Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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  x    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  x    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

  x    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  x

The number of shares of the issuer’s Common Stock outstanding as of October 19, 2012, was approximately 46,583,300.

 

 

 


Table of Contents

MOLINA HEALTHCARE, INC.

Index

 

Part I — Financial Information   

Item 1. Financial Statements

  

Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

     1   

Consolidated Statements of Operations for the three month and nine month periods ended September  30, 2012 and 2011 (unaudited)

     2   

Consolidated Statements of Comprehensive Income for the three month and nine month periods ended September 30, 2012 and 2011 (unaudited)

     3   

Consolidated Statements of Cash Flows for the nine month periods ended September  30, 2012 and 2011 (unaudited)

     4   

Notes to Consolidated Financial Statements (unaudited)

     6   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     50   

Item 4. Controls and Procedures

     50   
Part II — Other Information   

Item 1. Legal Proceedings

     51   

Item 1A. Risk Factors

     51   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     52   

Item 6. Exhibits

     52   

Signatures

     53   


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

 

     September 30,
2012
    December 31,
2011
 
     (Amounts in thousands,
except per-share data)
 
     (Unaudited)        
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 715,480      $ 493,827   

Investments

     356,895        336,916   

Receivables

     156,909        167,898   

Income tax refundable

     33,530        11,679   

Deferred income taxes

     21,533        18,327   

Prepaid expenses and other current assets

     30,002        19,435   
  

 

 

   

 

 

 

Total current assets

     1,314,349        1,048,082   

Property, equipment, and capitalized software, net

     210,972        190,934   

Deferred contract costs

     67,516        54,582   

Intangible assets, net

     85,033        101,796   

Goodwill and indefinite-lived intangible assets

     151,088        153,954   

Auction rate securities

     13,523        16,134   

Restricted investments

     44,488        46,164   

Receivable for ceded life and annuity contracts

     —          23,401   

Other assets

     20,098        17,099   
  

 

 

   

 

 

 
   $ 1,907,067      $ 1,652,146   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Medical claims and benefits payable

   $ 536,463      $ 402,476   

Accounts payable and accrued liabilities

     151,029        147,214   

Deferred revenue

     143,301        50,947   

Current maturities of long-term debt

     1,143        1,197   
  

 

 

   

 

 

 

Total current liabilities

     831,936        601,834   

Long-term debt

     260,551        216,929   

Deferred income taxes

     37,478        33,127   

Liability for ceded life and annuity contracts

     —          23,401   

Other long-term liabilities

     22,101        21,782   
  

 

 

   

 

 

 

Total liabilities

     1,152,066        897,073   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 46,571 shares at September 30, 2012 and 45,815 shares at December 31, 2011

     46        46   

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

     —          —     

Additional paid-in capital

     280,728        266,022   

Accumulated other comprehensive loss

     (330     (1,405

Retained earnings

     474,557        490,410   
  

 

 

   

 

 

 

Total stockholders’ equity

     755,001        755,073   
  

 

 

   

 

 

 
   $ 1,907,067      $ 1,652,146   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012     2011      2012     2011  
     (Amounts in thousands, except  
     net (loss) income per share)  
     (Unaudited)  

Revenue:

         

Premium revenue

   $ 1,488,718      $ 1,138,230       $ 4,308,439      $ 3,348,438   

Service revenue

     48,422        37,728         132,351        111,290   

Investment income

     1,171        764         3,996        3,804   

Rental income

     1,879        —           5,408        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     1,540,190        1,176,722         4,450,194        3,463,532   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses:

         

Medical care costs

     1,314,571        959,158         3,823,136        2,822,049   

Cost of service revenue

     37,004        34,584         98,111        105,020   

General and administrative expenses

     127,500        99,610         379,208        290,967   

Premium tax expenses

     37,894        36,374         120,953        110,633   

Depreciation and amortization

     16,034        13,430         47,446        38,587   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     1,533,003        1,143,156         4,468,854        3,367,256   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     7,187        33,566         (18,660     96,276   

Interest expense

     4,315        4,380         12,421        11,666   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     2,872        29,186         (31,081     84,610   

Income tax (benefit) expense

     (492     10,236         (15,228     30,832   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 3,364      $ 18,950       $ (15,853   $ 53,778   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) per share:

         

Basic

   $ 0.07      $ 0.41       $ (0.34   $ 1.18   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.07      $ 0.41       $ (0.34   $ 1.16   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding:

         

Basic

     46,546        45,834         46,301        45,693   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     46,880        46,296         46,301        46,334   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012      2011     2012     2011  
     (Amounts in thousands)  
     (Unaudited)  

Net income (loss)

   $ 3,364       $ 18,950      $ (15,853   $ 53,778   

Other comprehensive income, net of tax:

         

Unrealized gain (loss) on investments

     455         (165     1,075        430   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     455         (165     1,075        430   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 3,819       $ 18,785      $ (14,778   $ 54,208   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended  
     September 30,  
     2012     2011  
     (Amounts in thousands)  
     (Unaudited)  

Operating activities:

    

Net (loss) income

   $ (15,853   $ 53,778   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     58,289        52,414   

Deferred income taxes

     1,166        8,069   

Stock-based compensation

     15,448        12,723   

Gain on sale of subsidiary

     (2,390     —     

Non-cash interest on convertible senior notes

     4,414        4,095   

Change in fair value of interest rate swap agreement

     1,270        —     

Amortization of premium/discount on investments

     5,166        5,300   

Amortization of deferred financing costs

     825        2,451   

Tax deficiency from employee stock compensation

     (159     (647

Changes in operating assets and liabilities:

    

Receivables

     10,989        5,411   

Prepaid expenses and other current assets

     (10,574     (1,819

Medical claims and benefits payable

     133,987        6,699   

Accounts payable and accrued liabilities

     (9,030     246   

Deferred revenue

     92,354        25,400   

Income taxes

     (21,878     (18,957
  

 

 

   

 

 

 

Net cash provided by operating activities

     264,024        155,163   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of equipment

     (52,548     (45,921

Purchases of investments

     (234,465     (258,209

Sales and maturities of investments

     213,665        226,413   

Proceeds from sale of subsidiary, net of cash surrendered

     9,162        —     

Net cash paid in business combinations

     —          (3,253

Increase in deferred contract costs

     (18,799     (32,765

Increase in restricted investments

     (3,034     (8,394

Change in other noncurrent assets and liabilities

     (4,775     (533
  

 

 

   

 

 

 

Net cash used in investing activities

     (90,794     (122,662
  

 

 

   

 

 

 

Financing activities:

    

Amount borrowed under credit facility

     60,000        —     

Repayment of amount borrowed under credit facility

     (20,000     —     

Principal payments on term loan

     (846     —     

Treasury stock purchases

     —          (7,000

Credit facility fees paid

     —          (1,125

Proceeds from employee stock plans

     5,571        5,640   

Excess tax benefits from employee stock compensation

     3,698        1,590   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     48,423        (895
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     221,653        31,606   

Cash and cash equivalents at beginning of period

     493,827        455,886   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 715,480      $ 487,492   
  

 

 

   

 

 

 

 

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Table of Contents

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (Amounts in thousands)  
     (Unaudited)  

Supplemental cash flow information:

    

Cash paid during the period for:

    

Income taxes

   $ 1,074      $ 43,550   
  

 

 

   

 

 

 

Interest

   $ 5,663      $ 5,026   
  

 

 

   

 

 

 

Schedule of non-cash investing and financing activities:

    

Common stock used for stock-based compensation

   $ 9,852      $ 3,751   
  

 

 

   

 

 

 

Details of sale of subsidiary:

    

Decrease in carrying value of assets

   $ 30,942      $ —     

Decrease in carrying value of liabilities

     (24,170     —     

Gain on sale

     2,390        —     
  

 

 

   

 

 

 

Proceeds from sale of subsidiary, net of cash surrendered

   $ 9,162      $ —     
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2012

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: Health Plans and Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of September 30, 2012, these health plans served approximately 1.8 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Our direct delivery business consists of primary care community clinics in California, Florida, New Mexico and Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.

Our health plans’ state Medicaid contracts generally have terms of three to four years with annual adjustments to premium rates. These contracts are renewable at the discretion of the state. In general, either the state Medicaid agency or the health plan may terminate the state contract with or without cause upon 30 days to nine months with prior written notice. Most of these contracts contain renewal options that are exercisable by the state. Our health plan subsidiaries have generally been successful in obtaining the renewal of their contracts in each state prior to the actual expiration of their contracts. Our state contracts are generally at greatest risk of loss when a state issues a new request for proposals, or RFP, subject to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal. For instance, on February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri health plan’s prior contract with the state expired without renewal on June 30, 2012 subject to certain transition obligations. For the six months ended June 30, 2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30, 2012.

Our state Medicaid contracts may be periodically adjusted to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations (such as the aged, blind or disabled, or ABD); and regions or service areas. For example, our Texas health plan added significant membership effective March 1, 2012, in service areas we had not previously served (the Hidalgo and El Paso service areas); and among populations we had not previously served within existing service areas, such as the Temporary Assistance for Needy Families, or TANF, population in the Dallas service area. Additionally, the health benefits provided to our TANF and ABD members in Texas under our contracts with the state were expanded to include inpatient facility and pharmacy services.

Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.

On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its Medicaid Management Information System, or MMIS, in the state of Idaho from the Centers for Medicare and Medicaid Services, or CMS. As a result of the CMS certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs retroactive to June 1, 2010, the date that the system first began processing claims.

On June 9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intends to award the contract for a replacement MMIS to another company For the nine months ended September 30, 2012, our revenue under the Louisiana MMIS contract was approximately $38.8 million, or 29.3% of total service revenue. We expect that we will continue to perform under this contract through implementation and acceptance of the successor MMIS. Based upon our past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and acceptance of the successor MMIS we expect to recognize approximately $40 million in revenue annually under our Louisiana MMIS contract.

 

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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, 2012. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.

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, 2011. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2011 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2011 audited financial statements.

Reclassifications

We have reclassified certain amounts in the 2011 consolidated statement of cash flows to conform to the 2012 presentation.

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. The components of premium revenue subject to estimation fall into two categories:

Contractual provisions that may limit revenue based upon the costs incurred or the profits realized under a specific contract. These are contractual provisions that require the health plan to return premiums to the extent that certain thresholds are not met. In some instances premiums are returned when medical costs fall below a certain percentage of gross premiums; or when administrative costs or profits exceed a certain percentage of gross premiums. In other instances, premiums are partially determined by the acuity of care provided to members (risk adjustment). To the extent that our expenses and profits change from the amounts previously reported (due to changes in estimates) our revenue earned for those periods will also change. In all of these instances our revenue is only subject to estimate due to the fact that the thresholds themselves contain elements (expense or profit) that are subject to estimate. While we have adequate experience and data to make sound estimates of our expenses or profits, changes to those estimates may be necessary, which in turn will lead to changes in our estimates of revenue. In general, a change in estimate relating to expense or profit would offset any related change in estimate to premium, resulting in no or small impact to net income. The following contractual provisions fall into this category:

California Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by our California health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs. We recorded a liability under the terms of these contract provisions of $0.5 million and $1.0 million at September 30, 2012, and December 31, 2011, respectively.

Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health: A portion of premiums received by our Florida health plan may be returned to the state if certain minimum amounts are not spent on defined behavioral health care costs. At both September 30, 2012, and December 31, 2011, we had not recorded any liability under the terms of this contract provision since behavioral health expenses are not less than the contractual floor.

New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit Ceilings (Maximums): Our contract with the state of New Mexico directs that a portion of premiums received may be returned to the state if certain minimum amounts are not spent on defined medical care costs, or if administrative costs or profit (as defined) exceed certain amounts. At both September 30, 2012, and December 31, 2011, we had not recorded any liability under the terms of these contract provisions.

 

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Texas Health Plan Profit Sharing: Under our contract with the state of Texas, there is a profit-sharing agreement under which we pay a rebate to the state of Texas if our Texas health plan generates pretax income, as defined in the contract, above a certain specified percentage, as determined in accordance with a tiered rebate schedule. We are limited in the amount of administrative costs that we may deduct in calculating the rebate, if any. As a result of profits in excess of the amount we are allowed to fully retain, we had accrued an aggregate liability of approximately $3.2 million and $0.7 million pursuant to our profit-sharing agreement with the state of Texas at September 30, 2012, and December 31, 2011, respectively.

Washington Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by our Washington health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs. At both September 30, 2012, and December 31, 2011, we had not recorded any liability under the terms of this contract provision since medical expenses are not less than the contractual floor.

Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to 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’ heath 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 approximately $1.7 million and $5.0 million for anticipated Medicare risk adjustment premiums as of September 30, 2012, and December 31, 2011, respectively.

Quality incentives that allow us to recognize incremental revenue if certain quality standards are met. These are contract provisions that allow us to earn additional premium revenue in certain states if we achieve certain quality-of-care or administrative measures. We estimate the amount of revenue that will ultimately be realized for the periods presented based on our experience and expertise in meeting the quality and administrative measures as well as our ongoing and current monitoring of our progress in meeting those measures. The amount of the revenue that we will realize under these contractual provisions is determinable based upon that experience. The following contractual provisions fall into this category:

New Mexico Health Plan Quality Incentive Premiums: Under our contract with the state of New Mexico, incremental revenue of up to 0.75% of our total premium is earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care and administrative measures dictated by the state.

Ohio Health Plan Quality Incentive Premiums: Under our contract with the state of Ohio, incremental revenue of up to 1% of our total premium is earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures dictated by the state.

Texas Health Plan Quality Incentive Premiums: Effective March 1, 2012, under our contract with the state of Texas, incremental revenue of up to 5% of our total premium may be earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures established by the state.

Wisconsin Health Plan Quality Incentive Premiums: Under our contract with the state of Wisconsin, effective beginning in 2011, up to 3.25% of the premium is withheld by the state. The withheld premiums can be earned by the health plan by meeting certain performance measures. These performance measures are generally linked to various quality-of-care measures dictated by the state.

 

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The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the period presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of September 30, 2012 are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of September 30, 2012.

 

     Three Months Ended September 30, 2012  
     Maximum
Available Quality
Incentive
Premium -
Current Year
     Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized
     Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year
     Total Quality
Incentive
Premium Revenue
Recognized
     Total Revenue
Recognized
 
     (In thousands)  

New Mexico

   $ 560       $ 532       $ —         $ 532       $ 84,797   

Ohio

     2,824         1,412         —           1,412         306,314   

Texas

     17,685         10,453         —           10,453         350,810   

Wisconsin

     419         —           246         246         16,279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,488       $ 12,397       $ 246       $ 12,643       $ 758,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2011  
     Maximum
Available Quality
Incentive
Premium -
Current Year
     Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized
     Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year
     Total Quality
Incentive
Premium Revenue
Recognized
     Total Revenue
Recognized
 
     (In thousands)  

New Mexico

   $ 566       $ 345       $ 46       $ 391       $ 79,644   

Ohio

     2,160         1,719         —           1,719         232,616   

Texas

     400         400         —           400         105,577   

Wisconsin

     420         362         —           362         17,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,546       $ 2,826       $ 46       $ 2,872       $ 435,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2012  
     Maximum
Available Quality
Incentive
Premium -
Current Year
     Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized
     Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year
     Total Quality
Incentive
Premium Revenue
Recognized
     Total Revenue
Recognized
 
     (In thousands)  

New Mexico

   $ 1,676       $ 1,350       $ 658       $ 2,008       $ 253,418   

Ohio

     8,222         6,810         966         7,776         896,908   

Texas

     41,687         30,487         —           30,487         908,532   

Wisconsin

     1,284         —           492         492         52,209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52,869       $ 38,647       $ 2,116       $ 40,763       $ 2,111,067   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2011  
     Maximum
Available Quality
Incentive
Premium -
Current Year
     Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized
     Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year
     Total Quality
Incentive
Premium Revenue
Recognized
     Total Revenue
Recognized
 
     (In thousands)  

New Mexico

   $ 1,712       $ 1,219       $ 364       $ 1,583       $ 246,223   

Ohio

     7,472         6,152         3,501         9,653         693,829   

Texas

     1,560         1,560         —           1,560         290,787   

Wisconsin

     1,292         362         —           362         51,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,036       $ 9,293       $ 3,865       $ 13,158       $ 1,282,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, or DDI, of a Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO services (which include claims payment and eligibility processing) we also provide the state with other services including both hosting and support and maintenance. Our Molina Medicaid Solutions contracts may extend over a number of years, particularly in circumstances where we are delivering extensive and complex DDI services, such as the initial design, development and implementation of a complete MMIS. For example, the terms of our most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in total, consisting of two years allocated for the delivery of DDI services, followed by five years for the performance of BPO services. We receive progress payments from the state during the performance of DDI services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts – which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system enhancements) – are shorter in duration than our Idaho and Maine contracts.

 

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We have evaluated our Molina Medicaid Solutions contracts to determine if such arrangements include a software element. Based on this evaluation, we have concluded that these arrangements do not include a software element. As such, we have concluded that our Molina Medicaid Solutions contracts are multiple-element service arrangements under the scope of FASB Accounting Standards Codification Subtopic 605-25, Revenue Recognition –– Multiple–Element Arrangements, and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition.

Effective January 1, 2011, we adopted a new accounting standard that amends the guidance on the accounting for multiple-element arrangements. Pursuant to the new standard, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting which is generally based on whether the deliverable has standalone value to the customer. In addition to standalone value, previous guidance also required objective and reliable evidence of fair value of a deliverable in order to treat the deliverable as a separate unit of accounting. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent. We have adopted this guidance on a prospective basis for all new or materially modified revenue arrangements with multiple deliverables entered into on or after January 1, 2011. Our adoption of this guidance has not impacted the timing or pattern of our revenue recognition in 2011 or 2012. Also, there would have been no change in revenue recognized relating to multiple-element arrangements if we had adopted this guidance retrospectively for contracts entered into prior to January 1, 2011.

We have concluded that the various service elements in our Molina Medicaid Solutions contracts represent a single unit of accounting due to the fact that DDI, which is the only service performed in advance of the other services (all other services are performed over an identical period), does not have standalone value because our DDI services are not sold separately by any vendor and the customer could not resell our DDI services. Further, we have no objective and reliable evidence of fair value for any of the individual elements in these contracts, and at no point in the contract will we have objective and reliable evidence of fair value for the undelivered elements in the contracts. For contracts entered into prior to January 1, 2011, objective and reliable evidence of fair value would be required, in addition to DDI standalone value which we do not have, in order to treat DDI as a separate unit of accounting. We lack objective and reliable evidence of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:

 

   

Each contract calls for the provision of its own specific set of services. While all contracts support the system of record for state MMIS, the actual services we provide vary significantly between contracts; and

 

   

The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our new contracts (commercial off-the-shelf technology solutions).

Because we have determined the services provided under our Molina Medicaid Solutions contracts represent a single unit of accounting and because we are unable to determine a pattern of performance of services during the contract period, we recognize all revenue (both the DDI and BPO elements) associated with such contracts on a straight-line basis over the period during which BPO, hosting, and support and maintenance services are delivered. As noted above, the period of performance of BPO services under our Idaho and Maine contracts is five years. Therefore, absent any contingencies as discussed in the following paragraph, we would recognize all revenue associated with those contracts over a period of five years. In cases where there is no DDI element associated with our contracts, BPO revenue is recognized on a monthly basis as specified in the applicable contract or contract extension.

 

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Provisions specific to each contract may, however, lead us to modify this general principle. In those circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the contingency has been removed. These types of contingency features are present in our Maine and Idaho contracts. In those states, we deferred recognition of revenue until the contingencies were removed.

Costs associated with our Molina Medicaid Solutions contracts include software related costs and other costs. With respect to software related costs, we apply the guidance for internal-use software and capitalize external direct costs of materials and services consumed in developing or obtaining the software, and payroll and payroll-related costs associated with employees who are directly associated with and who devote time to the computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition, in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:

 

   

Transaction processing costs

 

   

Employee costs incurred in performing transaction services

 

   

Vendor costs incurred in performing transaction services

 

   

Costs incurred in performing required monitoring of and reporting on contract performance

 

   

Costs incurred in maintaining and processing member and provider eligibility

 

   

Costs incurred in communicating with members and providers

The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

Premium Deficiency Charges

We assess the profitability of each contract by state for providing medical care services to our members and identify any contracts where current operating results or forecasts indicate probable future losses. Anticipated future premiums are compared with the sum of anticipated future health care costs and maintenance costs. If the anticipated future costs exceed the premiums, a loss contract accrual is recognized. In the second quarter of 2012, our Texas and Wisconsin health plans recorded premium deficiency charges of $10.0 million and $3.0 million, respectively. Such charges were recorded to medical care costs. As of September 30, 2012, the aggregate premium deficiency reserve balance was $1.5 million.

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 non-deductible compensation and state taxes. The effective tax rate may be subject to fluctuations during the year 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 derecognition 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.

The total amount of unrecognized tax benefits was $10.3 million as of September 30, 2012, and $10.7 million as of December 31, 2011. Approximately $8.4 million of the unrecognized tax benefits recorded at September 30, 2012, relate to a tax position claimed on a state refund claim that will not result in a cash payment for income taxes if our claim is denied. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $7.2 million as of September 30, 2012. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $8.6 million due to the expiration of statute of limitations and the resolution to the state refund claim described above.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2012, and December 31, 2011, we had accrued $59,000 and $65,000, respectively, for the payment of interest and penalties.

 

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Recent Accounting Pronouncements

Balance Sheet Offsetting. In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance for new disclosure requirements related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new guidance is effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. While we do not expect the adoption of this guidance in 2013 to impact our financial position, results of operations or cash flows, we do expect it to change our disclosure policies relative to certain arrangements with rights of setoff.

