideration liability for the MMP implementation amounted to $1.5 million.
The aggregate contingent consideration liability fair value adjustments for the South Carolina transaction have resulted in a gain of $4.2 million in the nine months ended September 30, 2014.
New Mexico. In August 2013, our New Mexico health plan acquired Lovelace Community Health Plan’s contract for the state of New Mexico's Medicaid program. In addition to Lovelace's Medicaid members, we also added membership previously covered under New Mexico’s State Coverage Insurance (SCI) program with Lovelace. Effective January 1, 2014, these SCI members were either enrolled in New Mexico's Medicaid program, or eligible to enroll in New Mexico’s Marketplace. Because the number of SCI members we would ultimately retain was unknown as of the acquisition date in 2013, we recorded a contingent consideration liability for such members to be settled when the final purchase price was known in the second quarter of 2014. The aggregate contingent consideration liability fair value adjustments for the New Mexico transaction have resulted in a gain of $1.5 million in the nine months ended September 30, 2014.
Florida. In August 2014, our Florida health plan acquired certain assets relating to the Medicaid business of Healthy Palm Beaches, Inc. The final purchase price for this acquisition was $7.5 million. The Florida health plan's membership increased by approximately 11,000 members as a result of this transaction.
5. Stock-Based Compensation
In March 2014, our named executive officers were granted a total of 356,292 restricted shares with service, market, and performance conditions. In the event the vesting conditions are not achieved, the awards will lapse. As of September 30, 2014, we expect the performance conditions to be met in full.
Charged to general and administrative expenses, total stock-based compensation expense was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Restricted stock and performance awards
$
4,774

 
$
7,634

 
$
13,596

 
$
18,593

Employee stock purchase plan and stock options
885

 
870

 
2,519

 
2,061

 
$
5,659

 
$
8,504

 
$
16,115

 
$
20,654

As of September 30, 2014, there was $28.6 million of total unrecognized compensation expense related to unvested restricted stock awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of 2.0 years.
Restricted and performance stock activity for the nine months ended September 30, 2014 is summarized below:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance as of December 31, 2013
1,299,852

 
$
29.03

Granted
656,452

 
36.68

Vested
(597,301
)
 
27.70

Forfeited
(60,742
)
 
31.20

Unvested balance as of September 30, 2014
1,298,261

 
33.40

The total fair value of restricted and performance awards granted during the nine months ended September 30, 2014 and 2013 was $24.8 million and $33.3 million, respectively. The total fair value of restricted awards, including those with performance and market conditions, which vested during the nine months ended September 30, 2014 and 2013 was $22.5 million and $19.3 million, respectively.

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6. Fair Value Measurements
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, other assets, trade accounts payable, medical claims and benefits payable, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities (excluding contingent consideration) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs
Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
Level 2 — Directly or Indirectly Observable Inputs
Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, and certificates of deposit that are classified as current investments in the accompanying consolidated balance sheets. Such investments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs
Derivative financial instruments. Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Notes Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of September 30, 2014 included our common stock price, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 12, “Derivative Financial Instruments,” the 1.125% Call Option asset and the 1.125% Notes Conversion Option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
Contingent consideration liability. Such liability relates to our South Carolina health plan acquisition described in Note 4, "Business Combinations," and is recorded in accounts payable and accrued liabilities. We applied discounted cash flow analysis to determine the fair value of this liability. Significant unobservable inputs primarily related to the probability weighted present value of the purchase price estimate for the projected membership.
Auction rate securities. Auction rate securities are designated as available-for-sale and are reported at fair value in other assets. To estimate the fair value of these securities we use valuation data from our primary pricing source, a third party who provides a marketplace for illiquid assets with over 10,000 participants. This valuation data is based on a range of prices that represent indicative bids from potential buyers. To validate the reasonableness of the data, we compare these valuations to data from other third-party pricing sources, which also provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2014.


