MOLINA HEALTHCARE, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-31719
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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13-4204626
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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200 Oceangate, Suite 100, Long Beach, California 90802
(Address of principal executive offices)
(562) 435-3666
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 Par Value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes
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No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes
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No
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.
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Yes
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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).
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Yes
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No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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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. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
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No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30,
2015
, the last business day of our most recently completed second fiscal quarter, was approximately $2,823.5 million (based upon the closing price for shares of the registrant’s Common Stock as reported by the New York Stock Exchange, Inc. on June 30,
2015
).
As of
February 23, 2016
, approximately
56,199,000
shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the
2016
Annual Meeting of Stockholders to be held on April 27,
2016
, are incorporated by reference into Part III of this Form 10-K.
Molina Healthcare, Inc.
Form 10-K
For the Year Ended
December 31, 2015
TABLE OF CONTENTS
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Page
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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Item 9A.
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Item 9B.
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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Item 15.
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This Annual Report on Form 10-K ("Form 10-K") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Many of the forward-looking statements are located under the headings "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading "Risk Factors." Each of the terms "Company," "Molina Healthcare," "we," "our," and "us," as used herein refers collectively to Molina Healthcare, Inc. and its wholly owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Item 1:
Business
OVERVIEW
Our Vision and Mission
Molina Healthcare, Inc. offers cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program.We envision a future where everyone receives quality health care, and our mission is to provide quality health care to people receiving government assistance. To execute on our vision and mission, we dedicate ourselves to the following core values:
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Caring - We care about those we serve and advocate on their behalf.
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Enthusiasm - We enthusiastically address problems and seek creative solutions.
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Respect - We respect each other and value ethical business practices.
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Focus - We focus on our mission.
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Thrift - We are careful with scarce resources.
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Accountability - We are personally accountable for our actions and collaborate to get results.
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Feedback - We strive to improve the organization and achieve meaningful change through feedback and coaching.
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Our Strategy
The primary objectives of our strategy over the past 35 years have been to grow and diversify our revenue; sustain our mission by being profitable; and to always remain focused on providing access to high quality healthcare for our members.
According to the U.S. Department of Health and Human Services (HHS), by late 2015 nearly 18 million people nationally gained health insurance by signing up for Medicaid or the Health Insurance Marketplace (Marketplace), since several of the Affordable Care Act's coverage provisions took effect. The uninsured rate has fallen from a high of 18% to nearly 11%; the lowest uninsured rate in 50 years according to an ongoing study by the Centers for Disease Control and Prevention. We have participated in this trend by enrolling approximately
1.6 million
members since January 2014, including more than a half million Medicaid expansion members and
205,000
low-income Marketplace members. In total, as of
December 31, 2015
, our health plans served over
3.5 million
members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals.
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Beyond growing the number of members we serve, we believe our most important contribution lies in our commitment to provide access to quality health care for our members. To that end, we have set about expanding and deepening the care capabilities that we provide, focusing on quality outcomes, care integration, and measurable results. For example, the National Committee for Quality Assurance (NCQA) has accredited nine of our 12 Medicaid managed care plans. Our newer Illinois and South Carolina health plans are preparing for NCQA accreditation review in 2016. Our Puerto Rico health plan, which began serving members in 2015, will seek NCQA accreditation as soon as it is eligible to do so. We believe that these objective measures of the quality of the services we provide are increasingly important to state Medicaid agencies.
In addition, as states continue to seek cost-effective strategies to manage the care of individuals with more complex healthcare and behavioral needs, we believe that the movement toward the integration of behavioral health and medical care will continue.
Our growth strategy has four components:
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Growth and retention in our existing markets;
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Expansion into new geographies;
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Transitioning members and benefits from fee for service to managed care; and
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Developing and acquiring new products and capabilities.
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Significant accomplishments in support of our strategic growth initiatives during
2015
and early 2016 included:
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Growth and retention in our existing markets.
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We retained and grew existing business with our re-procurement wins in Michigan and Washington. Our new contract in Michigan expanded our service area across all of the Lower Peninsula, spanning an additional 18 counties. The Washington win, along with the acquisition described below, strengthens our position in the southwestern region of that state.
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Our Florida and Michigan health plans acquired Medicaid contracts which added approximately
192,000
new members in 2015.
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We have announced and/or closed on Medicaid contract acquisitions in Illinois, Michigan and Washington that we expect to add approximately
257,000
new members in the first quarter of 2016.
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Our Marketplace enrollment grew from approximately 15,000 members in 2014, to over 200,000 members as of December 31, 2015.
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Molina Medicaid Solutions entered into a 10-year contract with the state of New Jersey to design and operate that state's new Medicaid management information system (MMIS).
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Expansion into new geographies.
Our Puerto Rico health plan began serving its first members in April 2015. As of
December 31, 2015
, our Puerto Rico plan enrollment amounted to approximately
348,000
members.
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Transitioning members and benefits from fee for service to managed care.
In 2015, we saw strong growth in our Medicare-Medicaid Plan (MMP) and Aged, Blind or Disabled (ABD) programs. While smaller programs in total membership, they translate to strong revenue growth because these members bring much higher premiums when
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compared with our other members, including those in the Temporary Assistance for Needy Families, Medicaid expansion and Marketplace programs.
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Developing and acquiring new products and capabilities
. We acquired Pathways Health and Community Support LLC (Pathways), formerly known as Providence Human Services, LLC, a division of The Providence Service Corporation. Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia. We believe this acquisition will complement our Health Plans segment services with behavioral health and other services that focus on social determinants of health, as we increasingly arrange for healthcare services for members with complex needs.
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Finally, to support our future growth initiatives, in 2015 we raised approximately $
1.1 billion
under debt and equity financing transactions, and supplemented our financing resources under a new unsecured
$250 million
revolving credit facility.
Our Strengths
From a strategic perspective, we believe our organizational structure allows us to participate in an expanding sector of the economy and continue our mission to provide quality health care to people receiving government assistance. Our approach to our business is based on the following strengths:
Flexible Health Services Portfolio
. We offer a comprehensive suite of Medicaid services, ranging from quality care, disease management, cost management, and direct delivery of health care services, to state-level Medicaid management information systems (MMIS) administration through our Molina Medicaid Solutions segment. Our health plan care delivery systems are diverse and readily adaptable to different markets and changing conditions. We arrange health care services with a variety of providers, including independent physicians and medical groups, hospitals, ancillary providers, and our own clinics. Our systems support multiple types of contract models. Our provider networks are well-suited, based on medical specialty, member proximity, and cultural sensitivity, to provide services to our members. We believe that our Molina Medicaid Solutions platform, which is based on commercial off-the-shelf technology, has the flexibility to meet a wide variety of state Medicaid administrative needs in a timely and cost-effective manner.
Focus on People Receiving Government Assistance.
Our experience over more than 35 years has allowed us to develop strong relationships with the constituents we serve, establish significant expertise as a government contractor, and develop sophisticated disease management, care coordination and health education programs that address the particular health care needs of our members. We also benefit from a thorough understanding of the cultural and linguistic needs of Medicaid populations.
Scalable Administrative Infrastructure.
Our operations share common systems platforms, which allow for economies of scale and common experience in meeting the needs of state Medicaid programs. We have centralized and standardized various functions and practices to increase administrative efficiency. In addition, we have designed our administrative and operational infrastructure to be scalable for cost-effective expansion into new and existing markets.
Consistent Medicaid National Brand.
Since the founding of our company in 1980 to serve the Medicaid population in southern California through a small network of primary care clinics, we have increased our Health Plans membership to
3.5 million
members as of
December 31, 2015
, added Molina Medicaid Solutions, and introduced new capabilities with the acquisition of Pathways.
Seasoned Management Team.
Dr. C. David Molina founded our company in 1980 as a provider organization serving the Medicaid population in Southern California. Today, we remain a provider-focused company led by his son, Dr. J. Mario Molina, whose tenure with Molina is over 19 years. The rest of our named executive officers have been with Molina for periods ranging from 10 years to 20 years. We believe that this extensive experience allows senior management to take a longer-term view of our operations, while maintaining consistency.
Unique Culture.
We believe that we are unique culturally because of our employees' dedication to our core values and our mission. Many of our employees seek to work here—and continue to work here—because of our shared belief that we envision a future where everyone receives quality healthcare.
OUR INDUSTRY
Medicaid
Medicaid was established in 1965 under the U.S. Social Security Act to provide health care and long-term care services and support to low-income Americans. Although jointly funded by federal and state governments, Medicaid is a state-operated and state-implemented program. Subject to federal laws and regulations, states have significant flexibility to structure their own programs in terms of eligibility, benefits, delivery of services, and provider payments. As a result, there are 56 separate Medicaid programs—one for each U.S. state, each U.S. territory, and the District of Columbia.
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The federal government guarantees matching funds to states for qualifying Medicaid expenditures based on each state’s federal medical assistance percentage (FMAP). A state’s FMAP is calculated annually and varies inversely with average personal income in the state. The average FMAP across all jurisdictions is currently about 59%, and ranges from a federally established FMAP floor of 50% to as high as 74%.
The most common state-administered Medicaid program is the Temporary Assistance for Needy Families program (TANF), which covers primarily low-income mothers and children. In states that have elected to participate, Medicaid expansion provides eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Another common state-administered Medicaid program is for ABD Medicaid beneficiaries, which covers low-income persons with chronic physical disabilities or behavioral health impairments. ABD beneficiaries represent a growing portion of all Medicaid recipients, and typically use more services because of their critical health issues. Additionally, the Children's Health Insurance Program (CHIP) is a joint federal and state matching program that provides health care coverage to children whose families earn too much to qualify for Medicaid coverage. States have the option of administering CHIP through their Medicaid programs.
Every state Medicaid program must balance many potentially competing demands, including the need for quality care, adequate provider access, and cost-effectiveness. To improve quality and provide more uniform and cost-effective care, many states have implemented Medicaid managed care programs. These programs seek to improve access to coordinated health care services, including preventive care, and to control health care costs. Under Medicaid managed care programs, a health plan receives capitation payments from the state. The health plan, in turn, arranges for the provision of health care services by contracting with a network of medical providers. The health plan implements care management and care coordination programs that seek to improve both care access and care quality, while controlling costs more effectively.
While many states have embraced Medicaid managed care programs, others continue to operate traditional fee-for-service programs to serve all or part of their Medicaid populations. Under fee-for-service Medicaid programs, health care services are made available to beneficiaries as they seek that care, without the benefit of a coordinated effort to maintain and improve their health. As a consequence, treatment is often postponed until medical conditions become more severe, leading to higher costs and more unfavorable outcomes. Additionally, providers paid on a fee-for-service basis are compensated based upon services they perform, rather than health outcomes, and therefore lack incentives to coordinate preventive care, monitor utilization, and control costs.
Medicare
Medicare is a federal program that provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress, and administered by the Centers for Medicare and Medicaid Services (CMS). Medicare beneficiaries may enroll in a Medicare Advantage plan, under which managed care plans contract with CMS to provide benefits that are comparable to original Medicare. Such benefits are provided in exchange for a fixed per-member per-month (PMPM) premium payment that varies based on the county in which a member resides, the demographics of the member, and the member’s health condition.
Since 2006, Medicare beneficiaries have had the option of selecting a new prescription drug benefit from an existing Medicare Advantage plan. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain cost sharing depending upon the specific benefit design of the selected plan.
Medicaid Management Information Systems
Because Medicaid is a state-administered program, every state must have mechanisms, policies, and procedures in place to perform a large number of crucial functions, including the determination of eligibility and the reimbursement of medical providers for services provided. This requirement exists regardless of whether a state has adopted a fee-for-service or a managed care delivery model. MMIS are used by states to support these administrative activities. Although a small number of states build and operate their own MMIS, a far more typical practice is for states to sub-contract the design, development, implementation, and operation of their MMIS to private parties. Through our Molina Medicaid Solutions segment, we actively participate in this market.
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Competition
The Medicaid managed care industry is fragmented, and the competitive landscape is subject to ongoing changes as a result of health care reform, business consolidations and new strategic alliances. We compete with a large number of national, regional, and local Medicaid service providers, principally on the basis of size, location, quality of provider network, quality of service, and reputation. Our primary competitors in the Medicaid managed care industry include Centene Corporation, WellCare Health Plans, Inc., UnitedHealth Group Incorporated, Anthem, Inc., and Aetna Inc. Competition can vary considerably from state to state. Below is a general description of our principal competitors for state contracts, members, and providers:
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Multi-Product Managed Care Organizations - National and regional managed care organizations that have Medicaid members in addition to numerous commercial health plan and Medicare members.
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Medicaid HMOs - National and regional managed care organizations that focus principally on providing health care services to Medicaid beneficiaries, many of which operate in only one city or state.
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Prepaid Health Plans - Health plans that provide less comprehensive services on an at-risk basis or that provide benefit packages on a non-risk basis.
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Primary Care Case Management Programs - Programs established by the states through contracts with primary care providers to provide primary care services to Medicaid beneficiaries, as well as to provide limited oversight of other services.
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We will continue to face varying levels of competition. Health care reform proposals may cause organizations to enter or exit the market for government sponsored health programs. However, the licensing requirements and bidding and contracting procedures in some states may present partial barriers to entry into our industry.
We compete for government contracts, renewals of those government contracts, members, and providers. State agencies consider many factors in awarding contracts to health plans. Among such factors are the health plan’s provider network, medical management, degree of member satisfaction, timeliness of claims payment, and financial resources. Potential members typically choose a health plan based on a specific provider being a part of the network, the quality of care and services available, accessibility of services, and reputation or name recognition of the health plan. We believe factors that providers consider in deciding whether to contract with a health plan include potential member volume, payment methods, timeliness and accuracy of claims payment, and administrative service capabilities.
Molina Medicaid Solutions competes with large MMIS vendors, such as HP Enterprise Services, ACS (owned by Xerox Corporation), Computer Services Corporation, and CNSI.
BUSINESS OPERATIONS
Our Structure
We currently manage our operations through three reportable segments: the Health Plans segment, the Molina Medicaid Solutions segment, and Other, which includes our recent Pathways acquisition described above. We regularly evaluate the appropriateness of our reportable segments, particularly in light of organizational changes, acquisition activity and changing laws and regulations. Therefore, these reportable segments may change in the future.
We derive our revenues primarily from health insurance premiums. Refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
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, "
Significant Accounting Policies
," and Note
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, "
Segment Information
," for revenue information by state health plan, and segment revenue, profit and total asset information, respectively.
Health Plans
. The Health Plans segment consists of operational health plans in 11 states and the Commonwealth of Puerto Rico, and our direct delivery business. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate health plans. Our Health Plans segment operates in a highly regulated environment, with stringent minimum capitalization requirements that limit the ability of our health plan subsidiaries to pay dividends to us. As of December 31, 2015, the components of our membership by program, are indicated in the following chart.
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Molina Medicaid Solutions.
The Molina Medicaid Solutions segment provides design, development, implementation (DDI), and business process outsourcing (BPO) solutions to state governments for their Medicaid management information systems. 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; the U.S. Virgin Islands; and a contract to provide pharmacy rebate administration services for the Florida Medicaid program. The Molina Medicaid Solutions segment supports state Medicaid agency administrative needs, reduces the variability in our earnings resulting from fluctuations in medical care costs, improves our operating profit margin percentages, and improves our cash flow by adding a business for which there are no restrictions on dividend payments.
Other
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Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
Our reliance on operations in a limited number of states could cause our revenue and profitability to change suddenly and unexpectedly. Additionally, our inability to continue to operate in any of the states in which we currently operate, or a significant change in the nature of our existing operations, could adversely affect our business, financial condition, cash flows, or results of operations.
Pricing
Medicaid.
Under our Medicaid contracts, state government agencies pay our health plans fixed PMPM rates that vary by state, line of business and demographics; and we arrange, pay for and manage health care services provided to Medicaid beneficiaries. Therefore, our health plans are at risk for the medical costs associated with their members’ health care. The rates we receive are subject to change by each state and, in some instances, provide for adjustments for health risk factors. CMS requires these rates to be actuarially sound. Payments to us under each of our Medicaid contracts are subject to the annual appropriation process in the applicable state.
Medicare.
Under Medicare Advantage, managed care plans contract with CMS to provide benefits in exchange for a fixed PMPM premium payment that varies based on the county in which a member resides, and adjusted for demographic and health risk factors. CMS also considers inflation, changes in utilization patterns and average per capita fee-for-service Medicare costs in the calculation of the fixed PMPM premium payment.
Amounts payable to us under the Medicare Advantage contracts are subject to annual revision by CMS, and we elect to participate in each Medicare service area or region on an annual basis. Medicare Advantage premiums paid to us are subject to federal government reviews and audits which can result, and have resulted, in retroactive and prospective premium adjustments. Compared with our Medicaid plans, Medicare Advantage contracts generate higher average PMPM revenues and health care costs.
Marketplace
. For our Marketplace plans, we develop premium rates during early spring each year for policies effective January 1st of the following year. We develop our premium rates based on our estimates of projected member utilization, medical unit costs, member risk acuity, and administrative costs, with the intent of realizing a target pretax percentage profit margin. Our
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actuaries certify the actuarial soundness of Marketplace premiums in the rate filings submitted to the various state and federal authorities for approval.
Medical Management
Our experience in medical management extends back to our roots as a provider organization. Primary care physicians are the focal point of the delivery of health care to our members, providing routine and preventive care, coordinating referrals to specialists, and assessing the need for hospital care. This model has proved to be an effective method for coordinating medical care for our members. The underlying challenge we face is to coordinate health care so that our members receive timely and appropriate care from the right provider at the appropriate cost. In support of this goal, and to ensure medical management consistency among our various state health plans, we continuously refine and upgrade our medical management efforts at both the corporate and subsidiary levels.
We seek to ensure quality care for our members on a cost-effective basis through the use of certain key medical management and cost control tools. These tools include utilization management, case and health management, and provider network and contract management.
Utilization Management.
We continuously review utilization patterns with the intent to optimize quality of care and ensure that only appropriate services are rendered in the most cost-effective manner. Utilization management, along with our other tools of medical management and cost control, is supported by a centralized corporate medical informatics function which utilizes third-party software and data warehousing tools to convert data into actionable information. We use predictive modeling that supports a proactive case and health management approach both for us and our affiliated physicians.
Case and Health Management.
We seek to encourage quality, cost-effective care through a variety of case and health management programs, including disease management programs, educational programs, and pharmacy management programs such as the following:
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Disease Management Programs.
We develop specialized disease management programs that address the particular health care needs of our members. "
motherhood matters!
sm"
is a comprehensive program designed to improve pregnancy outcomes and enhance member satisfaction. "
breathe with ease!"
is a multi-disciplinary disease management program that provides health education resources and case management services to assist physicians caring for asthmatic members between the ages of three and 15. "
Healthy Living with Diabetes"
is a diabetes disease management program. "
Heart Healthy Living"
is a cardiovascular disease management program for members who have suffered from congestive heart failure, angina, heart attack, or high blood pressure.
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Educational Programs.
Educational programs are an important aspect of our approach to health care delivery. These programs are designed to increase awareness of various diseases, conditions, and methods of prevention in a manner that supports our providers while meeting the unique needs of our members. For example, we provide our members with information to guide them through various episodes of care. This information, which is available in several languages, is designed to educate members on the use of primary care physicians, emergency rooms, and nurse call centers.
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Pharmacy Management Programs.
Our pharmacy management programs focus on physician education regarding appropriate medication utilization and encouraging the use of generic medications. Our pharmacists and medical directors work with our pharmacy benefits manager to maintain a formulary that promotes both improved patient care and generic drug use. We employ full-time pharmacists and pharmacy technicians who work with physicians to educate them on the uses of specific drugs, the implementation of best practices, and the importance of cost-effective care.
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Provider Network and Contract Management.
The quality, depth, and scope of our provider network are essential if we are to ensure quality, cost-effective care for our members. In partnering with quality, cost-effective providers, we utilize clinical and financial information derived by our medical informatics function, as well as the experience we have gained in serving Medicaid members, to gain insight into the needs of both our members and our providers. As we grow in size, we seek to strengthen our ties with high-quality, cost-effective providers by offering them greater patient volume.