Goodwill. In September 2011, the FASB issued guidance related to evaluating goodwill for impairment. The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. An entity may begin or resume performing the qualitative assessment in any subsequent period. The new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this new guidance in 2012 did not impact our financial position, results of operations or cash flows.

Federal Premium-Based Assessment. In July 2011, the FASB issued guidance related to accounting for the fees to be paid by health insurers to the federal government under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “Affordable Care Act”). The Affordable Care Act imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014 that is allocated to health insurers based on the ratio of the amount of an entity’s net premium revenues written during the preceding calendar year to the amount of health insurance for any U.S. health risk that is written during the preceding calendar year. The new guidance specifies that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The new guidance is effective for annual reporting periods beginning after December 31, 2013, when the fee initially becomes effective. As enacted, this federal premium-based assessment is non-deductible for income tax purposes, and is anticipated to be significant. It is yet undetermined how this premium-based assessment will be factored into the calculation of our premium rates, if at all. Accordingly, adoption of this guidance and the enactment of this assessment as currently written could have a material impact on our financial position, results of operations, or cash flows in future periods.

Comprehensive Income. In June 2011, the FASB issued guidance, as amended in December 2011, related to the presentation of other comprehensive income. The new guidance provides entities with an option to either replace the statement of income with a statement of comprehensive income which would display both the components of net income and comprehensive income in a combined statement, or to present a separate statement of comprehensive income immediately following the statement of income. The new guidance does not affect the components of other comprehensive income or the calculation of earnings per share. To be applied retrospectively with early adoption permitted, the new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. We have elected to present a separate statement of comprehensive income immediately following the statement of income. The adoption of this new guidance in 2012 did not impact our financial position, results of operations or cash flows.

Fair Value. In May 2011, the FASB issued guidance related to fair value measurement and disclosure. The new guidance is a result of joint efforts by the FASB and the International Accounting Standards Board to develop a single converged fair value framework. The new guidance expands existing disclosure requirements for fair value measurements and makes other amendments; mostly to eliminate wording differences between U.S. generally accepted accounting principles (“GAAP”) and international financial reporting standards. To be applied prospectively, the new guidance became effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. Although the adoption of this new guidance in 2012 did not impact our financial position, results of operations or cash flows, it did change our disclosure policies relative to fair value measurements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or AICPA, and the Securities and Exchange Commission, or SEC, did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.

 

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3. Net Income (Loss) per Share

The following table sets forth the calculation of the denominators used to compute basic and diluted net income (loss) per share:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012      2011     2012      2011  
     (In thousands)  

Shares outstanding at the beginning of the period

     46,527         46,062        45,815         45,463   

Weighted-average number of shares repurchased

     —           (235     —           (160

Weighted-average number of shares issued

     19         7        486         390   
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator for basic income (loss) per share

     46,546         45,834        46,301         45,693   

Dilutive effect of employee stock options and stock grants (1)

     334         462        —           641   
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator for diluted income (loss) per share (2)

     46,880         46,296        46,301         46,334   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Unvested restricted shares are included in the calculation of diluted income per share when their grant date fair values are below the average fair value of the common shares for each of the periods presented. Options to purchase common shares are included in the calculation of diluted income per share when their exercise prices are below the average fair value of the common shares for each of the periods presented. For the three months ended September 30, 2012 and 2011, there were approximately 370,000 and 57,000 anti-dilutive weighted restricted shares, respectively. For the three months ended September 30, 2012 and 2011 there were approximately 125,000 and 316,000 anti-dilutive weighted options, respectively. Potentially dilutive unvested restricted shares and stock options were not included in the computation of diluted loss per share for the nine months ended September 30, 2012, because to do so would have been anti-dilutive. For the nine months ended September 30, 2011, there were no anti-dilutive weighted restricted shares. For the nine months ended September 30, 2011 there were approximately 126,000 anti-dilutive weighted options.
(2) Potentially dilutive shares issuable pursuant to our convertible senior notes were not included in the computation of diluted income (loss) per share for the three month and nine month periods ended September 30, 2012 and 2011, because to do so would have been anti-dilutive.

4. Share-Based Compensation

At September 30, 2012, we had employee equity incentives outstanding under three plans: (1) the 2011 Equity Incentive Plan; (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer awarded); and (3) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). In March 2012, our chief executive officer, chief financial officer, and chief operating officer were awarded 94,050 performance units, 53,236 performance units, and 30,167 performance units, respectively, that would vest and be settled in shares of the Company’s common stock equal in number to the units granted upon the achievement of certain service and performance conditions. Each of the grants shall vest in 2012, provided that: (i) the Company’s total operating revenue for 2012 is equal to or greater than $5.5 billion, and (ii) the respective officer continues to be employed by the Company if and when the operating revenue target is met. As of September 30, 2012, we expect such performance awards to vest in full. In the event the vesting conditions are not achieved, the awards shall lapse. Also in March 2012, our chief executive officer, chief financial officer, chief operating officer, and chief accounting officer were awarded 8,000 shares, 8,000 shares, 8,000 shares, and 3,000 shares, respectively, of performance units that would vest and be settled in shares of the Company’s common stock equal in number to the units granted upon the certification of our Idaho MMIS by CMS. Such awards vested when the Idaho MMIS was certified in July 2012.

Charged to general and administrative expenses, total share-based compensation expense was as follows for the three month and nine month periods ended September 30, 2012 and 2011:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2012      2011      2012      2011  
     (in thousands)  

Restricted share and performance/restricted unit awards

   $ 5,093       $ 4,004       $ 13,943       $ 11,742   

Stock options (including shares issued under our employee stock purchase plan)

     543         345         1,505         981   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 5,636       $ 4,349       $ 15,448       $ 12,723   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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As of September 30, 2012, there was $19.0 million of total unrecognized compensation expense related to unvested restricted share awards, which we expect to recognize over a remaining weighted-average period of 2.3 years. As of September 30, 2012, there was $1.9 million of total unrecognized compensation expense related to performance and restricted units, which we expect to recognize in the fourth quarter of 2012.

Restricted share activity for the nine months ended September 30, 2012 is summarized below:

 

           Weighted  
           Average  
           Grant Date  
     Shares     Fair Value  

Unvested balance as of December 31, 2011

     1,435,882      $ 18.97   

Granted

     498,057        31.86   

Vested

     (744,360     20.47   

Forfeited

     (79,999     23.21   
  

 

 

   

Unvested balance as of September 30, 2012

     1,109,580        23.45   
  

 

 

   

The total fair value of restricted shares vested during the nine months ended September 30, 2012 and 2011 was $24.3 million and $11.5 million, respectively.

Performance and restricted unit activity for the nine months ended September 30, 2012 is summarized below:

 

                         Weighted  
           Weighted             Average  
           Average      Aggregate      Remaining  
           Grant Date      Intrinsic      Contractual  
     Units     Fair Value      Value      term  
                  (In thousands)      (Years)  

Outstanding as of December 31, 2011

     —        $ —           

Granted

     213,022        33.59         

Vested

     (31,285     33.73       $ 823      
  

 

 

      

 

 

    

Outstanding as of September 30, 2012

     181,737        33.56       $ 4,571         0.3   
  

 

 

      

 

 

    

 

 

 

Performance and restricted units expected to vest as of September 30, 2012

     181,737        33.56       $ 4,571         0.3   
  

 

 

      

 

 

    

 

 

 

Stock option activity for the nine months ended September 30, 2012 is summarized below:

 

                         Weighted  
           Weighted             Average  
           Average      Aggregate      Remaining  
           Exercise      Intrinsic      Contractual  
     Options     Price      Value      term  
                  (In thousands)      (Years)  

Outstanding as of December 31, 2011

     553,049      $ 20.91         

Granted

     15,000        34.82         

Exercised

     (114,229     19.29       $ 1,553      
       

 

 

    

Forfeited

     (750     22.37         
  

 

 

         

Outstanding as of September 30, 2012

     453,070        21.78       $ 1,966         3.4   
  

 

 

      

 

 

    

 

 

 

Stock options exercisable and expected to vest as of September 30, 2012

     453,070        21.78       $ 1,966         3.4   
  

 

 

      

 

 

    

 

 

 

Exercisable as of September 30, 2012

     438,070        21.33       $ 1,966         3.2   
  

 

 

      

 

 

    

 

 

 

The weighted-average grant date fair value per share of the sole stock option awarded during the nine months ended September 30, 2012 was $13.97. No stock options were granted in 2011.

 

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5. Fair Value Measurements

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, 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 to approximate their fair value 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 such as quoted prices in active markets: Our Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.

 

   

Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable: Our Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, and certificates of deposit that are classified as current investments in the accompanying consolidated balance sheets, and an interest rate swap derivative recorded as a noncurrent liability. Our investments classified as Level 2 are traded frequently though not necessarily daily. Fair value for the investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. Fair value for the interest rate swap derivative is based on forward LIBOR rates that are and will be observable at commonly quoted intervals for the full term of the interest rate swap agreement. See Note 10, “Long-Term Debt,” for further information regarding the interest rate swap agreement.

 

   

Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions: Our level 3 financial instruments recorded at fair value consist of non-current auction rate securities that are designated as available-for-sale, and are reported at fair value of $13.5 million (par value of $15.0 million) as of September 30, 2012. To estimate the fair value of these securities, we use valuations from third-party pricing models that include factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would have a successful auction. To validate the reasonableness of these valuations, we compare such valuations to other third party valuations that provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2012.

Our financial instruments recorded at fair value on a recurring basis at September 30, 2012, were as follows:

 

     Total      Level 1      Level 2      Level 3  
     (In thousands)  

Corporate debt securities

   $ 208,862       $ —         $ 208,862       $ —     

Government-sponsored enterprise securities (GSEs)

     33,066         33,066         —           —     

Municipal securities

     73,899         —           73,899         —     

U.S. treasury notes

     33,691         33,691         —           —     

Certificates of deposit

     7,377         —           7,377         —     

Auction rate securities

     13,523         —           —           13,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 370,418       $ 66,757       $ 290,138       $ 13,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liability

   $ 1,270       $ —         $ 1,270       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Our financial instruments recorded at fair value on a recurring basis at December 31, 2011, were as follows:

 

     Total      Level 1      Level 2      Level 3  
     (In thousands)  

Corporate debt securities

   $ 231,634       $ —         $ 231,634       $ —     

GSEs

     33,949         33,949         —           —     

Municipal securities

     47,313         —           47,313         —     

U.S. treasury notes

     21,748         21,748         —           —     

Certificates of deposit

     2,272         —           2,272         —     

Auction rate securities

     16,134         —           —           16,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 353,050       $ 55,697       $ 281,219       $ 16,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swap liability

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents activity for the nine months ended September 30, 2012, relating to our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

     (Level 3)  
     (In thousands)  

Balance at December 31, 2011

   $ 16,134   

Total gains (unrealized only):

  

Included in other comprehensive income

     1,439   

Settlements

     (4,050
  

 

 

 

Balance at September 30, 2012

   $ 13,523   
  

 

 

 

The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at September 30, 2012

   $ 903   
  

 

 

 

Fair Value Measurements – Disclosure Only

The carrying amounts and estimated fair values of our long-term debt as well as the applicable fair value hierarchy tier, at September 30, 2012, are contained in the table below. Our convertible senior notes are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. Borrowings under our credit facility and our term loan are classified as Level 3 financial instruments, because certain inputs used to determine the fair value of these agreements are unobservable. The carrying value of the credit facility at September 30, 2012 approximates fair value because of the short period of time between the borrowing under the credit facility in 2012, and September 30, 2012. The carrying value of the term loan at September 30, 2012, approximates its fair value because there has been no significant change to our credit risk relating to this instrument from the term loan’s origination date in December 2011, to September 30, 2012.