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Our financial instruments measured at fair value on a recurring basis at September 30, 2014, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
553,936

 
$

 
$
553,936

 
$

Municipal securities
96,873

 

 
96,873

 

GSEs
99,254

 
99,254

 

 

U.S. treasury notes
41,031

 
41,031

 

 

Certificates of deposit
51,589

 

 
51,589

 

Auction rate securities
6,891

 

 

 
6,891

1.125% Call Option derivative asset
222,997

 

 

 
222,997

Total assets measured at fair value on a recurring basis
$
1,072,571

 
$
140,285

 
$
702,398

 
$
229,888

 
 
 
 
 
 
 
 
1.125% Notes Conversion Option derivative liability
$
222,877

 
$

 
$

 
$
222,877

Contingent consideration liability
1,500

 

 

 
1,500

Total liabilities measured at fair value on a recurring basis
$
224,377

 
$

 
$

 
$
224,377

Our financial instruments measured at fair value on a recurring basis at December 31, 2013, were as follows:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Corporate debt securities
$
449,772

 
$

 
$
449,772

 
$

Municipal securities
113,330

 

 
113,330

 

GSEs
68,817

 
68,817

 

 

U.S. treasury notes
37,376

 
37,376

 

 

Certificates of deposit
33,757

 

 
33,757

 

Auction rate securities
10,898

 

 

 
10,898

1.125% Call Option derivative asset
186,351

 

 

 
186,351

Total assets measured at fair value on a recurring basis
$
900,301

 
$
106,193

 
$
596,859

 
$
197,249

 
 
 
 
 
 
 
 
1.125 % Notes Conversion Option derivative liability
$
186,239

 
$

 
$

 
$
186,239

Contingent consideration liabilities
57,548

 

 

 
57,548

Total liabilities measured at fair value on a recurring basis
$
243,787

 
$

 
$

 
$
243,787

The following table presents activity relating to our assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Change in Level 3 Instruments
 
Auction Rate Securities
 
Derivatives, Net
 
Contingent Consideration Liabilities
 
(In thousands)
Balance at December 31, 2013
$
10,898

 
$
112

 
$
(57,548
)
Total gains for the period recognized in:
 
 


 
 
General and administrative expenses

 

 
5,699

Other expenses, net

 
8

 

Other comprehensive income
193

 

 

 
 
 
 
 
 
Settlements
(4,200
)
 

 
50,349

Balance at September 30, 2014
$
6,891

 
$
120

 
$
(1,500
)
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our convertible senior notes, which are classified as Level 2 financial instruments, are indicated in the following table. Fair value for these securities is determined using a market approach based on

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quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
 
September 30, 2014
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
430,484

 
$
649,770

 
$

 
$
649,770

 
$

1.625% Notes
266,726

 
302,908

 

 
302,908

 

3.75% Notes
10,449

 
15,290

 

 
15,290

 

 
$
707,659

 
$
967,968

 
$

 
$
967,968

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Carrying
Value
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
1.125% Notes
$
416,368

 
$
572,627

 
$

 
$
572,627

 
$

3.75% Notes
181,872

 
219,491

 

 
219,491

 

 
$
598,240

 
$
792,118

 
$

 
$
792,118

 
$

7. Investments
The following tables summarize our investments as of the dates indicated:
 
September 30, 2014
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
554,359

 
$
448

 
$
871

 
$
553,936

Municipal securities
96,899

 
179

 
205

 
96,873

GSEs
99,436

 
16

 
198

 
99,254

U.S. treasury notes
41,074

 
13

 
56

 
41,031

Certificates of deposit
51,601

 
3

 
15

 
51,589

Subtotal - current investments
843,369

 
659

 
1,345

 
842,683

Auction rate securities
7,200

 

 
309

 
6,891

 
$
850,569

 
$
659

 
$
1,654

 
$
849,574

 
December 31, 2013
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Corporate debt securities
$
450,162

 
$
442

 
$
832

 
$
449,772

Municipal securities
114,126

 
119

 
915

 
113,330

GSEs
68,898

 
6

 
87

 
68,817

U.S. treasury notes
37,360

 
44

 
28

 
37,376

Certificates of deposit
33,756

 
2

 
1

 
33,757

Subtotal - current investments
704,302

 
613

 
1,863

 
703,052

Auction rate securities
11,400

 

 
502

 
10,898

 
$
715,702

 
$
613

 
$
2,365

 
$
713,950


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The contractual maturities of our investments as of September 30, 2014 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
312,449