Provider Networks
We arrange health care services for our members through contracts with providers that include independent physicians and groups, hospitals, ancillary providers, and our own clinics. Our network of providers includes primary care physicians, specialists and hospitals. Our strategy is to contract with providers in those geographic areas and medical specialties necessary to meet the needs of our members. We also strive to ensure that our providers have the appropriate cultural and linguistic experience and skills.
Physicians.
We contract with both primary care physicians and specialists, many of whom are organized into medical groups or independent practice associations (IPAs). Primary care physicians provide office-based primary care services. Primary care
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physicians may be paid under capitation or fee-for-service contracts and may receive additional compensation by providing certain preventive services. Our specialists care for patients for a specific episode or condition, usually upon referral from a primary care physician, and are usually compensated on a fee-for-service basis. When we contract with groups of physicians on a capitated basis, we monitor their solvency.
Hospitals.
We generally contract with hospitals that have significant experience dealing with the medical needs of the Medicaid population. We reimburse hospitals under a variety of payment methods, including fee-for-service, per diems, diagnostic-related groups (DRGs) capitation, and case rates.
Direct Delivery.
The clinics we operate are located in neighborhoods where our members live, and provide us a first-hand opportunity to understand the special needs of our members. The clinics we operate assist us in developing and implementing community education, disease management, and other programs. Direct clinic management experience also enables us to better understand the needs of our contracted providers.
Reinsurance
Our health plans currently have reinsurance agreements with an unaffiliated insurer to cover certain claims. We enter into these contracts to reduce the risk of catastrophic losses which in turn reduce our capital and surplus requirements. We frequently evaluate reinsurance opportunities and review our reinsurance and risk management strategies on a regular basis.
Management Information Systems
All of our health plan information technology systems operate on a single platform. This approach avoids the costs associated with maintaining multiple systems, improves productivity, and enables medical directors to compare costs, identify trends, and exchange best practices among our plans. Our single platform also facilitates our compliance with current and future regulatory requirements.
The software we use is based on client-server technology and is scalable. We believe the software is flexible, easy to use, and allows us to accommodate anticipated enrollment growth and new contracts. The open architecture of the system gives us the ability to transfer data from other systems without the need to write a significant amount of computer code, thereby facilitating the integration of new plans and acquisitions.
We have designed our corporate website with a focus on ease of use and visual appeal. Our website has a secure ePortal which allows providers, members, and trading partners to access individualized data. The ePortal allows the following self-services:
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Provider Self Services - Providers have the ability to access information regarding their members and claims. Key functionalities include "Check Member Eligibility," "View Claim," and "View/Submit Authorizations."
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Member Self Services
- Members can access information regarding their personal data, and can perform the following key functionalities: "View Benefits," "Request New ID Card," "Print Temporary ID Card," and "Request Change of Address/PCP."
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File Exchange Services - Various trading partners, such as service partners, providers, vendors, management companies, and individual IPAs, are able to exchange data files (such as those that may be required by federal health care privacy regulations, or any other proprietary format) with us using the file exchange functionality.
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Best Practices.
We continuously seek to promote best practices. Our approach to quality is broad, encompassing traditional medical management and the improvement of our internal operations. We have staff assigned full-time to the development and implementation of a uniform, efficient, and quality-based medical care delivery model for our health plans. These employees coordinate and implement company-wide programs and strategic initiatives such as preparation of the Healthcare Effectiveness Data and Information Set (HEDIS), and accreditation by the NCQA. We use measures established by the NCQA in credentialing the physicians in our network. We routinely use peer review to assess the quality of care rendered by providers.
Claims Processing.
All of our health plans operate on a single managed care platform for claims processing (the QNXT system).
Centralized Management Services.
We provide certain centralized medical and administrative services to our health plans pursuant to administrative services agreements, including medical affairs and quality management, health education, credentialing, management, financial, legal, information systems, and human resources services. Fees for such services are based on the fair market value of services rendered. Payment is subordinated to the health plan’s ability to comply with minimum capital and other restrictive financial requirements of the states in which they operate.
Compliance.
Our health plans have established high standards of ethical conduct. Our compliance programs are modeled after the compliance guidance statements published by the Office of the Inspector General of the HHS. Our uniform approach to compliance makes it easier for our health plans to share information and practices and reduces the potential for compliance errors and any associated liability.
8
Disaster Recovery.
We have established a disaster recovery and business resumption plan, with back-up operating sites, to be deployed in the case of a major disruptive event.
CONTRACTING AND REGULATORY COMPLIANCE
Government Contracts
Medicaid.
In all the states in which we operate health plans, we enter into a contract with the state’s Medicaid agency to offer managed care benefits to Medicaid-eligible individuals. Some states award contracts to any applicant demonstrating that it meets the state’s requirements, while other states engage in a competitive bidding process. In all cases, we must demonstrate to the satisfaction of the state Medicaid program that we are able to meet the state’s operational and financial requirements. These requirements are in addition to those required for a license and are targeted to the specific needs of the Medicaid population; for example:
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We must measure provider access and availability in terms of the time needed to reach the doctor’s office using public transportation;
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Our quality improvement programs must emphasize member education and outreach and include measures designed to promote utilization of preventive services;
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We must have linkages with schools, city or county health departments, and other community-based providers of health care, to demonstrate our ability to coordinate all of the sources from which our members may receive care;
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We must be able to meet the needs of the disabled and others with special needs;
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Our providers and member service representatives must be able to communicate with members who do not speak English or who are deaf; and
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Our member handbook, newsletters, and other communications must be written at the prescribed reading level, and must be available in languages other than English.
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To operate a health plan in a given state, we must apply for and obtain a certificate of authority or license from that state. We are regulated by the state agency with responsibility for the oversight of HMOs which, in most cases, is the state department of insurance. In California, however, the agency with responsibility for the oversight of HMOs is the Department of Managed Health Care. Licensing requirements are the same for us as they are for health plans serving commercial or Medicare members. For example, we must demonstrate that:
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Our provider network is adequate;
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Our quality and utilization management processes comply with state requirements;
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We have adequate procedures in place for responding to member and provider complaints and grievances;
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We can meet requirements for the timely processing of provider claims;
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We can collect and analyze the information needed to manage our quality improvement activities;
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We have the financial resources necessary to pay our anticipated medical care expenses and the infrastructure needed to account for our costs;
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We have the systems required to process enrollment information, to report on care and services provided, and to process claims for payment in a timely fashion; and
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We have the financial resources needed to protect the state, our providers, and our members against the insolvency of one of our health plans.
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Our state contracts determine the type and scope of health care services that we arrange for our members. Generally, our contracts require us to arrange for preventive care, office visits, inpatient and outpatient hospital and medical services, and pharmacy benefits. The contracts also detail the requirements for operating in the Medicaid sector, including provisions relating to: eligibility; enrollment and dis-enrollment processes; covered benefits; eligible providers; subcontractors; record-keeping and record retention; periodic financial and informational reporting; quality assurance; marketing; financial standards; timeliness of claims payments; health education, wellness and prevention programs; safeguarding of member information; fraud and abuse detection and reporting; grievance procedures; and organization and administrative systems. A health plan’s compliance with these requirements is subject to monitoring by state regulators. A health plan is subject to periodic comprehensive quality assurance evaluation by a third-party reviewing organization and generally by the insurance department of the jurisdiction that licenses the health plan.
9
The contractual relationship with the state is generally for a period of three to four years and is renewable on an annual or biennial basis 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’ 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 (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, in early 2012 our Missouri health plan was notified that it was not awarded a new contract under that state’s RFP, and therefore its contract expired in that year.
Medicare.
Under annually renewable contracts with CMS, our state health plans offer Medicare Advantage special needs plans which include a mandatory Part D prescription drug benefit. Molina Medicare Options Plus, our trade name for these plans, serves beneficiaries who are dually eligible for both Medicare and Medicaid, such as low-income seniors and people with disabilities. We believe offering these Medicare plans is consistent with our historical mission of serving low-income and medically under-served families and individuals. We employ sales personnel, and engage independent brokers, agents and consultants to enroll new Molina Medicare Options Plus members. None of our health plans operates a Medicare Advantage private fee-for-service plan.
Federal regulations place prohibitions and limitations on certain sales and marketing activities of Medicare Advantage plans. Among other things, Medicare Advantage plans are not permitted to make unsolicited outbound calls to potential members or engage in other forms of unsolicited contact, establish appointments without documented consent from potential members, or conduct sales events in certain provider-based settings. Additionally, there are certain restrictions on agent and broker compensation.
Molina Medicaid Solutions.
We continually monitor the status of various states' legacy MMIS capabilities and contracts to determine whether Molina Medicaid Solutions’ value proposition and core strengths will address a state’s MMIS goals. Once an RFP with a Medicaid agency is won, our Molina Medicaid Solutions contracts may extend over a number of years, particularly in circumstances where we deliver extensive and complex DDI services, such as the initial design, development and implementation of a complete MMIS. For example, the initial term of our most recently implemented Molina Medicaid Solutions contract in New Jersey is 10 years in total, consisting of 2.5 years allocated for the delivery of DDI services, followed by 7.5 years for the performance of BPO services. In most of these engagements option years are offered which span 2-3 years. The terms of some of our other established 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 more recent contracts.
The federal government typically reimburses the states for 90% of the costs incurred in the design, development, and implementation of an MMIS and for 75% of the costs incurred in operating a certified MMIS. Federal certification increases the share of the claims processing costs the federal government will pay for monthly operations. With an uncertified system, the federal government contributes approximately 50% of claims processing costs, with the state paying the other half. With a certified system, the federal government pays 75% of costs, reducing the state’s share.
Other.
Substantially all of Pathways' revenue is derived from contracts with state or local government agencies and government intermediaries, the majority of which are negotiated fee-for-service arrangements. A significant number of these contracts allow the payer to terminate the contract immediately for cause, such as for our failure to meet our contract obligations. Additionally, these contracts typically permit the payer to terminate the contract at any time prior to its stated expiration date without cause, at will and without penalty to the payer, either upon the expiration of a short notice period, typically 30 days, or immediately, in the event federal or state appropriations supporting the programs serviced by the contract are reduced or eliminated.
Regulatory Compliance
Our health plans are highly regulated by both state and federal government agencies. Regulation of managed care products and health care services varies from jurisdiction to jurisdiction, and changes in applicable laws and rules occur frequently. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Such agencies have become increasingly active in recent years in their review and scrutiny of health insurers and managed care organizations, including those operating in the Medicaid and Medicare programs.
States’ Risk-Based Capital Requirements.
Our health plans are required to file quarterly and annual reports of their operating results with the appropriate state regulatory agencies. These reports are accessible for public viewing. Each health plan undergoes periodic examinations and reviews by the state in which it operates. The health plans generally must obtain approval from the state before declaring dividends in excess of certain thresholds. Each health plan must maintain its net worth at an amount determined by statute or regulation. The minimum statutory net worth requirements differ by state, and are generally based on statutory minimum risk-based capital (RBC) requirements. The RBC requirements are based on guidelines established
10
by the National Association of Insurance Commissioners (NAIC) and are administered by the states. All of our state health plans are subject to RBC requirements, except California and Florida. Any acquisition of another plan’s members or its state contracts must also be approved by the state, and our ability to invest in certain financial securities may be prescribed by statute. For further information regarding RBC requirements, refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
19
, "
Commitments and Contingencies
."
In addition, we are also regulated by each state’s department of health services or the equivalent agency charged with oversight of Medicaid and CHIP. These agencies typically require demonstration of the same capabilities mentioned above and perform periodic audits of performance, usually annually.
HIPAA.
In 1996, Congress enacted the Health Insurance Portability and Accountability Act (HIPAA). All health plans are subject to HIPAA, including ours. HIPAA generally requires health plans to:
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Establish the capability to receive and transmit electronically certain administrative health care transactions, like claims payments, in a standardized format;
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Afford privacy to patient health information; and
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Protect the privacy of patient health information through physical and electronic security measures.
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Health care reform created additional tools for fraud prevention, including increased oversight of providers and suppliers participating or enrolling in Medicaid, CHIP, and Medicare. Those enhancements included mandatory licensure for all providers, and site visits, fingerprinting, and criminal background checks for higher risk providers.
The Health Information Technology for Economic and Clinical Health Act (HITECH Act), a part of the American Recovery and Reinvestment Act of 2009, or ARRA, modified certain provisions of HIPAA by, among other things, extending the privacy and security provisions to business associates, mandating new regulations around electronic medical records, expanding enforcement mechanisms, allowing the state Attorneys General to bring enforcement actions, and increasing penalties for violations. As required by ARRA, the Secretary of HHS has promulgated regulations implementing various provisions of the HITECH Act. The Final Omnibus Rule promulgated by HHS in January 2013, included the Final Breach Notification Rule as well as provisions that apply the HIPAA regulatory scheme to business associates. We anticipate that HHS will promulgate additional rules under the HITECH Act to implement provisions of the statute which were not addressed in the Final Omnibus Rule. The various requirements of the HITECH Act and the Final Omnibus Rule have different compliance dates, and in some cases, the applicable compliance date may depend on the publication of additional rules or guidance by HHS. With respect to those requirements whose compliance dates have passed, we believe that we are in compliance with such provisions. With respect to additional requirements that may be issued in the future by HHS, it is our intention to implement any such new requirements on or before the applicable compliance dates.
Fraud and Abuse Laws.
Our operations are subject to various state and federal health care laws commonly referred to as "fraud and abuse" laws. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy rights. These fraud and abuse laws include the federal False Claims Act which prohibits the knowing filing of a false claim or the knowing use of false statements to obtain payment from the federal government. Many states have false claim act statutes that closely resemble the federal False Claims Act. If an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties up to fifty thousand dollars for each separate false claim. Suits filed under the Federal False Claims Act, known as "
qui tam
" actions, can be brought by any individual on behalf of the government and such individuals (known as "relators" or, more commonly, as "whistleblowers") may share in any amounts paid by the entity to the government in fines or settlement.
Qui tam
actions have increased significantly in recent years, causing greater numbers of health care companies to have to defend a false claim action, pay fines or be excluded from the Medicaid, Medicare or other state or Federal health care programs as a result of an investigation arising out of such action. In addition, the Deficit Reduction Act of 2005 (DRA) encourages states to enact state-versions of the federal False Claims Act that establish liability to the state for false and fraudulent Medicaid claims and that provide for, among other things, claims to be filed by
qui tam
relators.
Companies involved in public health care programs such as Medicaid are often the subject of fraud and abuse investigations. The regulations and contractual requirements applicable to participants in these public sector programs are complex and subject to change. Violations of certain fraud and abuse laws applicable to us could result in civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicaid, Medicare, other federal health care programs and federally funded state health programs.
Federal and state governments have made investigating and prosecuting health care fraud and abuse a priority. Although we believe that our compliance efforts are adequate, we will continue to devote significant resources to support our compliance efforts.
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Federal and State Self-Referral Prohibitions.
We may be subject to federal and state statutes banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Section 1877 of the Social Security Act, also known as the "Stark Law," prohibits physicians from making a "referral" for "designated health services" for Medicare (and in many cases Medicaid) patients from entities or facilities in which such physicians directly or indirectly hold a "financial relationship." A financial relationship can take the form of a direct or indirect ownership, investment or compensation arrangement. A referral includes the request by a physician for, or ordering of, or the certifying or re-certifying the need for, any designated health services.
Certain services that we provide may be identified as "designated health services" for purposes of the Stark Law. We cannot provide assurance that future regulatory changes will not result in other services we provide becoming subject to the Stark Law’s ownership, investment or compensation prohibitions in the future.
Many states, including some states where we do business, have adopted similar or broader prohibitions against payments that are intended to induce referrals of clients. Moreover, many states where we operate have laws similar to the Stark Law prohibiting physician self-referrals. We contract with a significant number of human services providers and practitioners, including therapists, physicians and psychiatrists, and arrange for these individuals or entities to provide services to our clients. While we believe that these contracts are in compliance with the Stark Law, no assurance can be made that such contracts will not be considered in violation of the Stark Law.
For-profit ownership.
Certain of the agencies for which we provide services restrict our ability to contract directly as a for-profit organization. Instead, these agencies contract directly with a not-for-profit organization and in certain cases we negotiate to provide administrative and management services to the not-for-profit providers. The extent to which other agencies impose such requirements may affect our ability to continue to provide the full range of services that we provide or limit the organizations with which we can contract directly to provide services.
Corporate practice of medicine and fee splitting.
Some states in which we operate prohibit general business entities, such as us, from "practicing medicine," which definition varies from state to state and can include employing physicians, professional therapists and other mental health professionals, as well as engaging in fee-splitting arrangements with these health care providers. Among other things, we currently contract with professional therapists to provide intensive home based counseling and with nurse practitioners to perform comprehensive health assessments. We believe that we have structured our operations appropriately, however, we could be alleged or found to be in violation of some or all of these laws. If a state determines that some portion of our business violates these laws, it may seek to have us discontinue those portions or subject us to penalties, fines, certain license requirements or other measures. Any determination that we have acted improperly in this regard may result in liability to us. In addition, agreements between the corporation and the professional may be considered void and unenforceable.
Professional licensure and other requirements.
Many of our employees are subject to federal and state laws and regulations governing the ethics and practice of their professions. In addition, professionals who are eligible to participate in Medicare and Medicaid as individual providers must not have been excluded from participation in government programs at any time. Our ability to provide services depends upon the ability of our personnel to meet individual licensure and other requirements.
OTHER INFORMATION
Intellectual Property
We have registered and maintain various service marks, trademarks and trade names that we use in our businesses, including marks and names incorporating the "Molina" or "Molina Healthcare" phrase, and from time to time we apply for additional registrations of such marks. We utilize these and other marks and names in connection with the marketing and identification of products and services. We believe such marks and names are valuable and material to our marketing efforts.
Employees
As of
December 31, 2015
, we had approximately 21,000 employees. Our employee base is multicultural and reflects the diverse membership we serve. We believe we have good relations with our employees. None of our employees is represented by a union.
Available Information
Molina Healthcare, Inc. is a C corporation under Delaware law incorporated in 2002.
Our principal executive offices are located at 200 Oceangate, Suite 100, Long Beach, California 90802, and our telephone number is (562) 435-3666.
You can access our website at
www.molinahealthcare.com
to learn more about our Company.
From that site, you can download and print copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, along with amendments to those reports. You can also download our Corporate Governance Guidelines, Board of Directors
12
committee charters, and Code of Business Conduct and Ethics. We make periodic reports and amendments available, free of charge, as soon as reasonably practicable after we file or furnish these reports to the SEC. We will also provide a copy of any of our corporate governance policies published on our website free of charge, upon request. To request a copy of any of these documents, please submit your request to: Molina Healthcare, Inc., 200 Oceangate, Suite 100, Long Beach, California 90802, Attn: Investor Relations.
Information on or linked to our website is neither part of nor incorporated by reference into this Annual Report on Form 10-K or any other SEC filings.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers, including the business experience of each executive officer during the past five years:
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Name
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Age
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Position
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J. Mario Molina, M.D.
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57
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President and Chief Executive Officer
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John C. Molina, J.D.
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51
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Chief Financial Officer
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Terry P. Bayer
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65
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Chief Operating Officer
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Joseph W. White
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57
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Chief Accounting Officer
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Jeff D. Barlow
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53
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Chief Legal Officer and Corporate Secretary
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Dr. Molina
has served as President and Chief Executive Officer since succeeding his father and company founder, Dr. C. David Molina, in 1996. He has also served as Chairman of the Board of Directors since 1996. Dr. Molina is the brother of John C. Molina.
Mr. Molina
has served as Chief Financial Officer since 1995. He also has served as a member of the Board of Directors since 1994. Mr. Molina is the brother of Dr. J. Mario Molina.
Ms. Bayer
has served as Chief Operating Officer since 2005.