 

     September 30, 2012  
     Carrying      Total                       
     Value      Fair Value      Level 1      Level 2      Level 3  
     (In thousands)  

Convertible senior notes

   $ 173,940       $ 209,040       $ —         $ 209,040       $ —     

Credit facility

     40,000         40,000         —           —           40,000   

Term loan

     47,754         47,754         —           —           47,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 261,694       $ 296,794       $ —         $ 209,040       $ 87,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Carrying      Total                       
     Value      Fair Value      Level 1      Level 2      Level 3  
     (In thousands)  

Convertible senior notes

   $ 169,526       $ 192,049       $ —         $ 192,049       $ —     

Credit facility

     —           —           —           —           —     

Term loan

     48,600         48,600         —           —           48,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 218,126       $ 240,649       $ —         $ 192,049       $ 48,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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6. Investments

The following tables summarize our investments as of the dates indicated:

 

     September 30, 2012  
     Amortized      Gross
Unrealized
     Estimated
Fair
 
     Cost      Gains      Losses      Value  
     (In thousands)  

Corporate debt securities

   $ 208,217       $ 688       $ 43       $ 208,862   

GSEs

     33,015         55         4         33,066   

Municipal securities

     73,750         232         83         73,899   

U.S. treasury notes

     33,640         51         —           33,691   

Certificates of deposit

     7,377         —           —           7,377   

Auction rate securities

     14,950         —           1,427         13,523   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 370,949       $ 1,026       $ 1,557       $ 370,418   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Amortized      Gross
Unrealized
     Estimated
Fair
 
     Cost      Gains      Losses      Value  
     (In thousands)  

Corporate debt securities

   $ 231,407       $ 442       $ 215       $ 231,634   

GSEs

     33,912         46         9         33,949   

Municipal securities

     47,099         232         18         47,313   

U.S. treasury notes

     21,627         121         —           21,748   

Certificates of deposit

     2,272         —           —           2,272   

Auction rate securities

     19,000         —           2,866         16,134   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 355,317       $ 841       $ 3,108       $ 353,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturities of our investments as of September 30, 2012 are summarized below:

 

            Estimated  
     Cost      Fair Value  
     (In thousands)  

Due in one year or less

   $ 210,489       $ 210,828   

Due one year through five years

     145,510         146,067   

Due after ten years

     14,950         13,523   
  

 

 

    

 

 

 
   $ 370,949       $ 370,418   
  

 

 

    

 

 

 

Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Total proceeds from sales and maturities of available-for-sale securities were $76.8 million and $105.0 million for the three months ended September 30, 2012, and 2011, respectively. Total proceeds from sales and maturities of available-for-sale securities were $213.7 million and $226.4 million for the nine months ended September 30, 2012, and 2011, respectively. Net realized investment gains for the three months ended September 30, 2012, and 2011 were $12,000 and $153,000 respectively. Net realized investment gains for the nine months ended September 30, 2012, and 2011 were $250,000 and $331,000 respectively.

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, 2012, and December 31, 2011, 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.

 

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Table of Contents

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 18 years to 35 years. Considering the relative insignificance of these securities when compared with our liquid assets and other sources of liquidity, we have no current intention of selling these securities nor do we expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the decline in the fair value of the auction securities was not due to the credit quality of the issuers, we do not consider the auction rate securities to be other-than-temporarily impaired at September 30, 2012. 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 $67.1 million of these instruments at par value.

For the nine months ended September 30, 2012, and 2011, we recorded pretax unrealized gains of $1.4 million and $0.9 million, respectively, to accumulated other comprehensive income for the changes in their fair value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.

The following tables segregate those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of September 30, 2012.

 

     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

   $ 23,103       $ 43         15       $ —         $ —           —     

GSEs

     8,602         4         3         —           —           —     

Municipal securities

     15,077         81         30         3,693         2         2   

Auction rate securities

     —           —           —           13,523         1,427         22   

U.S. treasury notes

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 46,782       $ 128         48       $ 17,216       $ 1,429         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 loss position for 12 months or more as of December 31, 2011.

 

     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

   $ 72,766       $ 215         47       $ —         $ —           —     

GSEs

     11,493         9         9         —           —           —     

Municipal securities

     12,033         18         8         —           —           —     

Auction rate securities

     —           —           —           16,134         2,866         27   

U.S. treasury notes

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 96,292       $ 242         64       $ 16,134       $ 2,866         27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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7. Receivables

Health Plans segment receivables consist primarily of amounts due from the various states in which we operate. Such receivables are subject to potential retroactive adjustment. Because all of our receivable amounts are readily determinable and our creditors are in almost all instances state governments, our allowance for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determination is made. Accounts receivable were as follows:

 

     September 30,
2012
     December 31,
2011
 
     (In thousands)  

Health Plans segment:

     

California

   $ 36,600       $ 22,175   

Michigan

     9,440         8,864   

Missouri

     1,240         27,092   

New Mexico

     7,908         9,350   

Ohio

     37,971         27,458   

Texas

     5,175         1,608   

Utah

     4,568         2,825   

Washington

     17,024         15,006   

Wisconsin

     2,661         4,909   

Others

     2,121         2,489   
  

 

 

    

 

 

 

Total Health Plans segment

     124,708         121,776   

Molina Medicaid Solutions segment

     32,201         46,122   
  

 

 

    

 

 

 
   $ 156,909       $ 167,898   
  

 

 

    

 

 

 

8. Restricted Investments

Pursuant to the regulations governing our Health Plan subsidiaries, we maintain statutory deposits and deposits required by state authorities in certificates of deposit and U.S. treasury securities. Additionally, we maintain restricted investments as protection against the insolvency of certain capitated providers. The following table presents the balances of restricted investments.

 

     September 30,
2012
     December 31,
2011
 
     (In thousands)  

California

   $ 373       $ 372   

Florida

     5,733         5,198   

Insurance Company

     —           4,711   

Michigan

     1,000         1,000   

Missouri

     500         504   

New Mexico

     15,911         15,905   

Ohio

     9,079         9,078   

Texas

     3,506         3,518   

Utah

     2,979         2,895   

Washington

     151         151   

Other

     5,256         2,832   
  

 

 

    

 

 

 
   $ 44,488       $ 46,164   
  

 

 

    

 

 

 

The contractual maturities of our held-to-maturity restricted investments as of September 30, 2012 are summarized below.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (In thousands)  

Due in one year or less

   $ 44,177       $ 44,186   

Due one year through five years

     311         311   
  

 

 

    

 

 

 
   $ 44,488       $ 44,497   
  

 

 

    

 

 

 

 

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9. Medical Claims and Benefits Payable

The following table presents the components of the change in our medical claims and benefits payable as of and for the periods indicated. The amounts displayed for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period were (more) or less than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.

 

     Nine Months
Ended
    Three Months
Ended
    Year Ended  
     September 30,
2012
    September 30,
2012
    Dec. 31, 2011  
     (Dollars in thousands)  

Balances at beginning of period

   $ 402,476      $ 525,538      $ 354,356   

Components of medical care costs related to:

      

Current period

     3,860,825        1,361,539        3,911,803   

Prior periods

     (37,689     (46,968     (51,809
  

 

 

   

 

 

   

 

 

 

Total medical care costs

     3,823,136        1,314,571        3,859,994   
  

 

 

   

 

 

   

 

 

 

Payments for medical care costs related to:

      

Current period

     3,332,896        875,236        3,516,994   

Prior periods

     356,253        428,410        294,880   
  

 

 

   

 

 

   

 

 

 

Total paid

     3,689,149        1,303,646        3,811,874   
  

 

 

   

 

 

   

 

 

 

Balances at end of period

   $ 536,463      $ 536,463      $ 402,476   
  

 

 

   

 

 

   

 

 

 

Benefit from prior period as a percentage of:

      

Balance at beginning of period

     9.4     8.9     14.6

Premium revenue

     0.9     3.2     1.1

Total medical care costs

     1.0     3.6     1.3

We recognized favorable prior period claims development in the amount of $37.7 million for the nine months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2011 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at December 31, 2011 was due primarily to the following factors:

 

   

For our Washington health plan, we underestimated the amount of recoveries we would collect for certain high-cost newborn claims, resulting in an overestimation of reserves at year end.

 

   

For our Texas health plan, we overestimated the cost of new members in STAR+PLUS (the name of our ABD program in Texas), in the Dallas region.

 

   

In early 2011, the state of Michigan was delayed in the enrollment of newborns in managed care plans; the delay was resolved by mid-2011. This caused a large number of claims with older dates of service to be paid during late 2011, resulting in an artificial increase in the lag time for claims payment at our Michigan health plan. We adjusted reserves downward for this issue at December 31, 2011, but the adjustment did not capture all of the claims overestimation.

 

   

Offsetting some of the overestimation items described above, our Missouri health plan reserves were underestimated as a result of an unusually large number of premature infants during the fourth quarter of 2011.

We recognized favorable prior period claims development in the amount of $47.0 million for the three months ended September 30, 2012. This amount represents our estimate as of September 30, 2012 of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at June 30, 2012 was due primarily to the following factors:

 

   

For our Texas health plan, we had only four months of paid claims data for the expansion regions that were added March 1, 2012. As a result, we overestimated the medical costs for those regions.

 

   

Our contract with the state of Missouri expired without renewal on June 30, 2012; however we continue to be liable for services rendered to members who were admitted to the hospital on or before June 30, 2012, until the earlier of 90 days or their date of discharge. We overestimated the impact of 90 days of run-out claims for these members.

 

   

For our Washington health plan, we overpaid certain outpatient claims during 2011 and early 2012, disrupting our payment patterns and leading to an overstatement of our liability at June 30, 2012.

 

   

For our Michigan health plan, certain inpatient claims with an unusually long run-out were paid in late 2011 and early 2012, resulting in an artificial increase in the amount of time we typically apply for claims payments when estimating the reserve. In the process of developing the reserves as of June 30, 2012, an adjustment was applied to offset these late claim payments, but the adjustment did not completely remove the effect. As a result, reserves were overstated as of June 30, 2012.