 
$
312,493

Due one year through five years
530,920

 
530,190

Due after ten years
7,200

 
6,891

 
$
850,569

 
$
849,574

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the three and nine months ended September 30, 2014 and 2013 were insignificant.
We monitor our investments for other-than-temporary impairment. For investments other than our auction rate securities, discussed below, we have determined that unrealized gains and losses at September 30, 2014 and December 31, 2013, are temporary in nature, because the change in market value for these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial.
The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more as of September 30, 2014:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Securities
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Securities
 
(Dollars in thousands)
Corporate debt securities
$
231,598

 
$
639

 
163

 
$
43,112

 
$
232

 
13

Municipal securities
39,331

 
90

 
34

 
13,419

 
115

 
14

GSEs
71,602

 
161

 
21

 
5,992

 
37

 
6

U.S. treasury notes
21,545

 
51

 
12

 
4,245

 
5

 
2

Certificates of deposit
11,762

 
15

 
49

 

 

 

Auction rate securities

 

 

 
6,891

 
309

 
10

 
$
375,838

 
$
956

 
279

 
$
73,659

 
$
698

 
45

The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a continuous loss position for 12 months or more as of December 31, 2013:
 
In a Continuous Loss Position
for Less than 12 Months
 
In a Continuous Loss Position
for 12 Months or More
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Securities
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Securities
 
(Dollars in thousands)
Corporate debt securities
$
210,057

 
$
802

 
91

 
$
2,540

 
$
30

 
3

Municipal securities
30,715

 
398

 
49

 
31,091

 
517

 
39

GSEs
53,308

 
87

 
21

 

 

 

U.S. treasury notes
12,037

 
28

 
11

 

 

 

Certificates of deposit
414

 
1

 
2

 

 

 

Auction rate securities

 

 

 
10,898

 
502

 
15

 
$
306,531

 
$
1,316

 
174

 
$
44,529

 
$
1,049

 
57


Auction Rate Securities. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008, and such auctions have not resumed. Therefore, quoted prices in active markets have not been available since early 2008. Our investments in auction rate securities are collateralized by student loan portfolios guaranteed by the U.S. government, and the range of maturities for such securities is from 16 years to 32 years. Considering the insignificance of these securities when compared with our liquid assets and other sources of liquidity, we have no current

15

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intention of selling these securities nor do we expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the decline in the fair value of the auction rate securities was not due to the credit quality of the issuers, we do not consider the auction rate securities to be other-than-temporarily impaired at September 30, 2014. At the time of the first failed auctions during first quarter 2008, we held a total of $82.1 million in auction rate securities at par value; since that time, we have settled $74.9 million of these instruments at par value.
For the nine months ended September 30, 2014 and 2013, we recorded pretax unrealized gains of $0.2 million and $0.5 million, respectively, to accumulated other comprehensive income for the changes in their fair value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we determine that any future impairment is other-than-temporary, we will record a charge to earnings as appropriate.
8. Receivables
Receivables consist primarily of amounts due from the various states in which we operate, which may be subject to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are state governments, our allowance for doubtful accounts is immaterial.  
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
California
$
184,368

 
$
148,654

Florida
7,599

 
2,901

Illinois
3,412

 
5,773

Michigan
21,327

 
15,253

New Mexico
28,393

 
17,056

Ohio
66,839

 
43,969

South Carolina
4,229

 

Texas
14,608

 
9,736

Utah
9,274

 
10,953

Washington
33,214

 
13,455

Wisconsin
12,492

 
8,087

Direct delivery and other
8,240

 
2,463

Total Health Plans segment
393,995

 
278,300

Molina Medicaid Solutions segment
31,688

 
20,635

 
$
425,683

 
$
298,935

9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by state authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. Additionally, in connection with the Molina Medicaid Solutions contract with the state of Maine, we maintain restricted investments as collateral for a letter of credit. The following table

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presents the balances of restricted investments:
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
California
$
373

 
$
373

Florida
23,291

 
9,242

Illinois
312

 
310

Michigan
1,014

 
1,014

New Mexico
31,132

 
24,622

Ohio
12,719

 
9,080

South Carolina
6,038

 
310

Texas
3,500

 
3,500

Utah
3,601

 
3,301

Washington
151

 
151

Other
5,987

 
886

Total Health Plans segment
88,118

 
52,789

Molina Medicaid Solutions segment
5,001

 
10,304

 
$
93,119

 
$
63,093

The contractual maturities of our held-to-maturity restricted investments as of September 30, 2014 are summarized below:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
92,807