Mr. White
has served as Chief Accounting Officer since 2007.
Mr. Barlow
has served as Chief Legal Officer and Corporate Secretary since 2010.
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Item 1A:
Risk Factors
RISK FACTORS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K and the documents we incorporate by reference in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Other than statements of historical fact, all statements that we include in this report and in the documents we incorporate by reference may be deemed to be forward-looking statements for purposes of the Securities Act and the Exchange Act.
Such forward-looking statements may be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "guidance," "intends," "may," "outlook," "plans," "projects," "seeks," "will," or similar words or expressions.
Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully read and consider the following risk factors, as well as the other information we include or incorporate by reference in this report and the information in the other reports we file with the U.S. Securities Exchange Commission, or SEC. Such risk factors should be considered not only with regard to the information contained in this annual report, but also with regard to the information and statements in the other periodic or current reports we file with the SEC, as well as our press releases, presentations to securities analysts or investors, or other communications made by or with the approval of one of our executive officers.
No assurance can be given that we will actually achieve the results contemplated or disclosed in our forward-looking statements. Such statements may turn out to be wrong due to the inherent uncertainties associated with future events. Accordingly, you should not place undue reliance on our forward-looking statements, which reflect management’s analyses, judgments, beliefs, or expectations only as of the date they are made.
If any of the events described in the following risk factors actually occur, our business, results of operations, financial condition, cash flows, or prospects could be materially adversely affected.
The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also affect our business and operations. As such, you should not consider this list to be a complete statement of all potential risks or uncertainties. Except to the extent otherwise required by federal securities laws, we do not undertake to address or update forward-looking statements in future filings or communications regarding our business or operating results, and do not undertake to address how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications.
Risks Related to Our Health Plans Segment
Numerous risks associated with the Affordable Care Act and its implementation, and changes to health care regulatory laws, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In March 2010, President Obama signed both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively, the Affordable Care Act, or ACA). The ACA enacted comprehensive changes to the U.S. health care system, elements of which have been phased in at various stages over the past several years. The most significant changes effected by the ACA were implemented as of January 1, 2014. There are a multitude of risks associated with the scope of change in the health care system represented by the ACA, including, but not limited to, the following:
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Risks associated with the duals expansion
. Nine million low-income elderly and disabled people are covered under both the Medicare and Medicaid programs. These beneficiaries are more likely than other Medicare beneficiaries to be frail, live with multiple chronic conditions, and have functional and cognitive impairments. Medicare is their primary source of health insurance coverage, as it is for the nearly 50 million elderly and under-65 disabled beneficiaries in 2012. Medicaid supplements Medicare by paying for services not covered by Medicare, such as dental care and long-term care services and support, and by helping to cover Medicare’s premiums and cost-sharing requirements. Together, these two programs help to shield very low-income Medicare beneficiaries from potentially unaffordable out-of-pocket medical and long-term care costs. To coordinate care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to these individuals in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). We operate MMPs in six states. Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the first quarter of 2015; and our MMP in Michigan offered coverage beginning in the second quarter of 2015. At
December 31, 2015
, our membership included approximately
51,000
integrated MMP members.
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There are numerous risks associated with the initial implementation of a new program, with a health plan’s expansion into a new service area, and with the provision of medical services to a new population which has not previously been
14
in managed care. One such risk is the development of actuarially sound rates. Because there is limited historical information on which to develop rates, certain assumptions are required to be made which may subsequently prove to have been inaccurate. Rates of utilization could be significantly higher than had been projected, or the assumptions of policymakers about the amount of savings that could be achieved through the use of utilization management in managed care could be flawed. Moreover, because of our lack of actuarial experience for that program, region, or population, our reserve levels may be set at an inadequate level. For instance, these problems arose at our Texas health plan in 2012, leading to extremely elevated medical care costs and substantial losses at the health plan. All of these risks are present in the implementation of the duals demonstration programs. In the event these risks materialize at one or more of our health plans, the negative results of the health plan or plans could adversely affect our business, financial condition, cash flows, or results of operations.
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Risks associated with Medicaid expansion
. In the states that have elected to participate, the ACA provides for the expansion of the Medicaid program to offer eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Medicaid expansion membership phased in beginning January 1, 2014. Since that date, our health plans in California, Illinois, Michigan, New Mexico, Ohio, and Washington have participated in Medicaid expansion. At
December 31, 2015
, our membership included approximately
557,000
Medicaid expansion members, or
16%
of total membership. The new enrollees in our health plans represent a population that is different from the population of Medicaid enrollees we have historically managed. All of the risk factors described above with regard to the duals demonstration programs apply equally to Medicaid expansion.
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Risks associated with health insurance marketplaces
. The ACA authorized the creation of Marketplace insurance exchanges, allowing individuals and small groups to purchase health insurance that is federally subsidized, effective January 1, 2014. We participate in the Marketplace in all of the states in which we operate, except Illinois, Puerto Rico and South Carolina. At
December 31, 2015
, our membership included approximately
205,000
Marketplace members, with approximately
133,000
, or
65%
, of those members in Florida. All of the risk factors described above with regard to the duals demonstration programs apply equally to our participation in the insurance marketplaces.
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Risk associated with implementing regulations
. There are many parts of the ACA that require further guidance in the form of regulations. Due to the breadth and complexity of the ACA, the lack of implementing regulations and interpretive guidance, and the phased nature of the ACA’s implementation, the overall impact of the ACA on our business and on the health industry in general over the coming years is difficult to predict and not yet fully known, and implementing regulations could contain provisions that have a material adverse effect on our business, financial condition, cash flows, or results of operations.
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Changes to health care regulatory laws under the ACA, including the recently proposed Medicaid managed care rule, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
The health care regulatory law landscape is constantly changing. For example, on May 26, 2015, CMS posted a new proposed rule to the Federal Register regarding Medicaid programs and CHIP, Medicaid managed care, CHIP delivered in managed care, Medicaid and CHIP comprehensive quality strategies, and revisions related to third party liability that, if implemented, would, among other things, impose a medical loss ratio of 85% for Medicaid and CHIP programs, establish a Medicaid managed care quality rating system like the five-star system for Medicare Advantage plans, and expand health plans’ responsibilities in program integrity efforts. It is difficult to predict what final rules may be adopted and implemented by CMS, and if the final rule would result in any material adverse effect on our business, financial condition, cash flows, or results of operations.
Our profitability depends on our ability to accurately predict and effectively manage our medical care costs.
Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our medical care costs. Historically, our medical care cost ratio, meaning our medical care costs as a percentage of our premium revenue net of premium tax, has fluctuated substantially, and has also varied across our state health plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small changes in our medical care cost ratio can create significant changes in our overall financial results. For example, if our overall medical care ratio, continuing operations of
89.1%
, for the year ended
December 31, 2015
had been one percentage point higher, or 90.1%, our net income from continuing operations for the year ended
December 31, 2015
would have been approximately $1.08 per diluted share rather than our actual income from continuing operations of
$2.58
per diluted share, a decrease of approximately 58%.
Factors that may affect our medical care costs include the level of utilization of health care services, unexpected patterns in the annual flu season, increases in hospital costs, an increased incidence or acuity of high dollar claims related to catastrophic illnesses or medical conditions for which we do not have adequate reinsurance coverage, increased maternity costs, payment rates that are not actuarially sound, changes in state eligibility certification methodologies, relatively low levels of hospital and specialty provider competition in certain geographic areas, increases in the cost of pharmaceutical products and services, changes in health care regulations and practices, epidemics, new medical technologies, and other various external factors. Many of these factors are beyond our control and could reduce our ability to accurately predict and effectively manage the costs of
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providing health care services. The inability to forecast and manage our medical care costs or to establish and maintain a satisfactory medical care cost ratio, either with respect to a particular state health plan or across the consolidated entity, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could reduce our revenues and profit margins.
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP programs. Due to high unemployment levels, Medicaid enrollment levels and Medicaid costs remain elevated at the same time that state budgets are suffering from significant fiscal strain. Because Medicaid is one of the largest expenditures in every state budget, and one of the fastest-growing, it is a prime target for cost-containment efforts. The states in which we operate our health plans regularly face significant budgetary pressures. These budgetary pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts which could reduce our revenues and profit margins. Moreover, some federal deficit reduction or entitlement reform proposals would fundamentally change the structure and financing of the Medicaid program. A number of these proposals include both tax increases and spending reductions in discretionary programs and mandatory programs, such as Social Security, Medicare, and Medicaid.
We are unable to determine how any future congressional spending cuts will affect Medicare and Medicaid reimbursement. There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care that, if adopted, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
The Commonwealth of Puerto Rico may become unable to pay the premiums of our Puerto Rico health plan.
The government of Puerto Rico currently faces major fiscal and liquidity challenges. The government recently warned that it may lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations for fiscal year 2016. The extreme financial difficulties faced by the Commonwealth may make it impossible for ASES, the Puerto Rico Medicaid agency, to pay our Puerto Rico health plan under the terms of the parties’ Medicaid contract. As of
December 31, 2015
, our Puerto Rico health plan served approximately
348,000
members, and had recognized premium revenue of approximately
$192 million
in the fourth quarter of 2015, or approximately
$64 million
per month.
It is the practice of the Commonwealth to pay us for eligible members only after those members have been assigned to us, and our plan has sent electronic confirmation of the receipt of eligibility. Particularly in the early stages of our contract with Puerto Rico, the plan's confirmation of eligibility of certain members was not accepted by the Commonwealth as a result of various technical issues. The plan has continued to pay for medical services for all members in question, but the Commonwealth is withholding payment of approximately $12 million of premium revenue related to those members. We believe we have a valid claim to all of the premiums withheld and we are in discussions with the Commonwealth regarding this matter.
A default by ASES on its payment obligations under our Medicaid contract, or a determination by ASES to terminate our contract based on insufficient funds available, could result in our having paid, or in our having to pay, provider claims in amounts for which we are not paid reimbursement, and could make it unfeasible for the Puerto Rico health plan to continue to operate. A default by ASES or termination of our Puerto Rico Medicaid contract could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
A failure to accurately estimate incurred but not reported medical care costs may negatively impact our results of operations.
Because of the time lag between when medical services are actually rendered by our providers and when we receive, process, and pay a claim for those medical services, we must continually estimate our medical claims liability at particular points in time, and establish claims reserves related to such estimates. Our estimated reserves for such "incurred but not paid" (IBNP) medical care costs are based on numerous assumptions. We estimate our medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our ability to accurately estimate claims for our newer lines of business or populations, such as with respect to duals, Medicaid expansion members, or aged, blind or disabled Medicaid members, is impacted by the more limited experience we have had with those populations.
The IBNP estimation methods we use and the resulting reserves that we establish are reviewed and updated, and adjustments, if deemed necessary, are reflected in the current period. Given the numerous uncertainties inherent in such estimates, our actual claims liabilities for a particular quarter or other period could differ significantly from the amounts estimated and reserved for that quarter or period. Our actual claims liabilities have varied and will continue to vary from our estimates, particularly in times of significant changes in utilization, medical cost trends, and populations and markets served.
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If our actual liability for claims payments is higher than estimated, our earnings in any particular quarter or annual period could be negatively affected. Our estimates of IBNP may be inadequate in the future, which would negatively affect our results of operations for the relevant time period. Furthermore, if we are unable to accurately estimate IBNP, our ability to take timely corrective actions may be limited, further exacerbating the extent of the negative impact on our results.
Large-scale medical emergencies in one or more states in which we operate our health plans could significantly increase utilization rates and medical costs.
Large-scale medical emergencies can take many forms and be associated with widespread illness or medical conditions. For example, natural disasters, such as a major earthquake in Los Angeles or Cascadia, or a major hurricane in Florida or South Carolina, could have a significant impact on the health of a large number of our covered members. Other conditions that could impact our members include an influenza epidemic, or newly emergent mosquito-borne illnesses, such as the Zika virus, the West Nile virus, or the Chikungunya virus, conditions for which vaccines may not exist, are not effective, or have not been widely administered. In addition, federal and state law enforcement officials have issued warnings about potential terrorist activity involving biological or other weapons of mass destruction. All of these conditions, and others, could have a significant impact on the health of the population of wide-spread areas. We seek to set our IBNP reserves appropriately to account for anticipatable spikes in utilization, such as for the flu season. However, if one of our health plan states were to experience a large-scale natural disaster, a viral epidemic or pandemic, a significant terrorism attack, or some other large-scale event affecting the health of a large number of our members, our covered medical expenses in that state would rise, which could have a material adverse effect on our business, cash flows, financial condition, and results of operations, or, in the event of extreme circumstances, could threaten our viability.
If the responsive bids of our health plans for new or renewed Medicaid contracts are not successful, or if our government contracts are terminated or are not renewed, our premium revenues could be materially reduced and our operating results could be negatively impacted.
Our government contracts may be subject to periodic competitive bidding. In such process, our health plans may face competition as other plans, many with greater financial resources and greater name recognition, attempt to enter our markets through the competitive bidding process. In the event the responsive bid of one or more of our health plans is not successful, we will lose our Medicaid contract in the applicable state or states, and our premium revenues could be materially reduced as a result. If we are unable to renew, successfully re-bid, or compete for any of our government contracts, or if any of our contracts are terminated or renewed on less favorable terms, our business, financial condition, cash flows, or results of operations could be adversely affected. Alternatively, even if our responsive bids are successful, the bids may be based upon assumptions regarding enrollment, utilization, medical costs, or other factors which could result in the Medicaid contract being less profitable than we had expected.
If we sustain a cyber-attack or suffer privacy or data security breaches that disrupt our operations or result in the dissemination of sensitive personal or confidential information, we could suffer increased costs, exposure to significant liability, reputational harm, loss of business, and other serious negative consequences.
As part of our normal operations, we routinely collect, process, store, and transmit large amounts of data in our operations, including sensitive personal information as well as proprietary or confidential information relating to our business or third parties. We may be subject to breaches of the information technology systems we use. Experienced computer programmers and hackers may be able to penetrate our layered security controls and misappropriate or compromise sensitive personal information or proprietary or confidential information, vandalize our systems, create system disruptions, or cause shutdowns. They also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems or otherwise exploit any security vulnerabilities. Our systems are also susceptible to human error. Because the techniques used to circumvent security systems can be highly sophisticated and change frequently, often are not recognized until launched against a target, and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventive measures. Our facilities may also be vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human errors, acts of malicious insiders, or other similar events that could negatively affect our systems and our and our members’ data. The cost to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber-incident could be significant. While we currently expend significant resources and have implemented solutions, processes and procedures to protect against cyber-attacks and security breaches, we may need to expend significant additional resources in the future to continue to protect against potential security breaches or to address problems caused by such attacks or any breach of our systems. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of members, vendors, and state contracts. In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about our members could expose our members to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise have a material adverse effect on our business, financial condition, cash flows, or results of operations.
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The exorbitant cost of specialty drugs and new generic drugs could have a material adverse effect on the level of our medical costs and our results of operations.
In 2014, Gilead’s pricing of the hepatitis C drug, Sovaldi, at $84,000 per standard course of therapy received major attention as a health care policy and public policy matter. Because of the relatively high incidence of hepatitis C throughout the nation, particularly in the Medicaid population, the pricing of specialty drugs for the treatment of hepatitis C represents a major public health and public financing problem. In the case of Sovaldi, because of its advent on the health care market in early 2014, the cost of the drug was generally not factored into our 2014 capitation rates, thus threatening to undermine the actuarial soundness of those rates. New high priced specialty drugs and generic drugs are expected to enter the health care market in 2015. In addition, evolving regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. We will seek to work with state Medicaid agencies to ensure that we receive appropriate and actuarially sound reimbursement for all new drug therapies and pharmaceuticals. In the event we are required to bear the high costs of new specialty drugs or generic drugs without an appropriate rate adjustment or other reimbursement mechanism, or if new regulations or mandates affect our pharmaceutical costs, our business, financial condition, cash flows, or results of operations could be adversely affected.
States may not adequately compensate us for the value of drug rebates that were previously earned by us but that are now collectible by the states.
The ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by Medicaid managed care plans. Retroactive to March 23, 2010, state Medicaid programs are now required to collect federal rebates on all Medicaid-covered outpatient drugs dispensed or administered to Medicaid managed care enrollees (excluding certain drugs that are already discounted), and pharmaceutical manufacturers are required to pay specified rebates directly to the state Medicaid programs for those claims. This has impacted the level of rebates received by managed care plans from the manufacturers for Medicaid managed care enrollees. Many manufacturers have renegotiated or discontinued their rebate contracts with Medicaid managed care plans and pharmacy benefits managers to offset these new rebates paid directly to state Medicaid programs. As a result, the drug rebate amounts paid to managed care plans like ours continue to remain at levels that are much lower than prior to ACA implementation. There are provisions in the ACA that require rates paid to Medicaid managed care plans to be actuarially sound in regard to drug rebates. Although we will be pursuing rate increases with state agencies to make us whole for the rebate amounts lost, there can be no assurances that the premium increases we may receive, if any, will be adequate to offset the amount of the lost rebates. If such premium increases prove to be inadequate, our business, financial condition, cash flows, or results of operations could be adversely affected.
We derive our premium revenues from a relatively small number of state health plans.
We currently derive our premium revenues from 11 state health plans, and commenced operations with our Puerto Rico health plan in April 2015. If we are unable to continue to operate in any of those jurisdictions, or if our current operations in any portion of the jurisdictions we are in are significantly curtailed, our revenues could decrease materially. Our reliance on operations in a limited number of jurisdictions could cause our revenue and profitability to change suddenly and unexpectedly, depending on an abrupt loss of membership, significant rate reductions, a loss of a material contract, legislative actions, changes in Medicaid eligibility methodologies, catastrophic claims, an epidemic, an unexpected increase in utilization, general economic conditions, and similar factors in those jurisdictions. Our inability to continue to operate in any of the jurisdictions in which we currently operate, or a significant change in the nature of our existing operations, could adversely affect our business, financial condition, cash flows, or results of operations.
A large portion of our premium revenues are subject to risks related to medical cost expenditure floors and corridors, administrative cost and profit ceilings, premium stabilization programs, and cost-plus and performance-based reimbursement programs.
A substantial portion of our premium revenue is subject to contract provisions pertaining to medical cost floors and corridors, administrative cost and profit ceilings, cost-plus reimbursement, premium stabilization programs, and profit-sharing arrangements. Many of these contract provisions are complex, or are poorly or ambiguously drafted, and thus are potentially subject to differing interpretations by ourselves and the relevant government agency with whom we contract. In the event the applicable government agency disagrees with our interpretation or implementation of a particular contract provisions at issue, we could be required to adjust the amount of our obligations under these provisions and/or make a payment or payments to the government agency. Any interpretation of these contract provisions at variance with our interpretation and implementation of the provision, or that is inconsistent with our revenue recognition accounting treatment, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In addition, many of our contracts also contain provisions pertaining to at-risk premiums that require us to meet certain quality performance measures to earn all of our contract revenues. In the event we are unsuccessful in achieving the stated performance
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measure, we will be unable to recognize the revenue associated with that measure. Any failure of our health plans to satisfy one of these performance measure provisions could have a material adverse effect on our business, financial condition, cash flows or results of operations.
Failure to attain profitability in any new start-up operations, including in our new Puerto Rico health plan, could negatively affect our results of operations.
Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract and process claims. Often, we are also required to contribute significant capital to fund mandated net worth requirements, performance bonds or escrows, or contingency guaranties. If we are unsuccessful in obtaining the certificate of authority, winning the bid to provide services, or attracting members in sufficient numbers to cover our costs, any new business of ours would fail. We also could be required by the state or commonwealth to continue to provide services for some period of time without sufficient revenue to cover our ongoing costs or to recover our significant start-up costs.
Even if we are successful in establishing a profitable health plan in a new state or commonwealth, increasing membership, revenues, and medical costs will trigger increased mandated net worth requirements which could substantially exceed the net income generated by the health plan. Rapid growth in an existing state or commonwealth will also result in increased net worth requirements. In such circumstances, we may not be able to fund on a timely basis or at all the increased net worth requirements with our available cash resources. The expenses associated with starting up a health plan in a new state or commonwealth, or expanding a health plan in an existing state or commonwealth could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial condition, cash flows, or results of operations.