 

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Table of Contents

We recognized favorable prior period claims development in the amount of $49.5 million and $51.8 million for the nine months ended September 30, 2011, and the year ended December 31, 2011, respectively. This was primarily caused by the overestimation of our liability for claims and medical benefits payable at December 31, 2010, as a result of the following factors:

 

   

We overestimated the impact of a buildup in claims inventory in Ohio.

 

   

We overestimated the impact of the settlement of disputed provider claims in California.

 

   

We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule reduction in New Mexico effective November 2010.

In estimating our claims liability at September 30, 2012, we adjusted our base calculation to take account of the following factors which we believe are reasonably likely to change our final claims liability amount:

 

   

Our Texas health plan membership nearly doubled effective March 1, 2012. In addition, effective March 1, 2012, we assumed inpatient medical liability for ABD members for which we were not previously responsible. Reserves for new coverage and new regions are now based on the newly developing claims lag patterns and comparisons with similar coverage in other regions with more historical data. The lag patterns are still incomplete and therefore the true reserve liability is more uncertain than usual.

 

   

Our California health plan has enrolled approximately 20,000 new ABD members since September 30, 2011, as a result of the mandatory assignment of ABD members to managed care plans effective July 1, 2011. These new members converted from a fee-for-service environment. Due to the relatively recent transition of these members to managed care, their utilization of medical services is less predictable than it is for many of our other members.

 

   

Our claims inventory had increased significantly during the first quarter of 2012, followed by a significant reduction in claims inventory in the second quarter of 2012 and a slight drop in the third quarter. Changes in claims inventory can impact historical claims lag patterns.

The use of a consistent methodology in estimating our liability for claims and medical 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. 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 2011 and for the nine months ended September 30, 2012, the absence of adverse development of the liability for claims and medical benefits payable at the close of the previous period resulted in the recognition of substantial favorable prior period development. In both years, however, the recognition of a benefit from prior period claims development did not have a material impact on our consolidated results of operations because the amount of benefit recognized in each year was roughly consistent with that recognized in the previous year.

10. Long-Term Debt

Credit Facility

On September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility (the “Credit Facility”) with various lenders and U.S. Bank National Association, as LC Issuer, Swing Line Lender, and Administrative Agent. The Credit Facility is used for general corporate purposes.

The Credit Facility has a term of five years under which all amounts outstanding will be due and payable on September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $195 million. As of September 30, 2012 there was $40.0 million outstanding under the Credit Facility. Additionally, as of September 30, 2012, our lenders had issued two letters of credit in the aggregate principal amount of $10.3 million in connection with the Molina Medicaid Solutions contracts with the states of Maine and Idaho, which reduces the amount available under the Credit Facility.

Borrowings under the Credit Facility bear interest based, at our election, on the base rate plus an applicable margin or the Eurodollar rate. The base rate is, for any day, a rate of interest per annum equal to the highest of (i) the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sum of the federal funds rate for such day plus 0.50% per annum and (iii) the Eurodollar rate (without giving effect to the applicable margin) for a one month interest period on such day (or if such day is not a business day, the immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which Eurodollar deposits are offered in the interbank Eurodollar market plus an applicable margin. The applicable margins range between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon our leverage ratio. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility, we are required to pay a quarterly commitment fee of 0.25% to 0.50% (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Credit Facility.

 

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Table of Contents

Our obligations under the Credit Facility are secured by a lien on substantially all of our assets, with the exception of certain of our real estate assets, and by a pledge of the capital stock or membership interests of our operating subsidiaries and health plans (with the exception of the California health plan).

The Credit Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain as of the end of any fiscal quarter (calculated for each four consecutive fiscal quarter period) a ratio of total consolidated debt to total consolidated EBITDA, as defined in the Credit Facility, of not more than 2.75 to 1.00, and a fixed charge coverage ratio of not less than 1.75 to 1.00. At September 30, 2012, we were in compliance with all financial covenants under the Credit Facility.

In the event of a default, including cross-defaults relating to specified other debt in excess of $20.0 million, the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding, including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and all rights and remedies created under the Credit Facility or applicable law.

Convertible Senior Notes

As of September 30, 2012, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the “Notes”) remain outstanding. The Notes rank equally in right of payment with our existing and future senior indebtedness. The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The conversion rate is 31.9601 shares of our common stock per one thousand dollar principal amount of the Notes. This represents a conversion price of approximately $31.29 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.

The proceeds from the issuance of the Notes have been allocated between a liability component and an equity component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. As of September 30, 2012, we expect the Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 24 months. The Notes’ if-converted value did not exceed their principal amount as of September 30, 2012. At September 30, 2012, the equity component of the Notes, net of the impact of deferred taxes, was $24.0 million. The following table provides the details of the liability amounts recorded:

 

     As of     As of  
     September 30,     December 31,  
     2012     2011  
     (In thousands)  

Details of the liability component:

    

Principal amount

   $ 187,000      $ 187,000   

Unamortized discount

     (13,060     (17,474
  

 

 

   

 

 

 

Net carrying amount

   $ 173,940      $ 169,526   
  

 

 

   

 

 

 

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (in thousands)  

Interest cost recognized for the period relating to the:

           

Contractual interest coupon rate of 3.75%

   $ 1,753       $ 1,753       $ 5,259       $ 5,259   

Amortization of the discount on the liability component

     1,499         1,384         4,414         4,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest cost recognized

   $ 3,252       $ 3,137       $ 9,673       $ 9,354   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Term Loan

On December 7, 2011, our wholly owned subsidiary Molina Center LLC entered into a Term Loan Agreement with various lenders and East West Bank, as Administrative Agent (the “Administrative Agent”). Pursuant to the terms of the Term Loan Agreement, Molina Center LLC borrowed the aggregate principal amount of $48.6 million to finance a portion of the $81.0 million purchase price for the acquisition of the approximately 460,000 square foot office building, or Molina Center, located in Long Beach, California.

The outstanding principal amount under the Term Loan Agreement bears interest at the Eurodollar rate for each Interest Period (as defined below) commencing January 1, 2012. The Eurodollar rate is a per annum rate of interest equal to the greater of (a) the rate that is published in the Wall Street Journal as the London interbank offered rate for deposits in United States dollars, for a period of one month, two business days prior to the commencement of an Interest Period, multiplied by a statutory reserve rate established by the Board of Governors of the Federal Reserve System, or (b) 4.25%. “Interest Period” means the period commencing on the first day of each calendar month and ending on the last day of such calendar month. The loan matures on November 30, 2018, and is subject to a 25-year amortization schedule that commenced on January 1, 2012.

The Term Loan Agreement contains customary representations, warranties, and financial covenants. In the event of a default as described in the Term Loan Agreement, the outstanding principal amount under the Term Loan Agreement will bear interest at a rate 5.00% per annum higher than the otherwise applicable rate. All amounts due under the Term Loan Agreement and related loan documents are secured by a security interest in the Molina Center in favor of and for the benefit of the Administrative Agent and the other lenders under the Term Loan Agreement.

Interest Rate Swap

In May 2012, we entered into a $42.5 million notional amount interest rate swap agreement, or Swap Agreement, with an effective date of March 1, 2013. While not designated as a hedge instrument, the Swap Agreement is intended to reduce our exposure to fluctuations in the contractual variable interest rates under our Term Loan Agreement, and expires on the maturity date of the Term Loan Agreement, which is November 30, 2018. Under the Swap Agreement beginning on March 1, 2013, we will receive a variable rate of the one-month LIBOR plus 3.25%, and pay a fixed rate of 5.34%. The Swap Agreement is measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. Gains and losses relating to changes in its fair value are reported in earnings in the current period. For the three months and nine months ended September 30, 2012, we have recorded losses of $0.2 million and $1.3 million, respectively, to general and administrative expense. As of September 30, 2012, the fair value of the Swap Agreement is a liability of $1.3 million, recorded to other noncurrent liabilities. We do not use derivatives for trading or speculative purposes. We believe that we are not exposed to more than a nominal amount of credit risk relating to the Swap Agreement because the counterparty is an established and well-capitalized financial institution.

11. Stockholders’ Equity

Securities Repurchase Program. Effective as of October 26, 2011, our board of directors authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior notes due 2014 (see Note 10, “Long-Term Debt”). The repurchase program expired October 25, 2012. No securities were purchased under this program in the nine months ended September 30, 2012.

Stock Plans. In connection with the plans described in Note 4, “Share-Based Compensation,” we issued approximately 755,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the nine months ended September 30, 2012. Stock plan activity resulted in a $14.7 million increase to additional paid-in capital for the same period.

12. Segment Reporting

We report our financial performance based on two reportable segments: Health Plans and Molina Medicaid Solutions. 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 which serve Medicaid populations in nine states (subsequent to the termination of our Medicaid contract in Missouri effective June 30, 2012), and also includes our smaller direct delivery line of business. Our state health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics.

Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in an additional five states.

 

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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 segments is charged to the Health Plans segment.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Revenue:

        

Health Plans:

        

Premium revenue

   $ 1,488,718      $ 1,138,230      $ 4,308,439      $ 3,348,438   

Investment income

     1,171        764        3,996        3,804   

Rental income

     1,879        —          5,408        —     

Molina Medicaid Solutions:

        

Service revenue

     48,422        37,728        132,351        111,290   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,540,190      $ 1,176,722      $ 4,450,194      $ 3,463,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Health Plans

   $ 14,753      $ 12,207      $ 43,600      $ 34,915   

Molina Medicaid Solutions

     5,526        5,605        14,689        17,499   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 20,279      $ 17,812      $ 58,289      $ 52,414   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss):

        

Health Plans

   $ (969   $ 33,773      $ (41,867   $ 100,273   

Molina Medicaid Solutions

     8,156        (207     23,207        (3,997
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     7,187        33,566        (18,660     96,276   

Interest expense

     4,315        4,380        12,421        11,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 2,872      $ 29,186      $ (31,081   $ 84,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30,      December 31,  
     2012      2011  

Goodwill and intangible assets, net:

     

Health Plans

   $ 145,021       $ 159,963   

Molina Medicaid Solutions

     91,100         95,787   
  

 

 

    

 

 

 
   $ 236,121       $ 255,750   
  

 

 

    

 

 

 

Total assets:

     

Health Plans

   $ 1,672,149       $ 1,425,764   

Molina Medicaid Solutions

     234,918         226,382   
  

 

 

    

 

 

 
   $ 1,907,067       $ 1,652,146   
  

 

 

    

 

 

 

13. 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 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.

Molina Medicaid Solutions

On April 6, 2012, Molina Medicaid Solutions received a schedule from the state of Maine purporting to represent approximately $32.6 million in unspecified damages suffered by the state related to the state’s MMIS that was designed, developed, and implemented by Molina Medicaid Solutions. The level of detail provided in the schedule is not adequate for us to determine the specific nature of the damages claimed by the state. No formal claim has been asserted against us by the state, nor has any legal basis been asserted for any potential claims against us. To the extent that the state decides at some point in the future to pursue its alleged claims against us, Unisys Corporation, or Unisys, the former owner of the MMIS, has agreed to assume the defense of that portion of the claim related to the delay in the MMIS “go live” date from March 1, 2010 to August 1, 2010, since that delay had been agreed upon with the state prior to our May 1, 2010 acquisition of Molina Medicaid Solutions from Unisys. The amount of our potential liability related to this matter, if any, cannot be reasonably estimated at this time, nor can a range of such possible liability be established.