 
$
92,817

Due one year through five years
312

 
312

 
$
93,119

 
$
93,129

10. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated:
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
Fee-for-service claims incurred but not paid (IBNP)
$
796,433

 
$
424,173

Pharmacy payable
62,322

 
45,037

Capitation payable
31,535

 
20,267

Other
233,556

 
180,310

 
$
1,123,846

 
$
669,787

"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Such non-risk provider payables amounted to $136.0 million and $151.3 million as of September 30, 2014 and December 31, 2013, respectively.
The following table presents the components of the change in our medical claims and benefits payable from continuing and discontinued operations combined for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior period” represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.

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Table of Contents

 
Nine Months Ended
 
Year Ended
 
September 30, 2014
 
December 31, 2013
 
(Dollars in thousands)
Balances at beginning of period
$
669,787

 
$
494,530

Components of medical care costs related to:
 
 
 
Current period
5,795,404

 
5,434,443

Prior period
(41,033
)
 
(52,779
)
Total medical care costs
5,754,371

 
5,381,664

 
 
 
 
Change in non-risk provider payables
(15,344
)
 
111,267

 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
4,841,429

 
4,932,195

Prior period
443,539

 
385,479

Total paid
5,284,968

 
5,317,674

Balances at end of period
$
1,123,846

 
$
669,787

 
 
 
 
Benefit from prior period as a percentage of:
 
 
 
Balance at beginning of period
6.1
%
 
10.7
%
Premium revenue, trailing twelve months
0.5
%
 
0.9
%
Medical care costs, trailing twelve months
0.6
%
 
1.0
%
Assuming that our initial estimate of IBNP is accurate, we believe that amounts ultimately paid out would generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion in that liability of the allowance for adverse claims development and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate – we only know when the circumstances for any one or more factors are out of the ordinary.
As indicated above, the amounts ultimately paid out on our liabilities in fiscal years 2014 and 2013 were less than what we had expected when we established our reserves. For example, for the year ended December 31, 2013, the amounts ultimately paid out were less than the amount of the reserves we had established as of December 31, 2012 by 10.7%. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
While prior period development of our estimate as of December 31, 2013 through September 30, 2014 has been favorable by $41.0 million, that amount is substantially less than the favorable prior period development of $52.8 million that we recognized in all of 2013.
In estimating our claims liability at September 30, 2014, we adjusted our base calculation to take account of the numerous factors that we believe will likely change our final claims liability amount. We believe the most significant among those factors are:
Since January 1, 2014, we have added 314,500 members under Medicaid expansion in six of our health plans. Because these members are transitioning into managed care, and have different demographics than those of our legacy membership, we have little insight into their utilization of medical services. Additionally, as of September 30, 2014, we have relatively little medical claims payment history related to Medicaid expansion membership in Illinois, Michigan and Ohio because such membership was enrolled in these states later in the year. Accordingly, our estimates of the claims liability for this population are subject to a higher degree of uncertainty.

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Since January 1, 2014, we have added 118,000 new members at our South Carolina health plan. Because we have only nine months of claims payment history, the reserves are subject to greater uncertainty than that of our legacy Medicaid membership.
At our New Mexico health plan, the state has been adding approximately 10,000 to 15,000 members per month on a retroactive basis since March 2014. Because we have no claims payment history for these members, our estimates of the claims liability for this population are subject to a higher degree of uncertainty. However, for these members, the state will reimburse the health plan for claims with dates of service during the retroactive period on a cost-plus basis, i.e., for claims paid plus an administration fee.
Beginning in the third quarter of 2014, there was a substantial backlog of inpatient claims at our Washington health plan. This backlog was a result of payments held as the state of Washington considered whether to adjust its payment methodology for inpatient claims. We have adjusted the inpatient reserves to reflect the estimated impact of the claims backlog.
The use of a consistent methodology in estimating our liability for medical claims and benefits payable minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect consolidated results of operations in subsequent periods. In particular, the use of a consistent methodology should result in the replenishment of reserves during any given period in a manner that generally offsets the benefit of favorable prior period development in that period. Facts and circumstances unique to the estimation process at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent periods. Any absence of adverse claims development (as well as the expensing through general and administrative expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate. In 2013, and for the nine months ended September 30, 2014, the absence of adverse development of the liability for medical claims and benefits payable at the close of the previous period resulted in the recognition of substantial favorable prior period development. In both periods, however, the recognition of a benefit from prior period claims development did not have a material impact on our consolidated results of operations because the replenishment of reserves in the respective periods generally offset the benefit from the prior period.
11. Long-Term Debt
As of September 30, 2014, maturities of long-term debt for the years ending December 31 are as follows (in thousands):
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
1.125% Notes
$
550,000