Our premium revenues consist of fixed monthly payments per member, and supplemental payments for other services such as maternity deliveries. These premiums are fixed by contract, and we are obligated during the contract periods to provide health care services as established by the state governments. We use a large portion of our revenues to pay the costs of health care services delivered to our members. If premiums do not increase when expenses related to medical services rise, our medical margins will be compressed, and our earnings will be negatively affected. A state could increase hospital or other provider rates without making a commensurate increase in the rates paid to us, or could lower our rates without making a commensurate reduction in the rates paid to hospitals or other providers. In addition, if the actuarial assumptions made by a state in implementing a rate or benefit change are incorrect or are at variance with the particular utilization patterns of the members of one of our health plans, our medical margins could be reduced. Any of these rate adjustments in one or more of the states in which we operate could have a material adverse effect our business, financial condition, cash flows, or results of operations.
Furthermore, a state undergoing a budget crisis may significantly delay the premiums paid to one of our health plans. Any significant delay in the monthly payment of premiums to any of our health plans could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Centene’s acquisition of Health Net could affect the Los Angeles county subcontract of our California health plan.
Our California health plan operates in Los Angeles County, California as a subcontractor to Health Net, which holds a direct Medi-Cal contract with the state of California. Health Net has entered into a merger agreement with Centene Corporation, with the merger expected to close in early 2016. We currently do not expect there to be any material change to our Los Angeles county subcontract in connection with Centene’s acquisition of Health Net. However, if Centene seeks to modify our subcontract or otherwise refuses to perform under the contract, our business, financial condition, cash flows, or results of operations may be adversely affected.
Reductions in Medicare payments could reduce our earnings potential for our Medicare Advantage plans and our duals demonstration programs.
The Sequestration Transparency Act of 2012 included a 2% reduction of payments from CMS to our Medicare Advantage plans beginning April 1, 2013. Medicare Advantage plans will continue to be affected until Congress lifts the sequestration mandated under the Sequestration Transparency Act of 2012. Such reduction in our Medicare payments may have an adverse effect on our earnings potential for our Medicare Advantage plans and our duals demonstration programs. In addition, reductions to provider reimbursement rates associated with sequestration may adversely impact our relations with the impacted providers.
Difficulties in executing our acquisition strategy could adversely affect our business.
The acquisitions of other health plans and the assignment and assumption of Medicaid contract rights of other health plans have accounted for a significant amount of our growth over the last several years. Although we cannot predict with certainty our rate of growth as the result of acquisitions, we believe that additional acquisitions of all sizes will be important to our future growth
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strategy. Many of the other potential purchasers of these assets—particularly operators of large commercial health plans—have significantly greater financial resources than we do. Also, many of the sellers may insist on selling assets that we do not want, such as commercial lines of business, or may insist on transferring their liabilities to us as part of the sale of their companies or assets. Even if we identify suitable targets, we may be unable to complete acquisitions on terms favorable to us, or at all, or obtain the necessary financing for these acquisitions. For these reasons, among others, we cannot provide assurance that we will be able to complete favorable acquisitions, especially in light of the volatility in the capital markets over the past several years, or that we will not complete acquisitions that turn out to be unfavorable. Further, to the extent we complete an acquisition, we may be unable to realize the anticipated benefits from such acquisition because of operational factors or difficulty in integrating the acquisition with our existing business. This may include problems involving the integration of:
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new provider networks which may operate on terms different from our existing networks,
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additional members who may decide to transfer to other health care providers or health plans,
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disparate information, claims processing, and record-keeping systems,
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internal controls and accounting policies, including those which require the exercise of judgment and complex estimation processes, such as estimates of claims incurred but not reported, accounting for goodwill, intangible assets, stock-based compensation, and income tax matters, and
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new regulatory schemes, relationships, practices, and compliance requirements.
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Also, we are generally required to obtain regulatory approval from one or more state agencies when making acquisitions of health plans. In the case of an acquisition of a business located in a state in which we do not already operate, we would be required to obtain the necessary licenses to operate in that state. In addition, although we may already operate in a state in which we acquire a new business, we would be required to obtain regulatory approval if, as a result of the acquisition, we will operate in an area of that state in which we did not operate previously. Furthermore, we may be required to renegotiate contracts with the network providers of the acquired business. We may be unable to obtain the necessary governmental approvals, comply with these regulatory requirements or renegotiate the necessary provider contracts in a timely manner, if at all.
In addition, we may be unable to successfully identify, consummate, and integrate future acquisitions, including integrating the acquired businesses on our information technology platform, or to implement our operations strategy in order to operate acquired businesses profitably. Furthermore, we may incur significant transaction expenses in connection with a potential acquisition which may or may not be consummated. These expenses could impact our selling, general and administrative expense ratio.
For all of the above reasons, we may not be able to consummate our proposed acquisitions as announced from time to time to sustain our pattern of growth or to realize benefits from completed acquisitions.
We face periodic routine and non-routine reviews, audits, and investigations by government agencies, and these reviews and audits could have adverse findings, which could negatively impact our business.
We are subject to various routine and non-routine governmental reviews, audits, and investigations. Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations of those laws and regulations, could result in the imposition of civil or criminal penalties, the cancellation of our contracts to provide managed care services, the suspension or revocation of our licenses, the exclusion from participation in government sponsored health programs, or the revision and recoupment of past payments made based on audit findings. If we are unable to correct any noted deficiencies, or become subject to material fines or other sanctions, we could suffer a substantial reduction in profitability, and could also lose one or more of our government contracts and as a result lose significant numbers of members and amounts of revenue. In addition, government receivables are subject to government audit and negotiation, and government contracts are vulnerable to disagreements with the government. The final amounts we ultimately receive under government contracts may be different from the amounts we initially recognize in our financial statements.
We rely on the accuracy of eligibility lists provided by state governments. Inaccuracies in those lists would negatively affect our results of operations.
Premium payments to our health plan segment are based upon eligibility lists produced by state governments. From time to time, states require us to reimburse them for premiums paid to us based on an eligibility list that a state later discovers contains individuals who are not in fact eligible for a government sponsored program or are eligible for a different premium category or a different program. Alternatively, a state could fail to pay us for members for whom we are entitled to payment. Our results of operations would be adversely affected as a result of such reimbursement to the state if we make or have made related payments to providers and are unable to recoup such payments from the providers.
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We are subject to extensive fraud and abuse laws that may give rise to lawsuits and claims against us, the outcome of which may have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Because we receive payments from federal and state governmental agencies, we are subject to various laws commonly referred to as "fraud and abuse" laws, including federal and state anti-kickback statutes, prohibited referrals, and the federal False Claims Act, which permit agencies and enforcement authorities to institute a suit against us for violations and, in some cases, to seek treble damages, criminal and civil fines, penalties, and assessments. Violations of these laws can also result in exclusion, debarment, temporary or permanent suspension from participation in government health care programs, or the institution of corporate integrity agreements. Liability under such federal and state statutes and regulations may arise if we know, or it is found that we should have known, that information we provide to form the basis for a claim for government payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was out of compliance with program requirements. Fraud, waste and abuse prohibitions encompass a wide range of operating activities, including kickbacks or other inducements for referral of members or for the coverage of products (such as prescription drugs) by a plan, billing for unnecessary medical services by a provider, improper marketing, and the violation of patient privacy rights. Companies involved in public health care programs such as Medicaid and Medicare are required to maintain compliance programs to detect and deter fraud, waste and abuse, and are often the subject of fraud, waste and abuse investigations and audits. The regulations and contractual requirements applicable to participants in these public-sector programs are complex and subject to change. The federal government has taken the position that claims presented in violation of the federal anti-kickback statute may be considered a violation of the federal False Claims Act. In addition, under the federal civil monetary penalty statute, the U.S. Department of Health and Human Services (HHS), Office of Inspector General has the authority to impose civil penalties against any person who, among other things, knowingly presents, or causes to be presented, certain false or otherwise improper claims.
Qui tam
actions under federal and state law can be brought by any individual on behalf of the government.
Qui tam
actions have increased significantly in recent years, causing greater numbers of health care companies to have to defend a false claim action, pay fines, or be excluded from the Medicare, Medicaid, or other state or federal health care programs as a result of an investigation arising out of such action. We are currently defending one
qui tam
action where the federal government has declined to intervene:
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc.,
et al.
Other qui tam actions may have been filed against us of which we are presently unaware, or other qui tam actions may be filed against us in the future. In the event we are subject to liability under these or other
qui tam
actions, our business, financial condition, cash flows, or results of operations could be adversely affected.
Our business could be adversely impacted by adoption of the new ICD-10 standardized coding set for diagnoses.
HHS released rules pursuant to the Health Insurance Portability and Accountability Act, or HIPAA, which mandate the use of standard formats in electronic health care transactions. HHS also published rules requiring the use of standardized code sets and unique identifiers for providers. These new standardized code sets, known as ICD-10, require substantial investments from health care organizations, including us. We implemented ICD-10 effective as of October 1, 2015. Use of the ICD-10 code sets require significant administrative changes and may result in errors and otherwise negatively impact our service levels. In addition, we may experience complications related to supporting customers that are not fully compliant with the revised requirements as of the applicable compliance date. Furthermore, if physicians fail to provide appropriate codes for services provided as a result of the new coding set, we may not be reimbursed, or adequately reimbursed, for such services.
If we are unable to deliver quality care, maintain good relations with the physicians, hospitals, and other providers with whom we contract, or if we are unable to enter into cost-effective contracts with such providers, our profitability could be adversely affected.
We contract with physicians, hospitals, and other providers as a means to ensure access to health care services for our members, to manage health care costs and utilization, and to better monitor the quality of care being delivered. We compete with other health plans to contract with these providers. We believe providers select plans in which they participate based on criteria including reimbursement rates, timeliness and accuracy of claims payment, potential to deliver new patient volume and/or retain existing patients, effectiveness of resolution of calls and complaints, and other factors. We cannot be sure that we will be able to successfully attract and retain providers to maintain a competitive network in the geographic areas we serve. In addition, in any particular market, providers could refuse to contract with us, demand higher payments, or take other actions which could result in higher health care costs, disruption to provider access for current members, a decline in our growth rate, or difficulty in meeting regulatory or accreditation requirements.
The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures, some states may reduce rates paid to providers, which may further discourage participation in the Medicaid program.
In some markets, certain providers, particularly hospitals, physician/hospital organizations, and some specialists, may have significant market positions or even monopolies. If these providers refuse to contract with us or utilize their market position to negotiate favorable contracts which are disadvantageous to us, our profitability in those areas could be adversely affected.
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Some providers that render services to our members are not contracted with our health plans. In those cases, there is no pre-established understanding between the provider and our health plan about the amount of compensation that is due to the provider. In some states, the amount of compensation is defined by law or regulation, but in most instances it is either not defined or it is established by a standard that is not clearly translatable into dollar terms. In such instances, providers may believe they are underpaid for their services and may either litigate or arbitrate their dispute with our health plan. The uncertainty of the amount to pay and the possibility of subsequent adjustment of the payment could adversely affect our business, financial condition, results of operations, and cash flows.
The insolvency of a delegated provider could obligate us to pay its referral claims, which could have an adverse effect on our business, cash flows, or results of operations.
Circumstances may arise where providers to whom we have delegated risk, due to insolvency or other circumstances, are unable to pay claims they have incurred with third parties in connection with referral services provided to our members. The inability of delegated providers to pay referral claims presents us with both immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do so or we have already paid claims to a delegated provider and payments cannot be recouped when the delegated provider becomes insolvent. To reduce the risk that delegated providers are unable to pay referral claims, we monitor the operational and financial performance of such providers. We also maintain contingency plans that include transferring members to other providers in response to potential network instability. In certain instances, we have required providers to place funds on deposit with us as protection against their potential insolvency. These funds are frequently in the form of segregated funds received from the provider and held by us or placed in a third-party financial institution. These funds may be used to pay claims that are the financial responsibility of the provider in the event the provider is unable to meet these obligations. However, there can be no assurances that these precautionary steps will fully protect us against the insolvency of a delegated provider. Liabilities incurred or losses suffered as a result of provider insolvency could have an adverse effect on our business, financial condition, cash flows, or results of operations.
Regulatory actions and negative publicity regarding Medicaid managed care and Medicare Advantage may lead to programmatic changes and intensified regulatory scrutiny and regulatory burdens.
Several of our health care competitors have recently been involved in governmental investigations and regulatory actions which have resulted in significant volatility in the price of their stock. In addition, there has been negative publicity and proposed programmatic changes regarding Medicare Advantage private fee-for-service plans, a part of the Medicare Advantage program in which we do not participate. These actions and the resulting negative publicity could become associated with or imputed to us, regardless of our actual regulatory compliance or programmatic participation. Such an association, as well as any perception of a recurring pattern of abuse among the health plan participants in government programs and the diminished reputation of the managed care sector as a whole, could result in public distrust, political pressure for changes in the programs in which we do not participate, intensified scrutiny by regulators, additional regulatory requirements and burdens, increased stock volatility due to speculative trading, and heightened barriers to new managed care markets and contracts, all of which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed care or such application is denied, our membership in that state will likely decrease.
States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations. Waivers and programs under demonstrations are approved for two- to five-year periods and can be renewed on an ongoing basis if the state applies and the waiver request is approved or renewed by CMS. We have no control over this renewal process. If a state does not renew its mandated program or the federal government denies the state’s application for renewal, our business would suffer as a result of a likely decrease in membership.
If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may negatively affect our business strategy.
We are a corporate parent holding company and hold most of our assets at, and conduct most of our operations through, direct subsidiaries. As a holding company, our results of operations depend on the results of operations of our subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend on their operating results and will be subject to applicable laws and restrictions contained in agreements governing the debt of such subsidiaries. In addition, our health plan subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions that they can pay to us without prior approval of, or notification to, state regulators. In California, our health plan may dividend, without notice to or approval of the California Department of Managed Health Care, amounts by which its tangible net equity exceeds 130% of the tangible net equity requirement. Our other health plans must give thirty days’ advance notice and the opportunity to disapprove "extraordinary" dividends to the respective state departments of insurance for amounts
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over the lesser of (a) ten percent of surplus or net worth at the prior year end or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or disapproving a dividend is not clearly defined. Health plans that declare non-extraordinary dividends must usually provide notice to the regulators ten or fifteen days in advance of the intended distribution date of the non-extraordinary dividend. We received
$125 million
in dividends from our regulated health plan subsidiaries during 2015. We did not receive any dividends from our regulated health plan subsidiaries during 2014, because significant growth across all of our health plans necessitated that the plans retain their cash to meet increasing net worth requirements. The aggregate additional amounts our health plan subsidiaries could have paid us at
December 31, 2015
and
2014
, without approval of the regulatory authorities, were approximately $121 million and $96 million, respectively. If the regulators were to deny or significantly restrict our subsidiaries’ requests to pay dividends to us, the funds available to our company as a whole would be limited, which could harm our ability to implement our business strategy. For example, we could be hindered in our ability to make debt service payments under the senior notes or the revolving credit facility.
Unforeseen changes in pharmaceutical regulations or market conditions may impact our revenues and adversely affect our results of operations.
A significant category of our health care costs relate to pharmaceutical products and services. Evolving regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our pharmaceutical costs include, but are not limited to, the price of pharmaceuticals, geographic variation in utilization of new and existing pharmaceuticals, and changes in discounts. The unpredictable nature of these factors may have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Our use and disclosure of individually identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
State and federal laws and regulations, including HIPAA and the Gramm-Leach-Bliley Act, govern the collection, dissemination, use, privacy, confidentiality, security, availability, and integrity of individually identifiable information, including protected health information, or PHI. HIPAA establishes basic national privacy and security standards for protection of PHI by covered entities, including health plans such as ours. HIPAA requires covered entities like us to develop and maintain policies and procedures for PHI that is used or disclosed, and to adopt administrative, physical, and technical safeguards to protect PHI. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic health care transactions, including activities associated with the billing and collection of health care claims.
Mandatory penalties for HIPAA violations range from $100 to $50,000 per violation, and up to $1.5 million per violation of the same standard per calendar year. A single breach incident can result in violations of multiple standards, resulting in possible penalties potentially in excess of $1.5 million. If a person knowingly or intentionally obtains or discloses PHI in violation of HIPAA requirements, criminal penalties may also be imposed. HIPAA authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs, and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities for compliance with the HIPAA Privacy and Security Standards. Investigations of violations that indicate willful neglect, for which penalties are now mandatory, are statutorily required. It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty fine paid by the violator.
HIPAA further requires covered entities to notify affected individuals “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach” if their unsecured PHI is subject to an unauthorized access, use, or disclosure. If a breach affects 500 patients or more, it must be reported to HHS and local media without unreasonable delay, and HHS will post the name of the breaching entity on its public website. If a breach affects fewer than 500 individuals, the covered entity must log it and notify HHS at least annually. We have experienced HIPAA breaches in the past, including breaches affecting over 500 individuals.
New health information standards, whether implemented pursuant to HIPAA, congressional action, or otherwise, could have a significant effect on the manner in which we must handle health care related data, and the cost of complying with standards could be significant. If we do not comply with existing or new laws and regulations related to PHI, we could be subject to criminal or civil sanctions. Any security breach involving the misappropriation, loss, or other unauthorized disclosure or use of confidential member information, whether by us or a third party, such as our vendors, could subject us to civil and criminal
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penalties, divert management’s time and energy, and have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Risks Related to the Operation of Our Molina Medicaid Solutions Segment
We may be unable to retain or renew the state government contracts of the Molina Medicaid Solutions segment on terms consistent with our expectations or at all.
Molina Medicaid Solutions currently provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida. If we are unable to continue to operate in any of those six jurisdiction, or if our current operations in any of those jurisdictions are significantly curtailed, the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and as a result our profitability would be negatively impacted.
If the responsive bids to RFPs of Molina Medicaid Solutions are not successful, our revenues could be materially reduced and our operating results could be negatively impacted.
The government contracts of Molina Medicaid Solutions may be subject to periodic competitive bidding. In such process, Molina Medicaid Solutions may face competition as other service providers, some with much greater financial resources and greater name recognition, attempt to enter our markets through the competitive bidding process. Molina Medicaid Solutions also anticipates bidding in other states which have issued RFPs for procurement of a new MMIS. In the event our responsive bids in other states are not successful, we will be unable to grow in a manner consistent with our projections. Even if our responsive bids are successful, the bids may be based upon assumptions or other factors which could result in the contract being less profitable than we had expected or had been the case prior to competitive re-bidding.
Because of the complexity and duration of the services and systems required to be delivered under the government contracts of Molina Medicaid Solutions, there are substantial risks associated with full performance under the contracts.
The state contracts of Molina Medicaid Solutions typically require significant investment in the early stages that is expected to be recovered through billings over the life of the contracts. These contracts involve the construction of new computer systems and communications networks and the development and deployment of complex technologies. Substantial performance risk exists under each contract. Some or all elements of service delivery under these contracts are dependent upon successful completion of the design, development, construction, and implementation phases. Any increased or unexpected costs or delays in connection with the performance of these contracts, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which could have an adverse effect on our business, financial condition, cash flows, or results of operations.
If we fail to comply with our state government contracts or government contracting regulations, our business could be adversely affected.
Molina Medicaid Solutions’ contracts with state government customers may include unique and specialized performance requirements. In particular, contracts with state government customers are subject to various procurement regulations, contract provisions, and other requirements relating to their formation, administration, and performance. Any failure to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include termination of the contracts, forfeiture of profits, suspension of payments, imposition of fines, and suspension from future government contracting. Further, any negative publicity related to our state government contracts or any proceedings surrounding them may damage our business by affecting our ability to compete for new contracts. The termination of a state government contract, our suspension from government work, or any negative impact on our ability to compete for new contracts, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
System security risks and systems integration issues that disrupt our internal operations or information technology services provided to customers could adversely affect our financial results and damage our reputation.
Computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and the efforts to address these problems could result in interruptions, delays, cessation of service, and loss of existing or potential government customers.
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Molina Medicaid Solutions routinely processes, stores, and transmits large amounts of data for our clients, including sensitive and personally identifiable information. Breaches of our security measures could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for us and damage to our brand and reputation. Accordingly, we could lose existing or potential government customers for outsourcing services or other information technology solutions or incur significant expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in our products. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our information technology infrastructure also may experience interruptions, delays, or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive, and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins, or lost government customers resulting from these disruptions could adversely affect our financial results, reputation, and stock price.
In the course of providing services to customers, Molina Medicaid Solutions may inadvertently infringe on the intellectual property rights of others and be exposed to claims for damages.
The solutions we provide to our state government customers may inadvertently infringe on the intellectual property rights of third parties resulting in claims for damages against us. The expense and time of defending against these claims may have a material and adverse impact on our profitability. Additionally, the publicity we may receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our ability to develop new MMIS business or retain existing MMIS business.
Inherent in the government contracting process are various risks which may materially and adversely affect our business and profitability.
We are subject to the risks inherent in the government contracting process. These risks include government audits of billable contract costs and reimbursable expenses and compliance with government reporting requirements. In the event we are found to be out of compliance with government contracting requirements, our reputation may be adversely impacted and our relationship with the government agencies we work with may be damaged, resulting in a material and adverse effect on our profitability.
Our performance of contracts, including those with respect to which we have partnered with third parties, may be adversely affected if we or the third parties fail to deliver on commitments.
In some instances, our contracts require that we partner with other parties, including software and hardware vendors, to provide the complex solutions required by our state government customers. Our ability to deliver the solutions and provide the services required by our customers is dependent on our and our partners’ ability to meet our customers’ delivery schedules. If we or our partners fail to deliver services or products on time, our ability to complete the contract may be adversely affected, which may have a material and adverse impact on our revenues and profitability.
Our business may be adversely affected by the transition from traditional fee-for-service to Medicaid managed care.
In order to save on costs, a number of state Medicaid programs are expected to pursue the transition from a fee-for-service focus of their Medicaid programs to a Medicaid managed care focus. A shift in Medicaid payment models from fee-for-service to managed care will require a concomitant shift in the focus of MMIS. In connection with such a transition, MMIS must also make a transition from a system built around claims adjudication to one that performs analytics and can be used to manage Medicaid population health outcomes. In the event Molina Medicaid Solutions is unable to accomplish this transition, our business, financial condition, cash flows, or results of operations may be adversely affected.
Risks Related to our General Business Operations
Ineffective management of our growth may negatively affect our business, financial condition, or results of operations.
We expect to continue to grow our membership and to expand into other markets through acquisitions and other opportunities. Continued rapid growth could place a significant strain on our management and on our other resources. Our ability to manage our growth may depend on our ability to strengthen our management team and attract, train, and retain skilled employees, and our ability to implement and improve operational, financial, and management information systems on a timely basis. If we are unable to manage our growth effectively, our business, financial condition, cash flows, or results of operations could be materially and adversely affected. In addition, due to the initial substantial costs related to acquisitions, rapid growth could adversely affect our short-term profitability and liquidity.
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Any changes to the laws and regulations governing our business, or the interpretation and enforcement of those laws or regulations, could cause us to modify our operations and could negatively impact our operating results.
Our business is extensively regulated by the federal government and the states in which we operate. The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than managed care organizations. The government agencies administering these laws and regulations have broad latitude in interpreting and applying them. These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer, and how we interact with members and the public. For instance, some states mandate minimum medical expense levels as a percentage of premium revenues. These laws and regulations, and their interpretations, are subject to frequent change. The interpretation of certain contract provisions by our governmental regulators may also change. Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations, could reduce our profitability by imposing additional capital requirements, increasing our liability, increasing our administrative and other costs, increasing mandated benefits, forcing us to restructure our relationships with providers, or requiring us to implement additional or different programs and systems. Changes in the interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a prior interpretation.
Our business depends on our information and medical management systems, and our inability to effectively integrate, manage, and keep secure our information and medical management systems could disrupt our operations.
Our business is dependent on effective and secure information systems that assist us in, among other things, processing provider claims, monitoring utilization and other cost factors, supporting our medical management techniques, and providing data to our regulators. Our providers also depend upon our information systems for membership verifications, claims status, and other information. If we experience a reduction in the performance, reliability, or availability of our information and medical management systems, our operations, ability to pay claims, and ability to produce timely and accurate reports could be adversely affected. In addition, if the licensor or vendor of any software which is integral to our operations were to become insolvent or otherwise fail to support the software sufficiently, our operations could be negatively affected.
Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our operational needs. Moreover, our acquisition activity requires transitions to or from, and the integration of, various information systems. If we experience difficulties with the transition to or from information systems or are unable to properly implement, maintain, upgrade or expand our system, we could suffer from, among other things, operational disruptions, loss of members, difficulty in attracting new members, regulatory problems, and increases in administrative expenses.
Our business requires the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in compromises or breaches of our security systems and member data stored in our information systems. Anyone who circumvents our security measures could misappropriate our confidential information or cause interruptions in services or operations. The internet is a public network, and data is sent over this network from many sources. In the past, computer viruses or software programs that disable or impair computers have been distributed and have rapidly spread over the internet. Computer viruses could be introduced into our systems, or those of our providers or regulators, which could disrupt our operations, or make our systems inaccessible to our members, providers, or regulators. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. Because of the confidential health information we store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability, and loss. Our security measures may be inadequate to prevent security breaches, and our business operations would be negatively impacted by cancellation of contracts and loss of members if security breaches are not prevented.
Because our corporate headquarters are located in Southern California, our business operations may be significantly disrupted as a result of a major earthquake.
Our corporate headquarters is located in Long Beach, California. In addition, the claims of our health plans are also processed in Long Beach. Southern California is exposed to a statistically greater risk of a major earthquake than most other parts of the United States. If a major earthquake were to strike the Los Angeles area, our corporate functions and claims processing could be significantly impaired for a substantial period of time. Although we have established a disaster recovery and business resumption plan with back-up operating sites to be deployed in the case of such a major disruptive event, there can be no assurances that the disaster recovery plan will be successful or that the business operations of all our health plans, including those that are remote from any such event, would not be substantially impacted by a major Southern California earthquake.
We face claims related to litigation which could result in substantial monetary damages.
We are subject to a variety of legal actions, including medical malpractice actions, provider disputes, employment related disputes, health care regulatory law-based litigation, and breach of contract actions. In the event we incur liability materially in excess of the amount for which we have insurance coverage, our profitability would suffer. In addition, our providers involved in medical care decisions are exposed to the risk of medical malpractice claims. As an employer of physicians and ancillary
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medical personnel and as an operator of primary care clinics, our plans are subject to liability for negligent acts, omissions, or injuries occurring at one of our clinics or caused by one of our employees. We maintain medical malpractice insurance for our clinics in an amount which we believe to be reasonable in light of our experience to date. However, given the significant amount of some medical malpractice awards and settlements, this insurance may not be sufficient or available at a reasonable cost to protect us from damage awards or other liabilities. Even if any claims brought against us are unsuccessful or without merit, we may have to defend ourselves against such claims. The defense of any such actions may be time-consuming and costly, and may distract our management’s attention. As a result, we may incur significant expenses and may be unable to effectively operate our business.
Furthermore, claimants often sue managed care organizations for improper denials of or delays in care, and in some instances improper authorizations of care. Claims of this nature could result in substantial damage awards against us and our providers that could exceed the limits of any applicable medical malpractice insurance coverage. Successful malpractice or tort claims asserted against us, our providers, or our employees could adversely affect our business, financial condition, cash flows, or results of operations.
We cannot predict the outcome of any lawsuit with certainty. While we currently have insurance coverage for some of the potential liabilities relating to litigation, other such liabilities may not be covered by insurance, the insurers could dispute coverage, or the amount of insurance could be insufficient to cover the damages awarded. In addition, insurance coverage for all or certain types of liability may become unavailable or prohibitively expensive in the future or the deductible on any such insurance coverage could be set at a level which would result in us effectively self-insuring cases against us.
Although we establish reserves for litigation as we believe appropriate, we cannot assure you that our recorded reserves will be adequate to cover such costs. Therefore, the litigation to which we are subject could have a material adverse effect on our business, financial condition, results of operations, and cash flows, and could prompt us to change our operating procedures.
We are subject to competition which negatively impacts our ability to increase penetration in the markets we serve.
We operate in a highly competitive environment and in an industry that is subject to ongoing changes from business consolidations, new strategic alliances, and aggressive marketing practices by other managed care organizations. We compete for members principally on the basis of size, location, and quality of provider network, benefits supplied, quality of service, and reputation. A number of these competitive elements are partially dependent upon and can be positively affected by the financial resources available to a health plan. Many other organizations with which we compete, including large commercial plans, have substantially greater financial and other resources than we do. For these reasons, we may be unable to grow our membership, or may lose members to other health plans.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results, and stock price.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our future testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will continue to require that we incur substantial accounting expense and expend significant management time and effort. Moreover, if we are not able to continue to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock Exchange, SEC, or other regulatory authorities which would require additional financial and management resources.
Changes in accounting may affect our results of operations.
U.S. generally accepted accounting principles (GAAP) and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, or the adoption of new pronouncements could significantly affect our stated results of operations.
The value of our investments is influenced by varying economic and market conditions, and a decrease in value could have an adverse effect on our results of operations, liquidity, and financial condition.
Our investments consist of investment-grade debt securities. The unrestricted portion of this portfolio is designated as available-for-sale. Our non-current restricted investments are designated as held-to-maturity. Available-for-sale investments are carried at fair value, and the unrealized gains or losses are included in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, unless the decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such securities until their full cost can be recovered. For our available-for-sale investments
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and held-to-maturity investments, if a decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such security until its full cost can be recovered, the security is deemed to be other-than-temporarily impaired and it is written down to fair value and the loss is recorded as an expense.
In accordance with applicable accounting standards, we review our investment securities to determine if declines in fair value below cost are other-than-temporary. This review is subjective and requires a high degree of judgment. We conduct this review on a quarterly basis, using both quantitative and qualitative factors, to determine whether a decline in value is other-than-temporary. Such factors considered include the length of time and the extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, recommendations of investment advisors, and forecasts of economic, market or industry trends. This review process also entails an evaluation of our ability and intent to hold individual securities until they mature or full cost can be recovered.
The current economic environment and recent volatility of the securities markets increase the difficulty of assessing investment impairment and the same influences tend to increase the risk of potential impairment of these assets. Over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change our judgment regarding impairment. This could result in realized losses relating to other-than-temporary declines to be recorded as an expense. Given the current market conditions and the significant judgments involved, there is continuing risk that declines in fair value may occur and material other-than-temporary impairments may result in realized losses in future periods which could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws, including pending tax law changes, such as the health care federal excise tax discussed above. In addition, we are subject to the routine examination of our income tax returns by the Internal Revenue Service and other local and state tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our estimated income tax liabilities. Adverse outcomes from tax examinations could have a material adverse effect on our provision for income taxes, estimated income tax liabilities, or results of operations.
We are dependent on our executive officers and other key employees.
Our operations are highly dependent on the efforts of our executive officers. The loss of their leadership, knowledge, and experience could negatively impact our operations. Replacing many of our executive officers might be difficult or take an extended period of time because a limited number of individuals in the managed care industry have the breadth and depth of skills and experience necessary to operate and expand successfully a business such as ours. Our success is also dependent on our ability to hire and retain qualified management, technical, and medical personnel. It is critical that we recruit, manage, enable, and retain talent to successfully execute our strategic objections which requires aligned policies, a positive work environment, and a robust succession and talent development process. Further, particularly in light of the changing health care environment, we must focus on building employee capabilities to help ensure that we can meet upcoming challenges and opportunities. If we are unsuccessful in recruiting, retaining, managing, and enabling such personnel and are unable to meet upcoming challenges and opportunities, our operations could be negatively impacted.
We are subject to risks associated with outsourcing services and functions to third parties.
We contract with independent third party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Our arrangements with third party vendors and service providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data. In addition, we may have disagreements with third party vendors and service providers regarding relative responsibilities for any such failures under applicable business associate agreements or other applicable outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the terms and conditions of our contracts with third party vendors and service providers. Our outsourcing arrangements could be adversely impacted by changes in vendors’ or service providers’ operations or financial condition or other matters outside of our control. If we fail to adequately monitor and regulate the performance of our third party vendors and service providers, we could be subject to additional risk. Violations of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms by third party vendors and service providers could increase our exposure to liability to our members, providers, or other third parties, or sanctions and/or fines from the regulators that oversee our business. In turn, this could increase the costs associated with the operation of our business or have an adverse impact on our business and reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur significant costs in connection with any such vendor or service provider transition. As a result, we may not be able to meet the full demands of our customers and, in turn, our business, financial condition, or results of operations may be harmed. In addition, we may not
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fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships we enter into with third party vendors and service providers, as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the third party, vendor or service provider noncompliance with contract terms or violations of laws and/or regulations, or otherwise. This could result in substantial costs or other operational or financial problems that could adversely impact our business, financial condition, cash flows, or results of operations.
An impairment charge with respect to our recorded goodwill, or our finite-lived intangible assets, could have a material impact on our financial results.
As of
December 31, 2015
, goodwill was
$519 million
, and intangible assets, net, were
$122 million
. Intangible assets are amortized generally on a straight-line basis over their estimated useful lives.
Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment test. Tests are performed more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable.
The determination of the value of goodwill, and intangible assets, net, requires us to make estimates and assumptions about estimated asset lives, future business trends, and growth. Such evaluation is significantly impacted by estimates and assumptions of future revenues, costs and expenses, and other factors. If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill, and intangible assets, net, such revision could result in a non-cash impairment charge that could have a material impact on our financial results.
We are subject to the risks of owning and leasing real property.
We are a tenant under numerous leases in multiple states, including a 25-year lease of an approximately 460,000 square foot office building housing our principal executive offices in Long Beach, California. We also own a
186,000
square-foot office building in Troy, Michigan, a
26,700
square-foot data center in Albuquerque, New Mexico, a
24,000
square-foot community clinic in Pomona, California, and 40 properties in Pennsylvania, which are primarily residential housing facilities. Accordingly, we are subject to all of the risks generally associated with leasing and owning real estate, which include, but are not limited to: the possibility of environmental contamination, the costs associated with fixing any environmental problems and the risk of damages resulting from such contamination; adverse changes in the value of the property due to interest rate changes, changes in the neighborhood in which the property is located, or other factors; ongoing maintenance expenses and costs of improvements; the possible need for structural improvements in order to comply with changes in zoning, seismic, disability act, or other requirements; inability to renew or enter into leases for space not utilized by us on commercially acceptable terms or at all; and possible disputes with neighboring owners or other individuals and entities.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our our outstanding indebtedness.
We have a significant amount of indebtedness. As of
December 31, 2015
, our total indebtedness was approximately
$1,609 million
, including lease financing obligations. As of
December 31, 2015
, we also had
$244 million
available for borrowing under our revolving credit facility. Our substantial indebtedness could have significant consequences, including:
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increasing our vulnerability to adverse economic, industry, or competitive developments;
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requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, make capital expenditures, and pursue future business opportunities;
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exposing us to the risk of increased interest rates to the extent of any future borrowings, including borrowings under the revolving credit facility, at variable rates of interest;
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making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the revolving credit facility and our outstanding senior notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing our outstanding senior notes and the agreements governing such other indebtedness;
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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product and service development, debt service requirements, acquisitions, and general corporate or other purposes; and
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limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our substantial indebtedness may prevent us from exploiting.
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Despite our high indebtedness level, we and our subsidiaries are able to incur substantial additional amounts of debt, including secured debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indentures governing our outstanding senior notes and the credit agreement governing the revolving credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. As of
December 31, 2015
, we had approximately
$244 million
available for additional borrowing under our revolving credit facility. In addition, the indentures governing our outstanding senior notes and the credit agreement governing our revolving credit facility do not prevent us from incurring obligations that do not constitute prohibited indebtedness thereunder. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase.
The terms of our debt impose, and will impose, restrictions on us that may affect our ability to successfully operate our business and our ability to make payments on our outstanding senior notes.
The indentures governing our outstanding senior notes and the credit agreement governing the revolving credit facility contain various covenants that could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest. These covenants limit our ability to, among other things:
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incur additional indebtedness or issue certain preferred equity;
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pay dividends on, repurchase, or make distributions in respect of our capital stock, prepay, redeem, or repurchase certain debt or make other restricted payments;
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make certain investments;
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create certain liens;
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sell assets, including capital stock of restricted subsidiaries;
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enter into agreements restricting our restricted subsidiaries’ ability to pay dividends to us;
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consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;
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|
enter into certain transactions with our affiliates; and
|
|
•
|
designate our restricted subsidiaries as unrestricted subsidiaries.
|
All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under the indentures for our outstanding senior notes and/or the credit agreement governing the revolving credit facility including, as a result of cross default provisions and, in the case of the revolving credit facility permit the lenders to cease making loans to us. If there were an event of default under the indentures governing our outstanding senior notes and/or the credit agreement governing the revolving credit facility, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt instruments in the event of a default thereunder.
In addition, the restrictive covenants in the credit agreement governing the revolving credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control.
If our operating performance declines, we may be required to obtain waivers from the lenders under the revolving credit facility, from the holders of our outstanding senior notes or from the holders of other obligations, to avoid defaults thereunder. If we are not able to obtain such waivers, our creditors could exercise their rights upon default, and we could be forced into bankruptcy or liquidation.
30
We may not have the funds necessary to pay the amounts due upon conversion or required repurchase of our outstanding notes, and our indebtedness may contain limitations on our ability to pay the amounts due upon conversion or required repurchase.
In February 2013, we issued $550.0 million aggregate principal amount of 1.125% cash convertible senior notes due January 15, 2020, unless earlier repurchased or converted. We refer to these notes as our 1.125% Notes. In September 2014, we issued $301.6 million aggregate principal amount of 1.625% convertible senior notes due August 14, 2044, unless earlier repurchased, redeemed, or converted. We refer to these notes as our 1.625% Notes. As of
December 31, 2015
, the aggregate outstanding principal amount of our 1.125% Notes and our 1.625% Notes was
$550 million
and
$302 million
, respectively. Both our 1.125% Notes and our 1.625% Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger. The 1.125% Notes met the stock price trigger in the quarter ended
December 31, 2015
, and are convertible to cash through at least March 31, 2016. Because the 1.125% Notes may be converted into cash within 12 months, the
$448 million
carrying amount is reported in current portion of long-term debt as of
December 31, 2015
. In addition, holders of our 1.625% Notes may convert their notes into cash during any calendar quarter (and only during such calendar quarter) if the last reported sales price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to $75.51 per share. The last reported sale price of our common stock as reported on the New York Stock Exchange on
February 23, 2016
was $62.28 per share. As of
December 31, 2015
, our 1.625% Notes were not convertible. If conversion requests are received, the settlement of the notes must be paid primarily in cash pursuant to the terms of the relevant indentures.
For economic reasons related to the trading market for our 1.125% Notes, we believe that the amount of the notes that may be converted over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Notes becomes closed or restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Notes, which normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that marginal premium, holders of our 1.125% Notes may elect to convert the notes to cash. As of
December 31, 2015
, we had sufficient available cash, combined with borrowing capacity available under our revolving credit facility, to fund such conversions.
In addition, in the event of a change in control or the termination in trading of our stock, each holder of our 1.125% Notes and our 1.625% Notes would have the right to require us to purchase some or all of their notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest.