 

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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 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, and restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was $519.2 million at September 30, 2012, and $492.4 million at December 31, 2011.

The National Association of Insurance Commissioners, or 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. Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to state. California and Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.

As of September 30, 2012, our health plans had aggregate statutory capital and surplus of approximately $525.4 million compared with the required minimum aggregate statutory capital and surplus of approximately $270.0 million. All of our health plans were in compliance with the minimum capital requirements at September 30, 2012. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.

Receivable/Liability for Ceded Life and Annuity Contracts

Prior to February 17, 2012, we reported a 100% ceded reinsurance arrangement for life insurance policies written and held by our wholly owned insurance subsidiary, Molina Healthcare Insurance Company, by recording a non-current receivable from the reinsurer with a corresponding non-current liability for ceded life and annuity contracts. Effective February 17, 2012, we sold Molina Healthcare Insurance Company. The transaction resulted in the elimination of both the noncurrent receivable and liability for ceded life and annuity contracts, each amounting to $23.4 million as of December 31, 2011. Additionally, a gain of approximately $2.4 million was recorded upon closing of the transaction, recorded to general and administrative expenses in the accompanying consolidated income statement.

We remain liable for benefits payable under the life insurance policies that were held by Molina Healthcare Insurance Company, in the event that both the reinsurer and the buyer of Molina Healthcare Insurance Company are unable to pay those benefits. We believe the possibility of our having to pay such benefits is remote, and no provision for the payment of such benefits is included in our consolidated financial statements.

14. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. For the three months ended September 30, 2012 and 2011, we paid $7.0 million, and $5.0 million, respectively, for medical service fees to this provider. For the nine months ended September 30, 2012 and 2011, we paid $20.6 million, and $16.8 million, respectively, for medical service fees to this provider.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. All statements, other than statements of historical facts, included in this quarterly report may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would,” “could,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from the forward-looking statements that we make. You should read these factors and the other cautionary statements as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, expected, or contemplated as a result of, but not limited to, risk factors related to the following:

 

   

the effectiveness of our medical cost containment initiatives in Texas;

 

   

significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;

 

   

uncertainties regarding the implementation of the Patient Protection and Affordable Care Act, including the potential refusal of a state to expand Medicaid eligibility to its uninsured population, issues surrounding state insurance exchanges, the impact of the health insurance industry excise tax, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures;

 

   

management of the Company’s medical costs, including seasonal flu patterns and rates of utilization that are consistent with the Company’s expectations, and the reduction over time of the high medical costs associated with new populations;

 

   

the success of the Company’s efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, including the pending RFP in New Mexico, and the Company’s ability to grow the Company’s revenues consistent with the Company’s expectations;

 

   

the accurate estimation of incurred but not reported medical costs across the Company’s health plans;

 

   

risks associated with the continued growth in new Medicaid and Medicare enrollees, and the development of actuarially sound rates with respect to such new enrollees, including dually eligible enrollees;

 

   

retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates;

 

   

the continuation and renewal of the government contracts of both the Company’s health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;

 

   

the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine or Idaho;

 

   

additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Maine or Idaho;

 

   

government audits and reviews, and any enrollment freeze or monitoring program that may result therefrom;

 

   

changes with respect to the Company’s provider contracts and the loss of providers;

 

   

the establishment of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, and the interpretation and implementation of medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;

 

   

the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;

 

   

approval by state regulators of dividends and distributions by the Company’s health plan subsidiaries;

 

   

changes in funding under the Company’s contracts as a result of regulatory changes, programmatic adjustments, or other reforms;

 

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high dollar claims related to catastrophic illness;

 

   

the favorable resolution of litigation, arbitration, or administrative proceedings;

 

   

restrictions and covenants in the Company’s credit facility;

 

   

the relatively small number of states in which we operate health plans;

 

   

the availability of financing to fund and capitalize the Company’s acquisitions and start-up activities and to meet the Company’s liquidity needs;

 

   

a state’s failure to renew its federal Medicaid waiver;

 

   

an inadvertent unauthorized disclosure of protected health information;

 

   

changes generally affecting the managed care or Medicaid management information systems industries;

 

   

increases in government surcharges, taxes, and assessments;

 

   

changes in general economic conditions, including unemployment rates; and

 

   

increasing consolidation in the Medicaid industry.

Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as updated in Part II, Item 1A—Risk Factors, in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.

This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: Health Plans; and Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of September 30, 2012, these health plans served approximately 1.8 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Our direct delivery business consists of primary care community clinics in California, Florida, New Mexico and Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.

Our health plans’ state Medicaid contracts generally have terms of three to four years with annual adjustments to premium rates. These contracts are renewable at the discretion of the state. In general, either the state Medicaid agency or the health plan may terminate the state contract with or without cause upon 30 days to nine months with prior written notice. Most of these contracts contain renewal options that are exercisable by the state. Our health plan subsidiaries have generally been successful in obtaining the renewal of their contracts in each state prior to the actual expiration of their contracts. Our state contracts are generally at greatest risk of loss when a state issues a new request for proposals, or RFP, subject to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal. For instance, on February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for Proposal; therefore, our Missouri health plan’s prior contract with the state expired without renewal on June 30, 2012 subject to certain transition obligations. For the six months ended June 30, 2012, our Missouri health plan contributed premium revenue of $113.8 million, or 4.1% of total premium revenue, and comprised 79,000 members, or 4.3% of total Health Plans segment membership as of June 30, 2012.

Our state Medicaid contracts may be periodically adjusted to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations (such as the aged, blind or disabled, or ABD); and regions or service areas. For example, our Texas health plan added significant membership effective March 1, 2012, in service areas we had not previously served (the Hidalgo and El Paso service areas); and among populations we had not previously served within existing service areas, such as the Temporary Assistance for Needy Families, or TANF, population in the Dallas service area. Additionally, the health benefits provided to our TANF and ABD members in Texas under our contracts with the state were expanded to include inpatient facility and pharmacy services.

With regard to our Ohio health plan, as a result of a lawsuit challenging the selection of several plans including our health plan for the new Medicaid managed care program in Ohio, the Ohio Office of Medical Assistance (OMA) announced on October 5, 2012 that the operation of the program is being delayed from the previously scheduled January 1, 2013 start date and will now commence on July 1, 2013. Following the trial court’s dismissal of the lawsuit, the court of appeals has permitted the state of Ohio to move forward with working on implementing the new program and finalizing the provider agreements with our Ohio plan and the other selected managed care plans.

 

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During fiscal year 2012, we expect to respond to several RFPs and invitations to negotiate with respect to new business, including proposals to serve dual eligible populations and applications to participate in CMS’ Capitated Financial Alignment Demonstration project. On August 27, 2012, our Ohio health plan was chosen to participate in the Southwest, West Central, and Central markets under the Ohio Integrated Care Delivery System (ICDS). The Ohio ICDS is intended to improve care coordination for individuals enrolled in both Medicaid and Medicare. The selection of Molina of Ohio was made by the Ohio Department of Jobs and Family Services (ODJFS) pursuant to the request for applications for qualified health plans to serve in the ICDS issued in April 2012. The commencement of the ICDS is subject to the readiness review of the selected health plans, and the execution of three-way provider agreements between the health plans, ODJFS, and CMS. Enrollment of dual eligible members in the ICDS is expected to begin on April 1, 2013. Furthermore, on June 29, 2012, the Florida Agency for Health Care Administration (AHCA) issued invitations to negotiate for the Long-term Care Managed Care component of the Statewide Medicaid Managed Care program. We submitted a bid for eight of eleven regions on August 27, 2012, representing approximately thirty counties and 90,000 beneficiaries. We expect the state to announce contract awards in January 2013 with phased-in enrollment beginning August 2013 and extending through March 2014.

In addition, with regard to existing business, on August 31, 2012, the state of New Mexico issued an RFP for all covered Medicaid services (physical health, behavioral health, and long-term care), with such services expected to commence on January 1, 2014 under the new Medicaid contract. The awards are expected to be announced in January 2013.

Our Molina Medicaid Solutions segment provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida Medicaid program.

On October 12, 2012, the Governor of the U.S. Virgin Islands announced a partnership in which the Company will provide MMIS to the U.S. Virgin Islands through our West Virginia fiscal agent operation. The contract outlining the sharing of the Company’s platform went through several rounds of review at the federal level and has been approved by CMS. The partnership will benefit both the Virgin Islands and taxpayers by circumventing the costs associated with establishing an independent system while gaining leverage from operating under a common platform. This partnership can serve as a model for the country by demonstrating that state and territorial governments can reduce local and federal costs by sharing such technologies for their Medicaid populations.

On July 13, 2012, our Molina Medicaid Solutions segment received full federal certification of its MMIS in the state of Idaho from the Centers for Medicare and Medicaid Services, or CMS. As a result of the CMS certification, the state of Idaho is entitled to receive federal reimbursement of 75% of its MMIS operations costs retroactive to June 1, 2010, the date that the system first began processing claims.

On June 9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intends to award the contract for a replacement MMIS to another company. For the nine months ended September 30, 2012, our revenue under the Louisiana MMIS contract was $38.8 million, or 29.3% of total service revenue. We expect that we will continue to perform under this contract through implementation and acceptance of the successor MMIS. Based upon our past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and acceptance of the successor MMIS we expect to recognize approximately $40 million in revenue annually under our Louisiana MMIS contract.

Composition of Revenue and Membership

Health Plans Segment

Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts with the states in which our health plans operate. Premium revenue is fixed in advance of the periods covered and, except as described in “Critical Accounting Policies” below, is not generally subject to significant accounting estimates. For the nine months ended September 30, 2012, we received approximately 96% of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.

For the nine months ended September 30, 2012, we recognized approximately 4% of our premium revenue in the form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.

The amount of the premiums paid to us may vary substantially between states and among various government programs. PMPM premiums for the Children’s Health Insurance Program, or CHIP, members are generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the TANF Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range between approximately $110 in California to $260 in Ohio. Among our ABD membership, PMPM premiums range from approximately $330 in Utah to $1,400 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care contract (most often pharmacy, inpatient, behavioral health and catastrophic case benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest PMPM premiums in the aggregate, at approximately $1,200 PMPM.