 
$

 
$

 
$

 
$

 
$

 
$
550,000

1.625% Notes (1)
301,551

 

 

 

 

 

 
301,551

3.75% Notes
10,449

 
10,449

 

 

 

 

 

 
$
862,000

 
$
10,449

 
$

 
$

 
$

 
$

 
$
851,551

(1)
The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes.
1.125% Cash Convertible Senior Notes due 2020. In February 2013, we issued $550.0 million aggregate principal amount of 1.125% Cash Convertible Senior Notes due 2020 (the 1.125% Notes), which were outstanding as of September 30, 2014 and December 31, 2013. Interest on the 1.125% Notes is payable semiannually in arrears on January 15 and July 15, at a rate of 1.125% per annum. The 1.125% Notes will mature on January 15, 2020 unless repurchased or converted in accordance with their terms prior to such date. The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other securities.
The initial conversion rate for the 1.125% Notes is 24.5277 shares of our common stock per $1,000 principal amount of the 1.125% Notes. This represents an initial conversion price of approximately $40.77 per share of our common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% Notes Conversion Option), which was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Notes Conversion Option transaction settles or expires. The initial fair value liability of the 1.125% Notes Conversion Option simultaneously reduced the carrying value of the 1.125% Notes (effectively an original issuance discount). This discount is amortized to the 1.125% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately 5.9%. As of September 30, 2014, we expect the 1.125% Notes to be