In the event of conversions or required repurchases, we may not have enough available cash or be able to obtain financing at the time we are required to comply with our conversion or repurchase obligations. In addition, our ability to comply with these obligations may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. The indentures for the 1.125% Notes and the 1.625% Notes provide that it would be an event of default if we do not make the cash payments due upon conversion or required repurchase of the notes. The occurrence of an event of default under one or both of these indentures may also constitute an event of default under our revolving credit facility and under our other indebtedness we may have outstanding at such time. Any such default could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Our borrowings under the revolving credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained the same, and our net income could decrease. The applicable margin with respect to the loan under the revolving credit facility is a percentage per annum equal to a reference rate plus the applicable margin. In order to manage our exposure to interest rate risk, in the future we may enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and may impact our ability to make required principal and interest payments on our indebtedness.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, and interest on our indebtedness.
31
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the revolving credit facility, and the indentures governing our outstanding senior notes, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and there can be no assurance that any rating assigned by the rating agencies to our debt or our corporate rating will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies would likely increase our future borrowing costs and reduce our access to capital, which could have a materially adverse impact on our financial condition and results of operations.
Risks Related to Our Common Stock
Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our common stock to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, our board of directors or a committee thereof has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors or a committee thereof to create and issue a new series of preferred stock and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock and the value of our convertible senior notes.
Members of the Molina family own a significant amount of our capital stock, decreasing the influence of other stockholders on stockholder decisions.
Members of the Molina family, either directly or as trustees or beneficiaries of Molina family trusts, in the aggregate owned or were entitled to receive upon certain events approximately 26% of our capital stock as of
December 31, 2015
. Our president and chief executive officer, as well as our chief financial officer, are members of the Molina family, and they are also on our board of directors. Because of the amount of their shareholdings, Molina family members, if they were to act as a group with the trustees of their family trusts, have the ability to significantly influence all matters submitted to stockholders for approval, including the election of directors, amendments to our charter, and any merger, consolidation, or sale of our company. A significant concentration of share ownership can also adversely affect the trading price for our common stock because investors often discount the value of stock in companies that have controlling stockholders. Furthermore, the concentration of share ownership in the Molina family could delay or prevent a merger or consolidation, takeover, or other business combination that could be favorable to our stockholders. Finally, the interests and objectives of the Molina family may be different from those of our company or our other stockholders, and they may vote their common stock in a manner that is contrary to the vote of our other stockholders.
Future sales of our common stock or equity-linked securities in the public market could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.
We may issue equity securities in the future, or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Sales of a substantial number of shares of our common stock or other equity securities, including sales of shares in connection with any future acquisitions, could be substantially dilutive to our stockholders. These sales may have a harmful effect on prevailing market prices for our common stock and our ability to raise additional capital in the financial markets at a time and price favorable to us. Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options, or warrants to purchase our common stock in the future and those stock appreciation rights, options, or warrants are exercised or as the restricted stock units vest, our stockholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase a pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to
32
our stockholders. Our certificate of incorporation provides that we have authority to issue
150,000,000
shares of common stock and
20,000,000
shares of preferred stock. As of
December 31, 2015
, approximately
56,000,000
shares of common stock and no shares of preferred or other capital stock were issued and outstanding.
It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a premium on their stock price.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These provisions may prohibit stockholders owning 15% or more of our outstanding voting stock from merging or combining with us. In addition, any change in control of our state health plans would require the approval of the applicable insurance regulator in each state in which we operate.
Our certificate of incorporation and bylaws also contain provisions that could have the effect of delaying, deferring, or preventing a change in control of our company that stockholders may consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include:
|
•
|
a staggered board of directors, so that it would take three successive annual meetings to replace all directors,
|
|
•
|
prohibition of stockholder action by written consent, and
|
|
•
|
advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.
|
In addition, changes of control are often subject to state regulatory notification, and in some cases, prior approval.
Item 1B:
Unresolved Staff Comments
None.
Item 2:
Properties
As of
December 31, 2015
, the Health Plans segment leased a total of 84 facilities, the Molina Medicaid Solutions segment leased a total of 12 facilities and the Other segment leased a total of 215 facilities. We own a
186,000
square-foot office building in Troy, Michigan and a
24,000
square-foot mixed use (office and clinic) facility in Pomona, California under our Health Plans segment. We own a
26,700
square-foot data center in Albuquerque, New Mexico and 40 properties in Pennsylvania, which are primarily residential housing facilities, under our Other segment. While we believe our current and anticipated facilities will be adequate to meet our operational needs for the foreseeable future, we are continuing to periodically evaluate our employee and operations growth prospects to determine if additional space is required, and where it would be best located.
Item 3:
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.
State of Louisiana v. Molina Medicaid Solutions et al.
On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims.
The petitioner seeks actual damages to be proved at trial, plus interest.
We believe we have several meritorious defenses to the claims of the state, and any liability for the alleged claims is not currently probable or reasonably estimable.
33
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al.
On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by Relator, Anita Silingo, Case No. SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly turned a “blind eye” to these unlawful practices.
The relator seeks treble damages in the amount of $3 billion, plus interest and penalties.
The Department of Justice has declined to intervene. The District Court dismissed this action as to Molina without leave to amend as to some allegations and with leave to amend as to other allegations. On October 22, 2015, the Relator filed a third amended complaint. We believe that we have several meritorious defenses to the claims of the Relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
Item 4:
Mine Safety Disclosures
None.
34
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the trading symbol "MOH." As of
February 23, 2016
, there were approximately 120 holders of record of our common stock. The high and low intra-day sales prices of our common stock for specified periods are set forth below:
|
High
|
Low
|
||||||
|
2015
|
|||||||
|
First Quarter
|
$
|
67.58
|
|
$
|
49.37
|
|
|
|
Second Quarter
|
$
|
73.98
|
|
$
|
57.35
|
|
|
|
Third Quarter
|
$
|
82.37
|
|
$
|
65.72
|
|
|
|
Fourth Quarter
|
$
|
70.82
|
|
$
|
55.49
|
|
|
|
2014
|
|||||||
|
First Quarter
|
$
|
39.21
|
|
$
|
32.41
|
|
|
|
Second Quarter
|
$
|
46.17
|
|
$
|
32.86
|
|
|
|
Third Quarter
|
$
|
48.03
|
|
$
|
39.23
|
|
|
|
Fourth Quarter
|
$
|
54.57
|
|
$
|
40.79
|
|
|
Dividends
To date we have not paid cash dividends on our common stock. We currently intend to retain any future earnings to fund our projected business growth. However, we intend to periodically evaluate our cash position to determine whether to pay a cash dividend in the future.
Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the state departments of insurance in the states in which we operate or may operate, as well as requirements of the government-sponsored health programs in which we participate. Additionally, the indentures governing our outstanding senior notes and the credit agreement governing the revolving credit facility contain various covenants that limit our ability to pay dividends on our common stock.
Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual and regulatory restrictions. For more information regarding restrictions on the ability of our regulated subsidiaries to pay dividends to us, please see Item 7 of this Form 10-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in "Liquidity and Capital Resources," under the subheading "Regulatory Capital and Dividend Restrictions."
Unregistered Issuances of Equity Securities
None.
Stock Repurchase Programs
Securities Repurchases and Repurchase Programs.
Effective as of December 16, 2015, our board of directors authorized the repurchase of up to
$50 million
in aggregate of our common stock or senior notes. This newly authorized repurchase program extends through December 31, 2016.
35
Purchases of common stock made by or on behalf of the Company during the quarter ended December 31,
2015
, including shares withheld by the Company to satisfy our employees’ income tax obligations, are set forth below:
|
Total Number
of Shares
Purchased (1)
|
Average Price
Paid per Share (1)
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
|
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2)
|
||||||||||
|
October 1 — October 31
|
94
|
|
$
|
66.79
|
|
—
|
|
$
|
50,000,000
|
|
|||
|
November 1 — November 30
|
576
|
|
$
|
62.00
|
|
—
|
|
$
|
50,000,000
|
|
|||
|
December 1 — December 31
|
104,222
|
|
$
|
59.15
|
|
—
|
|
$
|
50,000,000
|
|
|||
|
104,892
|
|
$
|
59.17
|
|
—
|
|
|||||||
_______________________________
|
(1)
|
During the quarter we withheld 104,892 shares of common stock under our 2011 Equity Incentive Plan to settle our employees' income tax obligations.
|
|
(2)
|
Effective as of February 25, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock. This repurchase program expired December 31, 2015.
|
STOCK PERFORMANCE GRAPH
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be "soliciting materials" or to be "filed" with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that the Company specifically incorporates it by reference into a filing.
The following line graph compares the percentage change in the cumulative total return on our common stock against the cumulative total return of the Standard & Poor's Corporation Composite 500 Index (S&P 500) and a peer group index for the five-year period from December 31,
2010
to
December 31, 2015
. The comparison assumes $100 was invested on December 31,
2010
, in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
The peer group index consists of Brookdale Senior Living, Inc. (BKD), Catamaran Corporation (CTRX), Centene Corporation (CNC), Community Health Systems, Inc. (CYH), DaVita HealthCare Partners, Inc. (DVA), Health Net, Inc. (HNT), Kindred Healthcare, Inc. (KND), Laboratory Corporation of America Holdings (LH), Life Point Hospitals, Inc. (LPNT), Magellan Health, Inc. (MGLN), Omnicare, Inc. (OCR), Quest Diagnostics, Inc. (DGX), Select Medical Holdings Corporation (SEM), Team Health Holdings, Inc. (TMH), Tenet Healthcare Corporation (THC), Universal American Corporation (UAM), Universal Health Services, Inc. (UHS) and WellCare Health Plans, Inc. (WCG).
36
|
December 31,
|
||||||||||||||||||
|
Name
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
||||||||||||
|
Molina Healthcare, Inc.
|
$
|
100.00
|
|
$
|
120.27
|
|
$
|
145.75
|
|
$
|
187.16
|
|
$
|
288.31
|
|
$
|
323.86
|
|
|
S&P 500
|
100.00
|
|
102.11
|
|
118.45
|
|
156.82
|
|
178.29
|
|
180.75
|
|
||||||
|
Peer Group
|
100.00
|
|
110.25
|
|
131.73
|
|
155.98
|
|
197.59
|
|
189.81
|
|
||||||
37
Item 6.
Selected Financial Data
SELECTED FINANCIAL DATA
We derived the following selected consolidated financial data (other than the data under the caption "Operating Statistics, Continuing Operations") for the five years ended December 31,
2015
from our audited consolidated financial statements. You should read the data in conjunction with our consolidated financial statements, related notes and other financial information included herein. All dollar amounts are presented in millions, except per-share data. The data under the caption "Operating Statistics, Continuing Operations" has not been audited.
|
|
Year Ended December 31,
|
||||||||||||||||||
|
|
2015 (1)
|
2014
|
2013
|
2012
|
2011
|
||||||||||||||
|
Statements of Income Data:
|
|||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||
|
Premium revenue
|
$
|
13,241
|
|
$
|
9,023
|
|
$
|
6,179
|
|
$
|
5,544
|
|
$
|
4,212
|
|
||||
|
Service revenue
(1)
|
253
|
|
210
|
|
205
|
|
188
|
|
160
|
|
|||||||||
|
Premium tax revenue
|
397
|
|
294
|
|
172
|
|
159
|
|
155
|
|
|||||||||
|
Health insurer fee revenue
|
264
|
|
120
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Investment income
|
18
|
|
8
|
|
7
|
|
5
|
|
5
|
|
|||||||||
|
Other revenue
|
5
|
|
12
|
|
26
|
|
18
|
|
8
|
|
|||||||||
|
Total revenue
|
14,178
|
|
9,667
|
|
6,589
|
|
5,914
|
|
4,540
|
|
|||||||||
|
Operating expenses:
|
|||||||||||||||||||
|
Medical care costs
|
11,794
|
|
8,076
|
|
5,380
|
|
4,991
|
|
3,664
|
|
|||||||||
|
Cost of service revenue
(1)
|
193
|
|
157
|
|
161
|
|
141
|
|
144
|
|
|||||||||
|
General and administrative expenses
|
1,146
|
|
765
|
|
666
|
|
519
|
|
393
|
|
|||||||||
|
Premium tax expenses
|
397
|
|
294
|
|
172
|
|
159
|
|
155
|
|
|||||||||
|
Health insurer fee expenses
|
157
|
|
89
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Depreciation and amortization
|
104
|
|
93
|
|
73
|
|
63
|
|
48
|
|
|||||||||
|
Total operating expenses
|
13,791
|
|
9,474
|
|
6,452
|
|
5,873
|
|
4,404
|
|
|||||||||
|
Operating income
|
387
|
|
193
|
|
137
|
|
41
|
|
136
|
|
|||||||||
|
Other expenses, net:
|
|||||||||||||||||||
|
Interest expense
|
66
|
|
57
|
|
52
|
|
17
|
|
16
|
|
|||||||||
|
Other (income) expense, net
|
(1
|
)
|
1
|
|
4
|
|
1
|
|
—
|
|
|||||||||
|
Total other expenses, net
|
65
|
|
58
|
|
56
|
|
18
|
|
16
|
|
|||||||||
|
Income from continuing operations before income taxes
|
322
|
|
135
|
|
81
|
|
23
|
|
120
|
|
|||||||||
|
Income tax expense
|
179
|
|
73
|
|
36
|
|
10
|
|
43
|
|
|||||||||
|
Income from continuing operations
|
143
|
|
62
|
|
45
|
|
13
|
|
77
|
|
|||||||||
|
Income (loss) from discontinued operations, net of tax expense (benefit)
(2)
|
—
|
|
—
|
|
8
|
|
(3
|
)
|
(56
|
)
|
|||||||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
$
|
10
|
|
$
|
21
|
|
||||
|
Basic net income per share:
(3)
|
|||||||||||||||||||
|
Income from continuing operations
|
$
|
2.75
|
|
$
|
1.34
|
|
$
|
0.98
|
|
$
|
0.28
|
|
$
|
1.69
|
|
||||
|
(Loss) income from discontinued operations
|
—
|
|
(0.01
|
)
|
0.18
|
|
(0.07
|
)
|
(1.24
|
)
|
|||||||||
|
Basic net income per share
|
$
|
2.75
|
|
$
|
1.33
|
|
$
|
1.16
|
|
$
|
0.21
|
|
$
|
0.45
|
|
||||
|
Diluted net income per share:
(3)
|
|||||||||||||||||||
|
Income from continuing operations
|
$
|
2.58
|
|
$
|
1.30
|
|
$
|
0.96
|
|
$
|
0.27
|
|
$
|
1.67
|
|
||||
|
(Loss) income from discontinued operations
|
—
|
|
(0.01
|
)
|
0.17
|
|
(0.06
|
)
|
(1.22
|
)
|
|||||||||
|
Diluted net income per share
|
$
|
2.58
|
|
$
|
1.29
|
|
$
|
1.13
|
|
$
|
0.21
|
|
$
|
0.45
|
|
||||
|
Weighted average shares outstanding:
|
|||||||||||||||||||
|
Basic
|
52
|
|
47
|
|
46
|
|
46
|
|
46
|
|
|||||||||
|
Diluted
|
56
|
|
48
|
|
47
|
|
47
|
|
46
|
|
|||||||||
|
Operating Statistics, Continuing Operations:
(3)
|
|||||||||||||||||||
|
Medical care ratio
(4)
|
89.1
|
%
|
89.5
|
%
|
87.1
|
%
|
90.0
|
%
|
87.0
|
%
|
|||||||||
|
General and administrative expense ratio
(5)
|
8.1
|
%
|
7.9
|
%
|
10.1
|
%
|
8.8
|
%
|
8.7
|
%
|
|||||||||
|
Net profit margin
(5)
|
1.0
|
%
|
0.6
|
%
|
0.7
|
%
|
0.2
|
%
|
1.7
|
%
|
|||||||||
|
Members
(6)
|
3,533,000
|
|
2,623,000
|
|
1,931,000
|
|
1,797,000
|
|
1,618,000
|
|
|||||||||
38
|
|
December 31,
|
||||||||||||||||||
|
|
2015
|
2014
|
2013
|
2012
|
2011
|
||||||||||||||
|
Balance Sheet Data:
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
2,329
|
|
$
|
1,539
|
|
$
|
936
|
|
$
|
796
|
|
$
|
494
|
|
||||
|
Total assets
(7)
|
6,576
|
|
4,435
|
|
2,988
|
|
1,901
|
|
1,631
|
|
|||||||||
|
Long-term debt, including current maturities
(7) (8)
|
1,609
|
|
887
|
|
770
|
|
261
|
|
216
|
|
|||||||||
|
Total liabilities
(7)
|
5,019
|
|
3,425
|
|
2,095
|
|
1,119
|
|
876
|
|
|||||||||
|
Stockholders’ equity
|
1,557
|
|
1,010
|
|
893
|
|
782
|
|
755
|
|
|||||||||
|
(1)
|
Service revenue and cost of service revenue include revenue and costs generated by our Pathways subsidiary, which was acquired on November 1, 2015.
|
|
(2)
|
Income (loss) from discontinued operations is presented net of income tax expense (benefit), which was insignificant in 2015 and 2014, and $(10), and $(1), and $1, in 2013, 2012 and 2011, respectively.
|
|
(3)
|
Source data for calculations in thousands.
|
|
(4)
|
Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a key operating indicator used to measure our performance in delivering efficient and cost effective health care services. Changes in the medical care ratio from period to period result from changes in Medicaid funding by the states, utilization of medical services, our ability to effectively manage costs, contract changes, and changes in accounting estimates related to incurred but not paid claims. See Item 7 in this Form 10-K, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," for further discussion.
|
|
(5)
|
Computed as a percentage of total revenue.
|
|
(6)
|
Number of members at end of period.
|
|
(7)
|
We have reclassified certain amounts in prior periods to conform to the 2015 presentation. Specifically, deferred issuance costs relating to our senior notes are now reported as a direct deduction of the applicable debt liabilities. Additionally, aggregate deferred income taxes are now reported as non-current. Both reclassifications are a result of recently adopted accounting pronouncements. See Item 8 in this Form 10-K, "Financial Statements and Supplementary Data," for further discussion.
|
|
(8)
|
Includes senior notes, lease financing obligations, and other long-term debt.
|
39
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with Items 6 and 8 of this Form 10-K, Selected Financial Data, and Financial Statements and Supplementary Data, respectively. This discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth in Part I, Item 1A of this Form 10-K, Risk Factors.
Overview
Molina Healthcare, Inc. provides quality health care to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program.
We have
three
reportable segments. These segments include our Health Plans and Molina Medicaid Solutions segments, which comprise the vast majority of our operations, and our Other segment. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015, which is reported in Other.
Our Health Plans segment consists of health plans in
11
states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of
December 31, 2015
, these health plans served over
3.5 million
members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health Insurance Marketplace members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
Refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
2
, "
Significant Accounting Policies
," for a comprehensive description of our Health Plans and Molina Medicaid Solutions revenues and costs, and how we recognize them.We report revenue and costs attributable to Pathways as service revenue and cost of service revenue, respectively.
Beginning in 2013, after our Medicaid contract with the state of Missouri expired, we have reported the results relating to the Missouri health plan as discontinued operations for all periods presented.
The following discussion and analysis, with the exception of cash flow information, is presented in the context of continuing operations unless otherwise noted.
Fiscal Year 2015 Financial Highlights
|
•
|
Earnings per diluted share nearly doubled in 2015 when compared with 2014, while net income more than doubled. Substantial increases in revenue, along with improved operating efficiency, were responsible for our improved performance. Our after-tax margin increased to
1.0%
in 2015 from
0.6%
in 2014.
|
|
•
|
Strong enrollment growth across all of our programs, combined with a
5%
increase in premium revenue per member, generated over
$4 billion
, or
47%
, more premium revenue in
2015
compared with
2014
.
|
|
•
|
Medical care costs as a percentage of premium revenue (the "medical care ratio") decreased to
89.1%
in
2015
, from
89.5%
in
2014
.
|
|
•
|
General and administrative expenses as a percentage of revenue (the "general and administrative expense ratio") increased slightly to
8.1%
in
2015
, versus
7.9%
in
2014
, primarily as a result of dramatic growth in our Marketplace membership.