 

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The following table sets forth the approximate total number of members by state health plan as of the dates indicated:

 

     September 30,      June 30,      December 31,      September 30,  
     2012      2012      2011      2011  

Total Ending Membership by Health Plan:

           

California

     346,000         350,000         355,000         350,000   

Florida

     71,000         70,000         69,000         67,000   

Michigan

     219,000         220,000         222,000         217,000   

Missouri (1)

     —           79,000         79,000         78,000   

New Mexico

     90,000         89,000         88,000         89,000   

Ohio

     272,000         260,000         248,000         256,000   

Texas

     291,000         301,000         155,000         148,000   

Utah

     85,000         86,000         84,000         82,000   

Washington

     411,000         356,000         355,000         350,000   

Wisconsin

     41,000         42,000         42,000         41,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,826,000         1,853,000         1,697,000         1,678,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Ending Membership by State for our Medicare Advantage Plans:

           

California

     7,300         7,000         6,900         6,500   

Florida

     900         900         800         700   

Michigan

     9,300         8,900         8,200         7,600   

New Mexico

     900         900         800         800   

Ohio

     200         200         200         100   

Texas

     1,100         800         700         600   

Utah

     8,300         8,300         8,400         7,400   

Washington

     6,100         5,700         5,000         4,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     34,100         32,700         31,000         28,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Ending Membership by State for our Aged, Blind or Disabled Population:

           

California

     44,100         41,100         31,500         23,700   

Florida

     10,300         10,400         10,400         10,400   

Michigan

     40,700         40,000         37,500         31,600   

New Mexico

     5,600         5,600         5,600         5,600   

Ohio

     29,000         29,600         29,100         29,900   

Texas

     101,300         111,000         63,700         61,800   

Utah

     8,900         8,800         8,500         8,300   

Washington

     23,400         4,400         4,800         4,700   

Wisconsin

     1,600         1,700         1,700         1,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     264,900         252,600         192,800         177,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our contract with the state of Missouri expired without renewal on June 30, 2012.

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, or DDI, of a Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO services (which include claims payment and eligibility processing) we also provide the state with other services including both hosting and support and maintenance. 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 period during which BPO, hosting, and support and maintenance services are delivered.

Composition of Expenses

Health Plans Segment

Operating expenses for the Health Plans segment include expenses related to the provision of medical care services, G&A expenses, and premium tax expenses. Our results of operations are impacted by our ability to effectively manage expenses related to medical care services and to accurately estimate medical costs incurred. Expenses related to medical care services are captured in the following four categories:

 

   

Fee-for-service — Expenses paid for specific encounters or episodes of care according to a fee schedule or other basis established by the state or by contract with the provider.

 

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Capitation — Expenses for PMPM payments to the provider without regard to the frequency, extent, or nature of the medical services actually furnished.

 

   

Pharmacy — Expenses for all drug, injectible, and immunization costs paid through our pharmacy benefit manager.

 

   

Other — Expenses for medically related administrative costs of approximately $94.6 million, and $76.3 million, for the nine months ended September 30, 2012 and 2011, respectively, as well as certain provider incentive costs, reinsurance, costs to operate our medical clinics, and other medical expenses.

Our medical care costs include amounts that have been paid by us through the reporting date as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. See “Critical Accounting Policies” below for a comprehensive discussion of how we estimate such liabilities.

Molina Medicaid Solutions Segment

Cost of service revenue consists primarily of the costs incurred to provide business process outsourcing 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 remaining original contract term, consistent with the revenue recognition period.

Third Quarter Financial Performance Summary

The following table and narrative briefly summarizes our financial and operating performance for the three and nine months ended September 30, 2012. Comparable metrics for the third quarter of 2011 are also shown. All ratios, with the exception of the medical care ratio and the premium tax ratio, are shown as a percentage of total revenue. The medical care ratio and the premium tax ratio are computed as a percentage of premium revenue because there are direct relationships between premium revenue earned, and the cost of health care and premium taxes.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  
     (Dollar amounts in thousands, except per share data)  

Net income (loss) per diluted share

   $ 0.07      $ 0.41      $ (0.34   $ 1.16   

Premium revenue

   $ 1,488,718      $ 1,138,230      $ 4,308,439      $ 3,348,438   

Service revenue

   $ 48,422      $ 37,728      $ 132,351      $ 111,290   

Operating income (loss)

   $ 7,187      $ 33,566      $ (18,660   $ 96,276   

Net income (loss)

   $ 3,364      $ 18,950      $ (15,853   $ 53,778   

Total ending membership

     1,826,000        1,678,000        1,826,000        1,678,000   

Premium revenue

     96.7     96.7     96.8     96.7

Service revenue

     3.1        3.2        3.0        3.2   

Investment income

     0.1        0.1        0.1        0.1   

Rental income

     0.1        —          0.1        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Medical care ratio

     88.3     84.3     88.7     84.3

General and administrative expense ratio

     8.3     8.5     8.5     8.4

Premium tax ratio

     2.5     3.2     2.8     3.3

Operating income (loss)

     0.5     2.9     (0.4 )%      2.8

Net income (loss)

     0.2     1.6     (0.4 )%      1.6

Effective tax rate

     (17.1 )%      35.1     49.0     36.4

Third Quarter 2012 Overview

For the third quarter of 2012, net income was $3.4 million, or $0.07 per diluted share, compared with net income of $19.0 million, or $0.41 per diluted share, for the third quarter of 2011.

Our financial performance in the third quarter of 2012 improved substantially over the second quarter of 2012 due to a significant improvement in the profitability of the Texas health plan. Revenue was consistent between the second and third quarters of 2012 as a 30% increase in revenue at the Washington health plan offset the termination of our Missouri enrollment and a slight decline in Texas enrollment.

 

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Results of Operations

Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011

Health Plans Segment

Premium Revenue

Premium revenue for the third quarter of 2012 increased 30.8% over the third quarter of 2011, due primarily to an increase in membership, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and benefit expansions. Medicare premium revenue was $116.1 million for the third quarter of 2012 compared with $101.5 million for the third quarter of 2011.

Membership at the Texas health plan nearly doubled year over year, while also growing significantly in Ohio and Washington. Growth in our ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a percent of total membership, has increased approximately 37% year over year. Premium revenue PMPM also increased in the third quarter of 2012 as a result of the inclusion of revenue from the pharmacy benefit for our Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue from the inpatient facility and pharmacy benefits across all of our Texas health plan membership effective March 1, 2012.

Medical Care Costs

The following table provides the details of consolidated medical care costs for the periods indicated (dollars in thousands except PMPM amounts):

 

     Three Months Ended September 30,  
     2012     2011  
                   % of                   % of  
     Amount      PMPM      Total     Amount      PMPM      Total  

Fee for service

   $ 908,201       $ 165.97         69.1   $ 698,995       $ 140.55         72.9

Pharmacy

     219,823         40.17         16.7        89,191         17.93         9.3   

Capitation

     142,714         26.08         10.9        129,315         26.00         13.5   

Other

     43,833         8.03         3.3        41,657         8.39         4.3   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,314,571       $ 240.25         100.0   $ 959,158       $ 192.87         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Medical care costs increased in the third quarter of 2012 primarily due to the same shifts in member mix and the benefit expansions that led to increased premium revenue. Medical care costs as a percentage of premium revenue (the medical care ratio) also increased in the third quarter of 2012 when compared with the third quarter of 2011 because increases in premium rates have not kept pace with increases in medical costs.

Individual Health Plan Analysis

The Texas health plan’s financial performance improved dramatically in the third quarter from the second quarter of 2012. The medical care ratio of the Texas health plan was 90.3% in the third quarter of 2012 compared with 109.4% in the second quarter of 2012, and 93.7% in the third quarter of 2011. The medical care ratio for the Texas health plan’s ABD membership declined to 94% in the third quarter of 2012 from 119% in the second quarter. We received a blended rate increase in Texas of approximately 4%, or $4.5 million per month, effective September 1, 2012. The loss before taxes at the Texas health plan was approximately $5 million for the third quarter of 2012, compared with approximately $68 million for the second quarter of 2012 (which included a premium deficiency reserve charge of $10 million). In our Quarterly Report on Form 10-Q for the period ended June 30, 2012, we discussed the steps we are taking to return the Texas health plan to profitability. We confirm the previously disclosed expectation that the Texas health plan will be operating at financial break even on a go forward basis by December 2012.

The medical care ratio at the California health plan increased to 96.1% in the third quarter of 2012 from 88.8% in the third quarter of 2011. The higher medical care ratio was primarily the result of a shift in member mix to include more ABD members. The medical care ratio for the California health plan’s ABD membership was 110% in the third quarter of 2012, 100% for the nine months ended September 30, 2012, and 84% for the third quarter of 2011. The California Department of Health Care Services has recently solicited health plan input as to whether to conduct a review of the adequacy of ABD premium rates in California. The California health plan, which believes the ABD premium rates to be inadequate, has provided input supporting such a review. During the fourth quarter of 2012, we intend to exit an unprofitable service area in California, reducing enrollment by approximately 6,000 members.

 

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The California health plan’s medical care ratio also increased by 1.4% in the third quarter of 2012 due to reductions to premium revenue of $2.4 million related to the expected reduction in premium rates of 2.35% for the elimination of the gross premium tax effective July 1, 2012. The reduction in premium was offset by an equivalent decrease in premium tax of $2.4 million. Although the state has not yet reduced the premium rates, we believe that both premium taxes and premium rates will be reduced equivalently retroactive to July 1, 2012.

The medical care ratio of the Florida health plan decreased to 84.0% in the third quarter of 2012, from 89.2% in the third quarter of 2011 due to a premium rate increase effective September 1, 2011, the re-contracting of portions of the health plan’s specialty care network, lower inpatient utilization and lower pharmacy costs.

The medical care ratio of the Michigan health plan increased to 89.3% in the third quarter of 2012, from 82.0% in the third quarter of 2011. The primary reason for the increase in the medical care ratio in 2012 was a reduction to premium rates linked to a decrease in premium taxes, in which both premium taxes and premium revenue were reduced equivalently effective April 1, 2012. The result was a higher medical care ratio in 2012, but there was no impact on profitability as premium tax expense was reduced by the same amount as premium revenue. The remainder of the deterioration in the Michigan plan’s medical care ratio was the result of higher pharmacy and fee for service costs. We expect to receive a blended rate increase in Michigan of approximately 2%, effective October 1, 2012.

The medical care ratio of the New Mexico health plan increased to 86.9% in the third quarter of 2012, from 84.2% in the third quarter of 2011, primarily as a result of higher inpatient facility costs.

The medical care ratio of the Ohio health plan increased to 82.7% for the third quarter of 2012 from 78.4% for the third quarter of 2011. The increase in the Ohio health plan’s medical care ratio was primarily the result of a 2% rate reduction effective January 1, 2012, together with the assumption of the lower margin pharmacy benefit effective October 1, 2011. Although the Ohio health plan’s medical care ratio increased in 2012, the medical margin (measured as total premium revenue less total medical care costs) increased to $52.9 million in the third quarter of 2012, from $50.2 million in the third quarter of 2011.

The medical care ratio of the Utah health plan increased to 85.2% in the third quarter of 2012 from 79.3% in the third quarter of 2011. The Utah health plan received a premium rate reduction of approximately 2% effective July 1, 2012.