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outstanding until their January 15, 2020 maturity date, for a remaining amortization period of 5.3 years. The 1.125% Notes' if-converted value exceeded their principal amount by approximately $48 million as of September 30, 2014, and did not exceed their principal amount as of December 31, 2013.
3.75% Exchange. In August 2014, we entered into separate, privately negotiated, exchange agreements (the 3.75% Exchange) with certain holders of our outstanding 3.75% Convertible Senior Notes due 2014 (the 3.75% Notes). In this transaction, we exchanged $176.6 million aggregate principal amount of the 3.75% Notes for $176.6 million aggregate principal amount of 1.625% Convertible Senior Notes due 2044 (the 1.625% Notes, see further discussion below), approximately 1.7 million shares of our common stock (the Exchange Shares), and payment of accrued interest on the exchanged 3.75% Notes. In connection with the 3.75% Exchange, we did not receive any proceeds from the issuance of the 1.625% Notes or the Exchange Shares.
1.625% Convertible Senior Notes due 2044. In addition to the 1.625% Notes issued in connection with the 3.75% Exchange described above, we issued $125.0 million principal amount of 1.625% Notes in September 2014, amounting to $301.6 million aggregate principal amount outstanding under the 1.625% Notes as of September 30, 2014. The proceeds from the issuance of the $125.0 million principal amount of the 1.625% Notes amounted to $123.4 million, including a premium of $0.6 million, and net of deferred issuance costs paid. In connection with the 1.625% Notes, we have recorded total deferred issuance costs of approximately $6 million, which will be amortized over the expected term of the debt (discussed below).
Interest on the 1.625% Notes is payable semiannually in arrears on February 15 and August 15, at a rate of 1.625% per annum, beginning on February 15, 2015. The 1.625% Notes will mature on August 15, 2044 unless repurchased or converted in accordance with their terms prior to such date. In addition, beginning with the semiannual interest period commencing immediately following the interest payment date on August 15, 2018, contingent interest will accrue on the 1.625% Notes during any semiannual interest period in which certain conditions are satisfied, or under certain events of default. Furthermore, additional interest of 0.25% per year will be payable on the 1.625% Notes for any semiannual interest period for which the principal amount of 1.625% Notes outstanding is less than $100 million.
The initial conversion rate for the 1.625% Notes is 17.2157 shares of our common stock per $1,000 principal amount of the 1.625% Notes. This represents an initial conversion price of approximately $58.09 per share of our common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as defined in the related indenture). We may not redeem the 1.625% Notes prior to August 19, 2018. On or after August 19, 2018, we may redeem for cash all or part of the 1.625% Notes, except for the 1.625% Notes we are required to repurchase in connection with a fundamental change (as defined in the related indenture) or on any specified repurchase date (as defined in the indenture). The redemption price for the 1.625% Notes will equal 100% of the principal amount of the 1.625% Notes being redeemed, plus accrued and unpaid interest. In addition, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes for cash on August 19, 2018, August 19, 2024, August 19, 2029, August 19, 2034 and August 19, 2039, in each case, at a specified price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and unpaid interest.
Because the 1.625% Notes have cash settlement features, we have allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt discount that is amortized back to the 1.625% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. The expected life of the debt is approximately four years, beginning on the issuance date and ending on the first date we may redeem the notes in August 2018. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately 5%. The outstanding 1.625% Notes’ if-converted value did not exceed principal amount as of September 30, 2014. At September 30, 2014, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $22.6 million.
3.75% Convertible Senior Notes due 2014. We had $10.4 million and $187.0 million of the 3.75% Notes outstanding as of September 30, 2014 and December 31, 2013, respectively. As described above, we entered into the 3.75% Exchange transaction in August 2014, under which we exchanged $176.6 million of the outstanding principal amount of the 3.75% Notes for the 1.625% Notes. The remaining $10.4 million principal amount outstanding as of September 30, 2014 was repaid in full in early October 2014. In addition to the repayment of the outstanding principal balance, in early October 2014 we issued approximately 0.1 million shares to settle the 3.75% Notes' conversion feature.
Because the 3.75% Notes had cash settlement features, we allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 3.75% Notes resulted in a debt discount that was amortized back to the 3.75% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This resulted in our recognition of interest expense on the 3.75% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or 7.5%. The outstanding 3.75% Notes’ if-converted value exceeded their principal amount by approximately $4 million and $11 million as of September 30, 2014, and December 31, 2013, respectively.

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The principal amounts, unamortized discount (net of premium related to the 1.625% Notes), and net carrying amounts of the convertible senior notes were as follows:
 
Principal Balance
 
Unamortized Discount
 
Net Carrying Amount
 
(In thousands)
September 30, 2014:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
119,516

 
$
430,484

1.625% Notes
301,551

 
34,825

 
266,726

3.75% Notes
10,449

 

 
10,449

 
$
862,000

 
$
154,341

 
$
707,659

December 31, 2013:
 
 
 
 
 
1.125% Notes
$
550,000

 
$
133,632

 
$
416,368

3.75% Notes
187,000

 
5,128

 
181,872

 
$
737,000

 
$
138,760

 
$
598,240

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Interest cost recognized for the period relating to the:
 
 
 
 
 
 
 
Contractual interest coupon rate
$
3,132

 
$
3,300

 
$
9,732

 
$
9,127

Amortization of the discount
6,455

 
6,059

 
19,183

 
15,747

Total interest cost recognized
$
9,587

 
$
9,359

 
$
28,915

 
$
24,874

Lease Financing Obligations. In 2013 we entered into a sale-leaseback transaction for the sale and contemporaneous leaseback of the Molina Center located in Long Beach, California, and our Ohio health plan office building in Columbus, Ohio. Due to our continuing involvement with these leased properties, the sale did not qualify for sale-leaseback accounting treatment and we remain the "accounting owner" of the properties. These assets continue to be included in our consolidated balance sheets, and also continue to be depreciated and amortized over their remaining useful lives. The lease financing obligation is amortized over the 25-year lease term such that there will be no gain or loss recorded if the lease is not extended at the end of its term. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense amounted to $9.3 million and $3.7 million for the nine months ended September 30, 2014 and 2013, respectively.
As described and defined in further detail in Note 16, "Related Party Transactions," we entered into a lease for office space in February 2013 consisting of two office buildings then under construction. We have concluded that we are the accounting owner of the properties due to our continuing involvement with the properties. We have recorded $38.9 million to property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of September 30, 2014, which represents the total cost, including imputed interest, incurred by the Landlord for the construction of the buildings, net of accumulated depreciation. As of September 30, 2014, the aggregate amount recorded to lease financing obligations amounted to $40.7 million. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense was $2.2 million for the nine months ended September 30, 2014. In addition to the capitalization of the costs incurred by the Landlord, we impute and record rent expense relating to the ground leases for the property sites. Such rent expense is computed based on the fair value of the land and our incremental borrowing rate, and was $0.8 million for the nine months ended September 30, 2014.