Excluding Marketplace broker and exchange fees from both years, the general and administrative expense ratio decreased to 7.5% in 2015 from 7.9% in 2014.
|
|
•
|
Debt and equity financing transactions generated net cash of
$1,062 million
.
|
40
Market Updates—Health Plans
Medicare-Medicaid Plans
.
To coordinate care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to these individuals in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). We operate MMPs in six states. Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the first quarter of 2015; and our MMP in Michigan offered coverage beginning in the second quarter of 2015. At
December 31, 2015
, our membership included approximately
51,000
integrated MMP members.
Florida.
On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to operation of the Medicaid business, of Integral Health Plan, Inc.
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Preferred Medical Plan, Inc.
Illinois.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. We assumed approximately
58,000
Medicaid members in this acquisition.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Loyola Physician Partners, LLC. We assumed approximately
21,000
Medicaid members in this acquisition.
On November 30, 2015, we announced that our Illinois health plan entered into an agreement to assume the membership and certain Medicaid assets of Better Health Network, LLC (Better Health). As of November 30, 2015, Better Health served approximately
40,000
members in the Medicaid Family Health program in Cook County. Subject to regulatory approvals and the satisfaction of other closing conditions, we expect the transaction to close during the first half of 2016.
Michigan.
On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. We assumed approximately
81,000
Medicaid and MIChild members in this acquisition.
In October 2015, the Michigan Department of Health and Human Services announced that Molina Healthcare of Michigan was recommended to serve the state's Medicaid members under Michigan's Comprehensive Health Plan, which commenced on January 1, 2016. The new contract has a
five
-year term with
three
one
-year extensions, and covers Regions 2 through 6, and 8 through 10 of the state, representing an expansion into
18
additional counties compared with the previous Michigan Medicaid contract.
On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and certain provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc.
Puerto Rico.
Effective April 1, 2015, our Puerto Rico health plan served its first members. As of
December 31, 2015
, our Puerto Rico plan enrollment amounted to approximately
348,000
members.
41
Washington.
In November 2015, our Washington health plan was selected by the Washington State Health Care Authority (HCA) to negotiate and enter into managed care contracts for the Southwest region of the state's Apple Health Fully Integrated Managed Care Program. The start date is scheduled for April 1, 2016.
On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid membership and certain Medicaid assets of Columbia United Providers, Inc. We assumed approximately
57,000
Medicaid members in this acquisition.
Market Update—Molina Medicaid Solutions
New Jersey.
On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate that state's new Medicaid management information system (MMIS). The new contract was effective May 1, 2015, and has a term of
10
years with
three
one
-year renewal options. Molina Medicaid Solutions was the state's incumbent MMIS provider, and was awarded the new contract as a result of Molina Medicaid Solutions' submission in response to the state of New Jersey's request for proposals.
Market Update—Other
Pathways.
On
November 1, 2015, we acquired all of the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways), formerly known as Providence Human Services, LLC. Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia.
42
Financial Performance Summary
The following table summarizes our financial and operating performance from continuing operations for the years ended
December 31, 2015
,
2014
, and
2013
. All dollar amounts are presented in millions, except per-share data.
|
Year Ended
|
Year Ended
|
||||||||||||||||||||
|
December 31,
|
% Change
|
December 31,
|
% Change
|
||||||||||||||||||
|
|
2015
|
2014
|
2014
|
2013
|
|||||||||||||||||
|
Revenue:
|
|||||||||||||||||||||
|
Premium revenue
|
$
|
13,241
|
|
$
|
9,023
|
|
46.7
|
%
|
$
|
9,023
|
|
$
|
6,179
|
|
46.0
|
%
|
|||||
|
Service revenue
|
253
|
|
210
|
|
20.5
|
|
210
|
|
205
|
|
2.4
|
|
|||||||||
|
Premium tax revenue
|
397
|
|
294
|
|
35.0
|
|
294
|
|
172
|
|
70.9
|
|
|||||||||
|
Health insurer fee revenue
|
264
|
|
120
|
|
120.0
|
|
120
|
|
—
|
|
—
|
|
|||||||||
|
Investment income
|
18
|
|
8
|
|
125.0
|
|
8
|
|
7
|
|
14.3
|
|
|||||||||
|
Other revenue
|
5
|
|
12
|
|
(58.3
|
)
|
12
|
|
26
|
|
(53.8
|
)
|
|||||||||
|
Total revenue
|
14,178
|
|
9,667
|
|
46.7
|
|
9,667
|
|
6,589
|
|
46.7
|
|
|||||||||
|
Operating expenses:
|
|||||||||||||||||||||
|
Medical care costs
|
11,794
|
|
8,076
|
|
46.0
|
|
8,076
|
|
5,380
|
|
50.1
|
|
|||||||||
|
Cost of service revenue
|
193
|
|
157
|
|
22.9
|
|
157
|
|
161
|
|
(2.5
|
)
|
|||||||||
|
General and administrative expenses
|
1,146
|
|
765
|
|
49.8
|
|
765
|
|
666
|
|
14.9
|
|
|||||||||
|
Premium tax expenses
|
397
|
|
294
|
|
35.0
|
|
294
|
|
172
|
|
70.9
|
|
|||||||||
|
Health insurer fee expenses
|
157
|
|
89
|
|
76.4
|
|
89
|
|
—
|
|
—
|
|
|||||||||
|
Depreciation and amortization
|
104
|
|
93
|
|
11.8
|
|
93
|
|
73
|
|
27.4
|
|
|||||||||
|
Total operating expenses
|
13,791
|
|
9,474
|
|
45.6
|
|
9,474
|
|
6,452
|
|
46.8
|
|
|||||||||
|
Operating income
|
387
|
|
193
|
|
100.5
|
|
193
|
|
137
|
|
40.9
|
|
|||||||||
|
Other expenses, net:
|
|||||||||||||||||||||
|
Interest expense
|
66
|
|
57
|
|
15.8
|
|
57
|
|
52
|
|
9.6
|
|
|||||||||
|
Other (income) expense, net
|
(1
|
)
|
1
|
|
(200.0
|
)
|
1
|
|
4
|
|
(75.0
|
)
|
|||||||||
|
Total other expenses, net
|
65
|
|
58
|
|
12.1
|
|
58
|
|
56
|
|
3.6
|
|
|||||||||
|
Income from continuing operations before income tax expense
|
322
|
|
135
|
|
138.5
|
|
135
|
|
81
|
|
66.7
|
|
|||||||||
|
Income tax expense
|
179
|
|
73
|
|
145.2
|
|
73
|
|
36
|
|
102.8
|
|
|||||||||
|
Income from continuing operations
|
$
|
143
|
|
$
|
62
|
|
130.6
|
%
|
$
|
62
|
|
$
|
45
|
|
37.8
|
%
|
|||||
|
Diluted net income per share, continuing operations (1)
|
$
|
2.58
|
|
$
|
1.30
|
|
98.5
|
%
|
$
|
1.30
|
|
$
|
0.96
|
|
35.4
|
%
|
|||||
|
Diluted weighted average shares outstanding
|
56
|
|
48
|
|
16.7
|
%
|
48
|
|
47
|
|
2.1
|
%
|
|||||||||
|
Non-GAAP Measures: (2)
|
|||||||||||||||||||||
|
Adjusted net income per share, continuing operations (1)(3)
|
$
|
3.11
|
|
$
|
1.93
|
|
61.1
|
%
|
$
|
1.93
|
|
$
|
1.55
|
|
24.5
|
%
|
|||||
|
EBITDA
|
$
|
508
|
|
$
|
305
|
|
66.6
|
%
|
$
|
305
|
|
$
|
225
|
|
35.6
|
%
|
|||||
|
Operating Statistics: (1)
|
|||||||||||||||||||||
|
Medical care ratio (4)
|
89.1
|
%
|
89.5
|
%
|
89.5
|
%
|
87.1
|
%
|
|||||||||||||
|
Service revenue ratio (5)
|
76.4
|
%
|
74.6
|
%
|
74.6
|
%
|
79.0
|
%
|
|||||||||||||
|
General and administrative expense ratio (6)
|
8.1
|
%
|
7.9
|
%
|
7.9
|
%
|
10.1
|
%
|
|||||||||||||
|
Premium tax ratio (4)
|
2.9
|
%
|
3.2
|
%
|
3.2
|
%
|
2.7
|
%
|
|||||||||||||
|
Effective tax rate
|
55.5
|
%
|
53.8
|
%
|
53.8
|
%
|
44.8
|
%
|
|||||||||||||
|
Net profit margin (6)
|
1.0
|
%
|
0.6
|
%
|
0.6
|
%
|
0.7
|
%
|
|||||||||||||
____________
|
(1)
|
Source data for calculations of per-share amounts and ratios in thousands.
|
|
(2)
|
See reconciliation of non-GAAP financial measures to U.S. GAAP below.
|
|
(3)
|
Effective January 1, 2016, we will no longer exclude amortization of convertible notes and lease financing obligations from our presentation of adjusted net income and adjusted net income per share. We made this change because various capital transactions that we completed in 2015 reduced our relative reliance on convertible notes and lease financing as sources of capital. We believe that this change will enhance the comparability of these non-GAAP measures with the corresponding non-GAAP measures used by our competitors.
|
|
(4)
|
Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium tax expenses as a percentage of premium revenue plus premium tax revenue.
|
|
(5)
|
Service revenue ratio represents cost of service revenue as a percentage of service revenue.
|
|
(6)
|
Computed as a percentage of total revenue.
|
43
The following tables set forth our Health Plans segment membership as of the dates indicated:
|
|
As of December 31,
|
|||||||
|
|
2015
|
2014
|
2013
|
|||||
|
Ending Membership by Health Plan:
|
||||||||
|
California
|
620,000
|
|
531,000
|
|
368,000
|
|
||
|
Florida
|
440,000
|
|
164,000
|
|
89,000
|
|
||
|
Illinois
|
98,000
|
|
100,000
|
|
4,000
|
|
||
|
Michigan
|
328,000
|
|
242,000
|
|
213,000
|
|
||
|
New Mexico
|
231,000
|
|
212,000
|
|
168,000
|
|
||
|
Ohio
|
327,000
|
|
347,000
|
|
255,000
|
|
||
|
Puerto Rico (1)
|
348,000
|
|
—
|
|
—
|
|
||
|
South Carolina (2)
|
99,000
|
|
118,000
|
|
—
|
|
||
|
Texas
|
260,000
|
|
245,000
|
|
252,000
|
|
||
|
Utah
|
102,000
|
|
83,000
|
|
86,000
|
|
||
|
Washington
|
582,000
|
|
497,000
|
|
403,000
|
|
||
|
Wisconsin
|
98,000
|
|
84,000
|
|
93,000
|
|
||
|
3,533,000
|
|
2,623,000
|
|
1,931,000
|
|
|||
|
Ending Membership by Program:
|
||||||||
|
Temporary Assistance for Needy Families (TANF), CHIP (3)
|
2,312,000
|
|
1,809,000
|
|
1,603,000
|
|
||
|
Medicaid Expansion (4)
|
557,000
|
|
385,000
|
|
—
|
|
||
|
Aged, Blind or Disabled (ABD)
|
366,000
|
|
347,000
|
|
289,000
|
|
||
|
Marketplace (4)
|
205,000
|
|
15,000
|
|
—
|
|
||
|
Medicare-Medicaid Plan (MMP) – Integrated (5)
|
51,000
|
|
18,000
|
|
—
|
|
||
|
Medicare Special Needs Plans (Medicare)
|
42,000
|
|
49,000
|
|
39,000
|
|
||
|
3,533,000
|
|
2,623,000
|
|
1,931,000
|
|
|||
|
(1)
|
Our Puerto Rico health plan began serving members effective April 1, 2015.
|
|
(2)
|
Our South Carolina health plan began serving members under the state of South Carolina’s new full-risk Medicaid managed care program effective January 1, 2014.
|
|
(3)
|
CHIP stands for Children's Health Insurance Program.
|
|
(4)
|
Medicaid expansion membership phased in, and the Marketplace became available for consumers to access coverage, beginning January 1, 2014.
|
|
(5)
|
MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.
|
Non-GAAP Financial Measures
We use the following non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance and the performance of other companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not substitutes for or superior to, GAAP measures.
The first of these non-GAAP measures is earnings before interest, taxes, depreciation and amortization, or EBITDA. The following table reconciles net income, which we believe to be the most comparable GAAP measure, to EBITDA. The increases in EBITDA for both 2015 over 2014, and 2014 over 2013, were due primarily to increased net income and income taxes. The increases for both of these items are described below in Results of Operations, in the components of net income.
44
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
|
Adjustments:
|
|||||||||||
|
Depreciation, and amortization of intangible assets and capitalized software
|
120
|
|
114
|
|
94
|
|
|||||
|
Interest expense
|
66
|
|
57
|
|
52
|
|
|||||
|
Income tax expense
|
179
|
|
72
|
|
26
|
|
|||||
|
EBITDA
|
$
|
508
|
|
$
|
305
|
|
$
|
225
|
|
||
The second of these non-GAAP measures is adjusted net income and adjusted net income per diluted share, continuing operations. The following tables reconcile net income and net income per diluted share from continuing operations, which we believe to be the most comparable GAAP measures, to adjusted net income and adjusted net income per diluted share, continuing operations. The increases in adjusted net income and adjusted net income per diluted share for both 2015 over 2014, and 2014 over 2013, were due primarily to increased net income. Such increases are described below in Results of Operations, in the components of net income.
|
Year Ended December 31,
|
|||||||||||||||||||||||
|
2015
|
2014
|
2013
|
|||||||||||||||||||||
|
(In millions, except diluted per-share amounts)
|
|||||||||||||||||||||||
|
Net income, continuing operations
|
$
|
143
|
|
$
|
2.58
|
|
$
|
62
|
|
$
|
1.30
|
|
$
|
45
|
|
$
|
0.96
|
|
|||||
|
Adjustments, net of tax:
|
|||||||||||||||||||||||
|
Amortization of convertible senior notes and lease financing obligations
|
19
|
|
0.33
|
|
17
|
|
0.36
|
|
14
|
|
0.31
|
|
|||||||||||
|
Amortization of intangible assets
|
11
|
|
0.20
|
|
13
|
|
0.27
|
|
13
|
|
0.28
|
|
|||||||||||
|
Adjusted net income per diluted share, continuing operations (1)(2)
|
$
|
173
|
|
$
|
3.11
|
|
$
|
92
|
|
$
|
1.93
|
|
$
|
72
|
|
$
|
1.55
|
|
|||||
________________________
|
(1)
|
Beginning in the first quarter of 2015, we revised the calculation of adjusted net income, continuing operations. We no longer subtract "depreciation, and amortization of capitalized software" and "share-based compensation" from net income, continuing operations to arrive at adjusted net income, continuing operations. We have made this change to better reflect how we evaluate financial performance, make financing and business decisions, and forecast and plans for future periods. All periods presented conform to this presentation.
|
|
(2)
|
Effective January 1, 2016, we will no longer exclude amortization of convertible notes and lease financing obligations from our presentation of adjusted net income and adjusted net income per share. We made this change because various capital transactions that we completed in 2015 reduced our relative reliance on convertible notes and lease financing as sources of capital. We believe that this change will enhance the comparability of these non-GAAP measures with the corresponding non-GAAP measures used by our competitors.
|
Results of Operations, Continuing Operations
As described above, as of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015.
The following table presents gross margin as the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as "Medical margin," and for our Molina Medicaid Solutions and Other segments, as "Service margin." Medical margin represents the actual dollars earned by the Health Plans segment after medical costs are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue. One of the key metrics used to assess the performance of the Health Plans segment is the medical care ratio; therefore, the underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service margin is equal to service revenue minus cost of service revenue.
45
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Health Plans:
|
|||||||||||
|
Premium revenue
|
$
|
13,241
|
|
$
|
9,023
|
|
$
|
6,179
|
|
||
|
Less: medical care costs
|
11,794
|
|
8,076
|
|
5,380
|
|
|||||
|
Medical margin
|
$
|
1,447
|
|
$
|
947
|
|
$
|
799
|
|
||
|
Molina Medicaid Solutions:
|
|||||||||||
|
Service revenue
|
$
|
195
|
|
$
|
210
|
|
$
|
205
|
|
||
|
Less: cost of service revenue
|
140
|
|
157
|
|
161
|
|
|||||
|
Service margin
|
$
|
55
|
|
$
|
53
|
|
$
|
44
|
|
||
|
Other:
|
|||||||||||
|
Service revenue
|
$
|
58
|
|
$
|
—
|
|
$
|
—
|
|
||
|
Less: cost of service revenue
|
53
|
|
—
|
|
—
|
|
|||||
|
Service margin
|
$
|
5
|
|
$
|
—
|
|
$
|
—
|
|
||
Health Plans Segment
Premium Revenue.
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, and, to a lesser degree, from Medicare contracts entered into with the Centers for Medicare and Medicaid Services (CMS), a federal government agency.
2015 Compared with 2014
In 2015, a
42%
increase in membership and a
5%
increase in revenue PMPM resulted in increased premium revenue of
47%
, or over
$4.2 billion
, when compared with
2014
.
Enrollment growth was primarily due to increased Medicaid expansion, Marketplace and integrated Medicare-Medicaid Plan (MMP) enrollment, and the start-up of the Puerto Rico health plan in April 2015.
2014 Compared with 2013
In
2014
, premium revenue increased
46%
over
2013
, due to a
28%
increase in membership, and an
18%
increase in revenue PMPM.
Enrollment growth was primarily due to Medicaid expansion program membership added as a result of the Affordable Care Act, and membership added at our South Carolina and Illinois health plans. Higher PMPM premium revenue was primarily the result of the inclusion of long-term services and supports (LTSS) benefits in various Medicaid managed care programs in California, Florida, Illinois, New Mexico, and Ohio.
Premiums by Program.
The amount of the premiums paid to us may vary substantially between states and among various government programs. The following table sets forth the ranges of premiums paid to our state health plans by program, on a per-member per-month basis for the year ended
December 31, 2015
. The "Consolidated" column represents the weighted-average amounts for our total membership by program.
|
PMPM Premiums
|
|||||||||||
|
Low
|
High
|
Consolidated
|
|||||||||
|
TANF, CHIP
|
$
|
120.00
|
|
$
|
280.00
|
|
$
|
180.00
|
|
||
|
Medicaid Expansion
|
310.00
|
|
500.00
|
|
410.00
|
|
|||||
|
ABD
|
470.00
|
|
1,470.00
|
|
970.00
|
|
|||||
|
Marketplace
|
180.00
|
|
400.00
|
|
250.00
|
|
|||||
|
MMP – Integrated
|
1,170.00
|
|
3,220.00
|
|
2,030.00
|
|
|||||
|
Medicare
|
900.00
|
|
1,110.00
|
|
1,040.00
|
|
|||||
46
Medical Care Costs.
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 Estimates" below, and Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
11
, "
Medical Claims and Benefits Payable
," for further information on how we estimate such liabilities.
2015 Compared with 2014
Our medical margin increased nearly
53%
in
2015
over
2014
, and our consolidated medical care ratio
decreased
to
89.1%
in
2015
from
89.5%
in
2014
.
2014 Compared with 2013
Although medical margin increased nearly 20% in 2014 over 2013, our consolidated medical care ratio increased to 89.5% in 2014 from 87.1% in 2013.
The medical care ratio increased substantially in 2014 as a result of three developments:
|
•
|
Much of our revenue growth has come from participation in Medicaid programs covering LTSS. Percentage profit margins for LTSS benefits are generally lower than percentage profit margins for acute medical benefits.
|
|
•
|
Increases to our base premiums in recent years have not kept pace with medical cost trends.
|
|
•
|
Lack of coordination in the design of profit caps and medical cost floors in some of our state Medicaid contracts is resulting in counterproductive outcomes. In some instances, givebacks due to profitable performance in one program cannot be offset against losses in other programs.
|
Medical Care Costs by Category.