The addition of ABD members to the Washington health plan effective July 1, 2012 increased its medical care ratio to 86.4% in the third quarter of 2012 compared with 82.8% in the third quarter of 2011. The higher premium revenue PMPM associated with the ABD membership, however, offset the increased medical care ratio, so that income from operations was consistent between the third quarters of 2012 and 2011. The medical care ratio for the Washington health plan’s new ABD membership was 93% in the third quarter of 2012.

The Wisconsin health plan reported a medical care ratio of 93.5% for the third quarter of 2012 compared with 79.1% for the third quarter of 2011. We believe that the state’s premium rates in effect through December 31, 2012 are not adequate to cover the costs of servicing that contract. Accordingly, we recorded a premium deficiency reserve for the Wisconsin health plan at June 30, 2012 of $3.0 million. One-half of that reserve was reversed during the third quarter corresponding with the reduction in the number of months remaining in the rating period. Absent the $1.5 million partial reversal of the premium deficiency reserve, the medical care ratio of the Wisconsin health plan would have been approximately 102.6% for the third quarter of 2012. Inpatient costs in the TANF program are the primary driver of the increased costs in the third quarter of 2012, when compared with the third quarter 2011. The Wisconsin health plan will receive new premium rates effective January 1, 2013. Company management believes that premiums remain too low to cover medical costs and is working with the state and CMS to achieve actuarially sound rates. Additionally, our Wisconsin plan has implemented provider contracting initiatives and new utilization management techniques as a part of its efforts to improve profitability. If we are unable to achieve rates that are actuarially sound, it may no longer be feasible for us to continue as a health plan in the state.

 

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Health Plans Segment Operating Data

The following table summarizes member months, premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in thousands):

 

     Three Months Ended September 30, 2012  
            Premium Revenue      Medical Care Costs                  MCR
Excluding
 
     Member
Months (1)
     Total      PMPM      Total      Expense      Medical
Care Ratio
    Premium Tax
Expense
    Premium Tax
Expense (4)
 

California

     1,041       $ 162,389       $ 156.00       $ 156,106       $ 149.96         96.1   $ —          96.1

Florida

     214         57,429         268.56         48,250         225.64         84.0        (5     84.0   

Michigan

     656         160,637         244.91         143,513         218.80         89.3        1,046        89.9   

Missouri (2)

     —           —           —           —           —           —          —          —     

New Mexico

     269         84,797         315.49         73,721         274.28         86.9        1,761        88.8   

Ohio

     805         306,314         380.20         253,447         314.58         82.7        23,824        89.7   

Texas

     890         350,810         394.10         316,716         355.80         90.3        6,289        91.9   

Utah

     256         73,484         287.21         62,630         244.79         85.2        —          85.2   

Washington

     1,217         274,079         225.29         236,928         194.76         86.4        4,888        88.0   

Wisconsin

     124         16,279         131.21         15,217         122.65         93.5        —          93.5   

Other (3)

     —           2,500         —           8,043         —           —          91        —     
  

 

 

    

 

 

       

 

 

         

 

 

   
     5,472       $ 1,488,718       $ 272.08       $ 1,314,571       $ 240.25         88.3   $ 37,894        90.6
  

 

 

    

 

 

       

 

 

         

 

 

   
     Three Months Ended September 30, 2011  
            Premium Revenue      Medical Care Costs                  MCR
Excluding
 
     Member
Months (1)
     Total      PMPM      Total      Expense      Medical
Care Ratio
    Premium Tax
Expense
    Premium Tax
Expense (4)
 

California

     1,049       $ 144,888       $ 138.11       $ 128,596       $ 122.58         88.8   $ 1,114        89.4

Florida

     199         51,569         258.96         46,009         231.04         89.2        (17     89.2   

Michigan

     656         165,636         252.46         135,899         207.13         82.0        9,644        87.1   

Missouri (2)

     234         58,196         248.80         45,428         194.22         78.1        —          78.1   

New Mexico

     267         79,644         297.82         67,043         250.70         84.2        2,084        86.4   

Ohio

     745         232,616         312.55         182,363         245.02         78.4        18,072        85.0   

Texas

     414         105,577         255.25         98,954         239.24         93.7        1,613        95.2   

Utah

     243         69,763         286.47         55,293         227.05         79.3        —          79.3   

Washington

     1,043         211,131         202.49         174,912         167.76         82.8        3,776        84.4   

Wisconsin

     123         17,269         139.95         13,656         110.67         79.1        —          79.1   

Other (3)

     —           1,941         —           11,005         —           —          88        —     
  

 

 

    

 

 

       

 

 

         

 

 

   
     4,973       $ 1,138,230       $ 228.88       $ 959,158       $ 192.87         84.3   $ 36,374        87.0
  

 

 

    

 

 

       

 

 

         

 

 

   

 

(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) Our contract with the state of Missouri expired without renewal on June 30, 2012. The Missouri health plan’s claims run-out activity subsequent to June 30, 2012, is reported in “Other.”
(3) “Other” medical care costs also include medically related administrative costs at the parent company.
(4) The MCR Excluding Premium Tax Expense represents medical costs as a percentage of premium revenues, where premium revenue is reduced by premium tax expense.

 

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Molina Medicaid Solutions Segment

Performance of the Molina Medicaid Solutions segment was as follows:

 

 

     Three Months Ended September 30,  
     2012     2011  
     (In thousands)  

Service revenue before amortization

   $ 48,958      $ 39,273   

Amortization recorded as reduction of service revenue

     (536     (1,545
  

 

 

   

 

 

 

Service revenue

     48,422        37,728   

Cost of service revenue

     37,004        34,584   

General and administrative costs

     1,980        2,069   

Amortization of customer relationship intangibles recorded as amortization

     1,282        1,282   
  

 

 

   

 

 

 

Operating income (loss)

   $ 8,156      $ (207
  

 

 

   

 

 

 

Operating income for our Molina Medicaid Solutions segment improved $8.4 million for the three months ended September 30, 2012, compared with the same prior year period. This improvement was primarily the result of stabilization of our newest Medicaid Management Information Systems, or MMIS, in Idaho and Maine. As discussed earlier, our Idaho MMIS has received full federal certification. Among the reasons cited by the Company for purchasing Molina Medicaid Solutions effective May 1, 2010, was the benefit of reducing our reliance on health plan operations. For the quarter ended September 30, 2012, the Molina Medicaid Solutions segment gross margin rate was 23.6%, compared with 11.7% for the Health Plans segment.

Nine Months Ended September 30, 2012 Compared with the Nine Months Ended September 30, 2011

Health Plans Segment

Premium Revenue

In the nine months ended September 30, 2012, compared with the nine months ended September 30, 2011, premium revenue grew 28.7% primarily due to an increase in membership, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and benefit expansions. Medicare premium revenue was $346.6 million for the nine months ended September 30, 2012, compared with $282.3 million for the nine months ended September 30, 2011.

Growth in our ABD membership led to higher premium revenue PMPM in 2012. ABD membership, as a percent of total membership, has increased approximately 37% year over year. Premium revenue PMPM also increased in the nine months ended September 30, 2012, as a result of the inclusion of revenue from the pharmacy benefit for our Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue from the inpatient facility and pharmacy benefits across all of our Texas health plan membership effective March 1, 2012.

Medical Care Costs

The following table provides the details of consolidated medical care costs for the periods indicated (dollars in thousands except PMPM amounts):

 

     Nine Months Ended September 30,  
     2012     2011  
     Amount      PMPM      % of
Total
    Amount      PMPM      % of
Total
 

Fee for service

   $ 2,666,470       $ 164.09         69.8   $ 2,050,430       $ 138.40         72.7

Pharmacy

     606,004         37.29         15.9        268,637         18.13         9.5   

Capitation

     417,643         25.70         10.9        383,955         25.92         13.6   

Other

     133,019         8.19         3.4        119,027         8.03         4.2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 3,823,136       $ 235.27         100.0   $ 2,822,049       $ 190.48         100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Our medical care ratio and medical margin deteriorated in the nine months ended September 30, 2012, when compared with the nine months ended September 30, 2011, for the same reasons described above in the “Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011.”

 

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Health Plans Segment Operating Data

The following table summarizes member months, premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in thousands):

 

     Nine Months Ended September 30, 2012    

MCR
Excluding

Premium

 
     Member      Premium Revenue      Medical Care Costs      Medical Care     Premium Tax     Tax  
     Months (1)      Total      PMPM      Total      PMPM      Ratio     Expense     Expense(4)  

California

     3,156       $ 491,718       $ 155.80       $ 446,694       $ 141.53         90.8   $ 5,004        91.8

Florida

     632         170,922         270.47         146,261         231.44         85.6        (18     85.6   

Michigan

     1,983         491,301         247.78         419,406         211.52         85.4        11,203        87.4   

Missouri (2)

     483         113,818         235.63         113,101         234.15         99.4        —          99.4   

New Mexico

     801         253,418         316.56         208,668         260.66         82.3        5,971        84.3   

Ohio

     2,313         896,908         387.74         735,432         317.93         82.0        69,689        88.9   

Texas

     2,389         908,532         380.30         890,042         372.57         98.0        16,155        99.7   

Utah

     767         225,533         293.93         183,930         239.71         81.6        —          81.6   

Washington

     3,352         697,065         207.97         592,398         176.75         85.0        12,599        86.5   

Wisconsin

     374         52,209         139.46         54,861         146.54         105.1        —          105.1   

Other (3)

     —           7,015         —           32,343         —           —          350        —     
  

 

 

    

 

 

       

 

 

         

 

 

   
     16,250       $ 4,308,439       $ 265.14       $ 3,823,136       $ 235.27         88.7   $ 120,953        91.3
  

 

 

    

 

 

       

 

 

         

 

 

   
     Nine Months Ended September 30, 2011    

MCR
Excluding

Premium

 
     Member      Premium Revenue      Medical Care Costs      Medical Care     Premium Tax     Tax  
     Months (1)      Total      PMPM      Total      PMPM      Ratio     Expense     Expense(4)  

California

     3,133       $ 418,961       $ 133.71       $ 359,844       $ 114.84         85.9   $ 4,937        86.9

Florida

     588         150,561         256.13         141,872         241.35         94.2        34        94.3   

Michigan

     2,002         495,971         247.70         399,952         199.75         80.6        29,219        85.7   

Missouri (2)

     722         169,988         235.45         148,135         205.18         87.1        —          87.1   

New Mexico

     808         246,223         304.71         205,659         254.51         83.5        6,472        85.8   

Ohio

     2,218         693,829         312.86         533,216         240.44         76.9        53,629        83.3   

Texas

     1,154         290,787         252.06         271,723         235.54         93.4        5,016        95.1   

Utah

     723         215,205         297.62         167,605         231.79         77.9        —          77.9   

Washington

     3,104         608,998         196.25         515,769         166.20         84.7        11,099        86.3   

Wisconsin

     364         51,526         141.42         47,450         130.23         92.1        44        92.2   

Other (3)

     —           6,389         —           30,824         —           —          183        —