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12. Derivative Financial Instruments
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets:
 
Balance Sheet Location
 
September 30, 2014
 
December 31, 2013
 
 
 
(In thousands)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Non-current assets: Derivative asset
 
$
222,997

 
$
186,351

 

 


 
 
Derivative liability:
 
 
 
 
 
1.125% Notes Conversion Option
Non-current liabilities: Derivative liability
 
$
222,877

 
$
186,239

Our derivative financial instruments do not qualify for hedge treatment, therefore the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in other expenses, net. Gains and losses for our derivative financial instruments are presented individually in the consolidated statements of cash flows, supplemental cash flow information.
1.125% Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Notes in 2013 as described in Note 11, "Long-Term Debt," we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments due upon any conversion of the 1.125% Notes.
1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 6, "Fair Value Measurements."
1.125% Notes Conversion Option. The embedded cash conversion option within the 1.125% Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Notes Conversion Option, refer to Note 6, "Fair Value Measurements."
13. Stockholders' Equity
Stockholders' equity increased $71.4 million during the nine months ended September 30, 2014 compared with stockholders' equity at December 31, 2013. The increase was due to net income of $28.4 million, $25.0 million related to 1.625% Notes and 3.75% Exchange, $0.5 million related to other comprehensive income and $17.5 million related to employee stock transactions.
3.75% Exchange and 3.75% Notes. As described in Note 11, "Long-Term Debt," we issued approximately 1.7 million shares in connection with the exchange of our 3.75% Notes for the 1.625% Notes in the third quarter of 2014. Additionally, we issued 0.1 million shares in connection with the conversion of the 3.75% Notes in the fourth quarter of 2014.
1.125% Warrants. If the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the 160 trading day measurement period under the 1.125% Warrants, we will be obligated to issue to the Counterparties a number of shares equal in value to the product of the amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of our common stock underlying the 1.125% Warrants, subject to a share delivery cap. We will not receive any additional proceeds if the 1.125% Warrants are exercised. Pursuant to the 1.125% Warrants, we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants and the strike price are subject to adjustment under certain circumstances. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the 1.125% Warrants.
Securities Repurchases and Repurchase Program. Effective September 30, 2013, our board of directors authorized the repurchase of up to $50.0 million in aggregate of our common stock through December 31, 2014. Stock repurchases under this

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program may be made through open-market and/or privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. As of September 30, 2014, the remaining balance available to repurchase our stock under this program was $47.3 million.
Shelf Registration Statement. In May 2012, we filed an automatic shelf registration statement on Form S-3 with the SEC covering the issuance of an indeterminate number of our securities, including common stock, warrants, or debt securities. We may publicly offer securities from time to time at prices and terms to be determined at the time of the offering.
Stock Plans. In connection with our equity incentive plans, we issued approximately 643,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the nine months ended September 30, 2014.
14. Segment Information
We report our financial performance based on two reportable segments: the Health Plans segment and the Molina Medicaid Solutions segment. Our reportable segments are consistent with how we manage the business and view the markets we serve. Our Health Plans segment consists of our state health plans and our direct delivery business. Our state health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics.
Our Molina Medicaid Solutions segment provides MMIS design, development, implementation; business process outsourcing solutions; hosting services; and information technology support services to state Medicaid agencies.
We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources. The accounting policies of the segments are the same as those described in Note 2, "Significant Accounting Policies." The cost of services shared between the Health Plans and Molina Medicaid Solutions segment is charged to the Health Plans segment.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Revenue from continuing operations:
 
 
 
 
 
 
 
Health Plans segment:
 
 
 
 
 
 
 
Premium revenue
$
2,316,759

 
$
1,584,656

 
$
6,424,238

 
$
4,583,818

Premium tax revenue
81,240

 
43,723

 
203,053

 
127,606

Health insurer fee revenue
29,427

 

 
67,785

 

Investment income
2,041

 
1,740

 
5,615

 
4,884

Other revenue
2,327

 
5,860

 
8,523

 
16,476

Molina Medicaid Solutions segment:
 
 
 
 
 
 
 
Service revenue
52,557

 
51,100

 
156,419

 
150,528

Total revenue
$
2,484,351

 
$
1,687,079

 
$
6,865,633

 
$
4,883,312

 
 
 
 
 
 
 
 
Income from continuing operations before income tax:
 
 
 
 
 
 
 
Health Plans segment
$
29,874

 
$
16,929

 
$
65,879

 
$
118,600

Molina Medicaid Solutions segment
9,905

 
7,997

 
30,594

 
20,645

Total operating income from continuing operations
39,779

 
24,926

 
96,473

 
139,245

Other expenses, net
15,282

 
13,508

 
43,044

 
41,583

Income from continuing operations before income tax expense
$
24,497

 
$
11,418

 
$
53,429

 
$
97,662

15. Commitments and Contingencies
Legal Proceedings. The health care and business process outsourcing industries are 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. Penalties associated with violations of these laws and regulations include significant fines and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for certain matters for which we deem

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the loss to be both probable and estimable. Although we believe that our estimates of such losses are reasonable, these estimates could change as a result of further developments of these matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have not been established have not progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these pending matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Washington Health Plan. In September 2014, our Washington health plan paid $19.2 million to the Washington Health Care Authority (HCA) to settle two outstanding overpayment matters. The matters related to demands for recoupment of claims for psychotropic drugs and claims for health plan members under the Washington Community Options Program Entry System (COPES). Additionally, in September 2014 HCA paid our Washington health plan $8.0 million to settle certain matters brought by the Washington health plan related to auto-assignment provisions in the parties' contract. The net effect of these settlements resulted in a premium revenue reduction of $11.2 million in the third quarter of 2014, and resolved all pending disputes between the parties.
State of Louisiana. On June 26, 2014, the State of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims. We believe we have several meritorious defenses to the claims of the state, and any liability for the alleged claims is not currently probable or reasonably estimable.
USA and State of Florida ex rel. Charles Wilhelm. On July 24, 2014, Molina Healthcare, Inc. and Molina Healthcare of Florida, Inc. were served with a Complaint filed under seal on December 5, 2012 in District Court for the Southern District of Florida by relator, Charles C. Wilhelm, M.D., Case No. 12-24298. The Complaint alleges that, in late 2008 and early 2009, in connection with the acquisition of Florida NetPass by which Molina Healthcare entered into the state of Florida, the defendants failed to adequately staff the plan and provide other services, resulting in a disproportionate number of sicker beneficiaries of Florida NetPass moving back into the Florida fee-for-service Medicaid program. This alleged conduct purportedly resulted in a violation of the federal False Claims Act. Both the United States of America and the State of Florida have declined to intervene. We believe we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by relator, Anita Silingo. The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., turned a “blind eye” to these unlawful practices. The Department of Justice has declined to intervene. We believe that we have several meritorious defenses to the claims of the relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
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 have led certain 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 business, consolidated financial position, results of operations, or cash flows.
Regulatory Capital and Dividend Restrictions. Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statues, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions 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 net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately $717 million at September 30, 2014, and $608 million at December 31, 2013. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained

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earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $374.3 million and $365.2 million as of September 30, 2014 and December 31, 2013, respectively.
The National Association of Insurance Commissioners (NAIC) adopted rules effective December 31, 1998, which, if implemented by the states, set 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 (RBC) rules. Illinois, Michigan, New Mexico, Ohio, South Carolina, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to state. California and Florida have not adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.
As of September 30, 2014, our health plans had aggregate statutory capital and surplus of approximately $798 million compared with the required minimum aggregate statutory capital and surplus of approximately $413 million. All of our health plans were in compliance with the minimum capital requirements at September 30, 2014. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.
16. Related Party Transactions
In Fe