The following table provides the details of consolidated medical care costs by category for the periods indicated (dollars in millions except PMPM amounts):
|
Year Ended December 31,
|
||||||||||||||||||||||||||||||||
|
2015
|
2014
|
2013
|
||||||||||||||||||||||||||||||
|
Amount
|
PMPM
|
% of
Total
|
Amount
|
PMPM
|
% of
Total
|
Amount
|
PMPM
|
% of
Total
|
||||||||||||||||||||||||
|
Fee for service
|
$
|
8,572
|
|
$
|
218.35
|
|
72.7
|
%
|
$
|
5,673
|
|
$
|
202.87
|
|
70.2
|
%
|
$
|
3,612
|
|
$
|
160.43
|
|
67.1
|
%
|
||||||||
|
Pharmacy
|
1,610
|
|
41.01
|
|
13.7
|
|
1,273
|
|
45.54
|
|
15.8
|
|
935
|
|
41.54
|
|
17.4
|
|
||||||||||||||
|
Capitation
|
982
|
|
25.02
|
|
8.3
|
|
748
|
|
26.77
|
|
9.3
|
|
604
|
|
26.83
|
|
11.2
|
|
||||||||||||||
|
Direct delivery
|
128
|
|
3.26
|
|
1.1
|
|
96
|
|
3.44
|
|
1.2
|
|
48
|
|
2.14
|
|
0.9
|
|
||||||||||||||
|
Other
|
502
|
|
12.79
|
|
4.2
|
|
286
|
|
10.22
|
|
3.5
|
|
181
|
|
8.05
|
|
3.4
|
|
||||||||||||||
|
$
|
11,794
|
|
$
|
300.43
|
|
100.0
|
%
|
$
|
8,076
|
|
$
|
288.84
|
|
100.0
|
%
|
$
|
5,380
|
|
$
|
238.99
|
|
100.0
|
%
|
|||||||||
Financial Performance by Program.
The following table presents the components of premium revenue and medical care costs by program.
|
Year Ended December 31, 2015 (1)
|
|||||||||||||||||||||||||
|
Member
Months
(2)
|
Premium Revenue
|
Medical Care Costs
|
MCR
(3)
|
Medical Margin
|
|||||||||||||||||||||
|
Total
|
PMPM
|
Total
|
PMPM
|
||||||||||||||||||||||
|
TANF and CHIP
|
25.5
|
|
$
|
4,483
|
|
$
|
175.64
|
|
$
|
4,122
|
|
$
|
161.50
|
|
92.0
|
%
|
$
|
361
|
|
||||||
|
Medicaid Expansion
|
5.9
|
|
2,389
|
|
408.51
|
|
1,931
|
|
330.18
|
|
80.8
|
|
458
|
|
|||||||||||
|
ABD
|
4.3
|
|
4,124
|
|
966.83
|
|
3,784
|
|
887.27
|
|
91.8
|
|
340
|
|
|||||||||||
|
Marketplace
|
2.6
|
|
652
|
|
251.96
|
|
481
|
|
185.85
|
|
73.8
|
|
171
|
|
|||||||||||
|
MMP
|
0.5
|
|
1,063
|
|
2,034.51
|
|
974
|
|
1,863.93
|
|
91.6
|
|
89
|
|
|||||||||||
|
Medicare
|
0.5
|
|
530
|
|
1,038.15
|
|
502
|
|
982.50
|
|
94.6
|
|
28
|
|
|||||||||||
|
39.3
|
|
$
|
13,241
|
|
$
|
337.28
|
|
$
|
11,794
|
|
$
|
300.43
|
|
89.1
|
%
|
$
|
1,447
|
|
|||||||
_______________________
|
(1)
|
Year ended December 31, 2014 and 2013 data not presented due to lack of comparability.
|
|
(2)
|
A member month is defined as the aggregate of each month's ending membership for the period presented.
|
|
(3)
|
"MCR" represents medical costs as a percentage of premium revenue.
|
47
Financial Performance by State Health Plan.
The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):
|
Year Ended December 31, 2015
|
|||||||||||||||||||||||||
|
Member
Months
|
Premium Revenue
|
Medical Care Costs
|
MCR
|
Medical Margin
|
|||||||||||||||||||||
|
Total
|
PMPM
|
Total
|
PMPM
|
||||||||||||||||||||||
|
California
|
7.1
|
|
$
|
2,200
|
|
$
|
310.89
|
|
$
|
1,926
|
|
$
|
272.22
|
|
87.6
|
%
|
$
|
274
|
|
||||||
|
Florida
|
4.1
|
|
1,199
|
|
289.85
|
|
1,081
|
|
261.49
|
|
90.2
|
|
118
|
|
|||||||||||
|
Illinois
|
1.2
|
|
397
|
|
328.93
|
|
367
|
|
303.72
|
|
92.3
|
|
30
|
|
|||||||||||
|
Michigan
|
3.4
|
|
1,067
|
|
317.15
|
|
903
|
|
268.27
|
|
84.6
|
|
164
|
|
|||||||||||
|
New Mexico
|
2.8
|
|
1,237
|
|
446.27
|
|
1,106
|
|
398.98
|
|
89.4
|
|
131
|
|
|||||||||||
|
Ohio
|
4.1
|
|
2,034
|
|
499.34
|
|
1,718
|
|
421.61
|
|
84.4
|
|
316
|
|
|||||||||||
|
Puerto Rico
(1)
|
3.2
|
|
567
|
|
178.31
|
|
505
|
|
158.80
|
|
89.1
|
|
62
|
|
|||||||||||
|
South Carolina
(1)
|
1.3
|
|
348
|
|
267.25
|
|
278
|
|
213.30
|
|
79.8
|
|
70
|
|
|||||||||||
|
Texas
|
3.1
|
|
1,961
|
|
621.37
|
|
1,809
|
|
573.32
|
|
92.3
|
|
152
|
|
|||||||||||
|
Utah
|
1.2
|
|
331
|
|
286.22
|
|
300
|
|
259.32
|
|
90.6
|
|
31
|
|
|||||||||||
|
Washington
|
6.6
|
|
1,602
|
|
242.36
|
|
1,470
|
|
222.36
|
|
91.7
|
|
132
|
|
|||||||||||
|
Wisconsin
|
1.2
|
|
261
|
|
213.48
|
|
215
|
|
176.01
|
|
82.4
|
|
46
|
|
|||||||||||
|
Other
(2)
|
—
|
|
37
|
|
—
|
|
116
|
|
—
|
|
—
|
|
(79
|
)
|
|||||||||||
|
39.3
|
|
$
|
13,241
|
|
$
|
337.28
|
|
$
|
11,794
|
|
$
|
300.43
|
|
89.1
|
%
|
$
|
1,447
|
|
|||||||
|
Year Ended December 31, 2014
|
|||||||||||||||||||||||||
|
Member
Months
|
Premium Revenue
|
Medical Care Costs
|
MCR
|
Medical Margin
|
|||||||||||||||||||||
|
Total
|
PMPM
|
Total
|
PMPM
|
||||||||||||||||||||||
|
California
|
5.6
|
|
$
|
1,523
|
|
$
|
270.51
|
|
$
|
1,269
|
|
$
|
225.37
|
|
83.3
|
%
|
$
|
254
|
|
||||||
|
Florida
|
1.1
|
|
439
|
|
397.79
|
|
419
|
|
379.95
|
|
95.5
|
|
20
|
|
|||||||||||
|
Illinois
|
0.3
|
|
153
|
|
498.48
|
|
141
|
|
456.88
|
|
91.7
|
|
12
|
|
|||||||||||
|
Michigan
|
2.8
|
|
781
|
|
278.68
|
|
661
|
|
235.81
|
|
84.6
|
|
120
|
|
|||||||||||
|
New Mexico
|
2.5
|
|
1,076
|
|
435.17
|
|
996
|
|
402.92
|
|
92.6
|
|
80
|
|
|||||||||||
|
Ohio
|
3.7
|
|
1,553
|
|
425.47
|
|
1,335
|
|
365.87
|
|
86.0
|
|
218
|
|
|||||||||||
|
Puerto Rico
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
South Carolina
(1)
|
1.5
|
|
381
|
|
260.72
|
|
323
|
|
220.89
|
|
84.7
|
|
58
|
|
|||||||||||
|
Texas
|
3.0
|
|
1,318
|
|
442.32
|
|
1,197
|
|
401.81
|
|
90.8
|
|
121
|
|
|||||||||||
|
Utah
|
1.0
|
|
310
|
|
310.64
|
|
285
|
|
286.43
|
|
92.2
|
|
25
|
|
|||||||||||
|
Washington
|
5.5
|
|
1,305
|
|
236.27
|
|
1,219
|
|
220.75
|
|
93.4
|
|
86
|
|
|||||||||||
|
Wisconsin
|
1.0
|
|
156
|
|
150.87
|
|
136
|
|
130.91
|
|
86.8
|
|
20
|
|
|||||||||||
|
Other
(2)
|
—
|
|
28
|
|
—
|
|
95
|
|
—
|
|
—
|
|
(67
|
)
|
|||||||||||
|
28.0
|
|
$
|
9,023
|
|
$
|
322.68
|
|
$
|
8,076
|
|
$
|
288.84
|
|
89.5
|
%
|
$
|
947
|
|
|||||||
48
|
Year Ended December 31, 2013
|
|||||||||||||||||||||||||
|
Member
Months
|
Premium Revenue
|
Medical Care Costs
|
MCR
|
Medical Margin
|
|||||||||||||||||||||
|
Total
|
PMPM
|
Total
|
PMPM
|
||||||||||||||||||||||
|
California
|
4.2
|
|
$
|
750
|
|
$
|
177.10
|
|
$
|
667
|
|
$
|
157.46
|
|
88.9
|
%
|
$
|
83
|
|
||||||
|
Florida
|
1.0
|
|
265
|
|
272.23
|
|
231
|
|
237.57
|
|
87.3
|
|
34
|
|
|||||||||||
|
Illinois
|
—
|
|
8
|
|
1,201.34
|
|
8
|
|
1,164.10
|
|
96.9
|
|
—
|
|
|||||||||||
|
Michigan
|
2.6
|
|
676
|
|
261.91
|
|
571
|
|
221.09
|
|
84.4
|
|
105
|
|
|||||||||||
|
New Mexico
|
1.5
|
|
447
|
|
299.36
|
|
384
|
|
257.62
|
|
86.1
|
|
63
|
|
|||||||||||
|
Ohio
|
3.0
|
|
1,099
|
|
365.44
|
|
925
|
|
307.53
|
|
84.2
|
|
174
|
|
|||||||||||
|
Puerto Rico
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
South Carolina
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||
|
Texas
|
3.2
|
|
1,291
|
|
406.27
|
|
1,115
|
|
350.84
|
|
86.4
|
|
176
|
|
|||||||||||
|
Utah
|
1.0
|
|
311
|
|
299.05
|
|
259
|
|
249.51
|
|
83.4
|
|
52
|
|
|||||||||||
|
Washington
|
4.9
|
|
1,168
|
|
236.47
|
|
1,028
|
|
208.10
|
|
88.0
|
|
140
|
|
|||||||||||
|
Wisconsin
|
1.1
|
|
143
|
|
135.40
|
|
114
|
|
107.91
|
|
79.7
|
|
29
|
|
|||||||||||
|
Other
(2)
|
—
|
|
21
|
|
—
|
|
78
|
|
—
|
|
—
|
|
(57
|
)
|
|||||||||||
|
22.5
|
|
$
|
6,179
|
|
$
|
274.48
|
|
$
|
5,380
|
|
$
|
238.99
|
|
87.1
|
%
|
$
|
799
|
|
|||||||
______________________________
|
(1)
|
Our Puerto Rico health plan began serving members effective April 1, 2015. Our South Carolina health plan began serving members under the state of South Carolina’s new full-risk Medicaid managed care program effective January 1, 2014.
|
|
(2)
|
"Other" medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.
|
Individual Health Plan Analysis
2015 Compared with 2014
California.
Premium revenue grew
$677 million
, or
44%
, in
2015
compared with
2014
, the result of higher membership. Overall, enrollment on a member-month basis increased
31%
in
2015
compared with
2014
. Increased premium revenue was also driven by a
15%
increase in premium revenue PMPM, which was the result of the higher relative premium revenue PMPM among those programs experiencing enrollment growth (Medicaid expansion and MMP); and the addition of long-term care benefits to some of the California health plan's Medicaid membership. The medical care ratio
increased
to
87.6%
in
2015
, from
83.3%
in
2014
. During 2014, the plan benefited from the recognition of approximately $23 million in premium revenue and medical margin that related to 2013, as a result of certain programmatic changes implemented by the state of California. Absent this benefit, the medical care ratio of the California plan would have been 84.6% in 2014.
Florida.
Premium revenue grew to
$1,199 million
in
2015
, from
$439 million
in
2014
, due to increased Marketplace membership. The medical care ratio
decreased
to
90.2%
in
2015
, from
95.5%
in
2014
, due to the lower medical care ratio of the Marketplace membership more than offsetting an increase in the medical care ratio for the Medicaid program.
Illinois.
Premium revenue grew to
$397 million
in
2015
, from
$153 million
in
2014
, due to significant membership growth in late 2014. The medical care ratio
increased
to
92.3%
in
2015
, from
91.7%
in
2014
.
Michigan.
Premium revenue grew
$286 million
, or
37%
, in
2015
compared with
2014
, due to increased Medicaid expansion membership and the startup of the MMP program. The medical care ratio of
84.6%
for
2015
was unchanged from
2014
.
New Mexico.
Premium revenue grew
$161 million
, or
15%
, in
2015
compared with
2014
, due to substantial increases in membership in all Medicaid programs. The medical care ratio
decreased
to
89.4%
in
2015
, from
92.6%
in
2014
, due to improved profitability for the ABD and Medicaid expansion programs.
Ohio.
Premium revenue grew
$481 million
, or
31%
, in
2015
compared with
2014
, due to growth in membership within the Medicaid expansion, and MMP programs. The medical care ratio
decreased
to
84.4%
in
2015
, from
86.0%
in
2014
, due to lower medical care ratios in these newer programs, as well as ABD.
Puerto Rico.
The Puerto Rico health plan began serving members on April 1, 2015, and finished the year with a medical care ratio of
89.1%
. See further discussion below, under
Financial Condition
, regarding the Commonwealth of Puerto Rico.
49
South Carolina.
The medical care ratio
decreased
to
79.8%
in
2015
, from
84.7%
in
2014
. We believe that medical care ratios below 80% are not sustainable over time, and that the performance of the South Carolina health plan in
2014
is more representative of its likely long-term performance than are its financial results for
2015
.
Texas.
Premium revenue grew
$643 million
, or
49%
, in
2015
compared with
2014
, primarily due to the addition of ABD members receiving nursing facility benefits effective March 1, 2015, and the start-up of the Texas MMP program on that date. The medical care ratio
increased
to
92.3%
in
2015
, from
90.8%
in
2014
, primarily as a result of lower percentage margins on premiums to support nursing home services. As previously disclosed, we are unable to recognize certain quality related revenue in Texas because we do not have historical information, clear definitions, and clarity around minimum standards.
Utah.
The medical care ratio of the Utah health plan
decreased
to
90.6%
in
2015
, from
92.2%
in
2014
, primarily due to improved financial performance of the plan's Medicare program.
Washington.
Premium revenue grew
$297 million
, or
23%
, in
2015
when compared with
2014
, primarily due to growth in Medicaid expansion membership. The medical care ratio
decreased
to
91.7%
in
2015
, from
93.4%
in
2014
, as a lower medical care ratio for the ABD program more than offset a higher medical care ratio in the TANF and Medicaid expansion programs.
Wisconsin.
Premium revenue grew
$105 million
, or
67%
, in
2015
compared with
2014
as a result of increased Marketplace enrollment. The medical care ratio
decreased
to
82.4%
in
2015
, from
86.8%
in
2014
, primarily as a result of improvement in the financial performance of the Wisconsin health plan's Medicaid program.
2014 Compared with 2013
California.
The medical care ratio for the California health plan
decreased
significantly to
83.3%
in
2014
from
88.9%
in
2013
. Additionally, medical margin improved $171 million when compared with
2013
. This improvement was the result of higher enrollment, primarily due to the addition of approximately 107,000 Medicaid expansion members; and premium increases effective October 1, 2013 (2.5%), and July 1, 2014 (5.5%). During 2014, the plan benefited from the recognition of approximately $23 million in premium revenue and medical margin that related to 2013 as a result of certain programmatic changes implemented by the state of California. In 2013, the plan recognized approximately $32 million of premium revenue related to 2012 and earlier years as a result of retroactive rate increases from the state of California. The plan served its first MMP members in 2014.
Florida.
Due to the re-procurement undertaken by the Florida Agency for Health Care Administration starting in 2014, the Florida health plan transitioned many of its members to other health plans in the second quarter of 2014, and then added approximately 105,000 members in the second half of 2014, both from the addition of new service areas and through acquisitions. Although revenue increased approximately 66% at the plan for the year ended December 31, 2014, when compared with 2013, profitability fell in 2014. The higher medical care costs were the result of 1) the assumption of risk for LTSS benefits for certain members effective December 2013 (as noted above percentage profit margins for LTSS benefits are generally less than those for other benefits); and 2) our inability to recognize revenue related to a rate increase effective September 1, 2014, as a result of those rates not being finalized prior to year end.
Illinois.
The medical care ratio for the Illinois health plan decreased to
91.7%
in
2014
, from
96.9%
in
2013
. The plan experienced significant growth in 2014; enrollment increased approximately 96,000 members overall, with 78,000 members added in the fourth quarter alone. This growth occurred primarily within the traditional TANF program, and to a lesser degree within the Medicaid expansion program. The Illinois health plan served its first MMP members in 2014.
Michigan.
The medical care ratio of the Michigan health plan was consistent year over year, at
84.6%
in
2014
, compared with
84.4%
in
2013
.
New Mexico.
Premium revenue at the New Mexico health plan increased 141% for 2014 compared with 2013, primarily as a result of the addition of Medicaid behavioral health and LTSS benefits effective January 1, 2014, and the addition of approximately 54,000 Medicaid expansion members during the course of 2014. The medical care ratio of the plan
increased
to
92.6%
in
2014
, from
86.1%
in
2013
. The higher medical care ratio was the result of: 1) the assumption of risk for LTSS benefits effective January 1, 2014; and 2) premium rates effective January 1, 2014 that did not keep pace with the increase in medical costs in 2014.
Ohio.
The medical care ratio of the Ohio health plan
increased
to
86.0%
in
2014
, from
84.2%
in
2013
, primarily due to the increase in Medicaid expansion enrollment (which is incurring a medical care ratio slightly in excess of the plan's traditional experience), and the initiation of the Ohio MMP.
South Carolina.
The
South Carolina health plan began serving members on January 1, 2014, and finished the year with a medical care ratio of
84.7%
.
Texas.
Financial performance at the Texas health plan declined in
2014
, when compared with
2013
. The medical care ratio of the Texas health plan
increased
to
90.8%
in
2014
, from
86.4%
in
2013
. Our inability to recognize a portion of the plan's quality
50
revenue reduced income before taxes by approximately $26 million, or $0.33 per diluted share, for the year ended December 31, 2014. Approximately $20 million of this amount is related to measures for which we lack sufficient information to calculate our compliance. Removing quality revenue and profit-sharing adjustments would have resulted in a medical care ratio of approximately 88% in 2014 and 86% in 2013.
Utah.
The medical care ratio of the Utah health plan
increased
to
92.2%
in
2014
, from
83.4%
in
2013
, due to deteriorating margins for both Medicaid and Medicare products.
Washington.
Financial performance at the Washington health plan declined in 2014, when compared with 2013.The medical care ratio of the plan
increased
to
93.4%
in
2014
, compared with
88.0%
in
2013
, primarily due to the high cost of medical services relative to revenue for members served under the state's program for ABD members. The plan added approximately 102,000 Medicaid expansion members in 2014. The plan received a blended rate increase of approximately 3% effective January 1, 2015. For the plan’s ABD membership, the rate increase effective January 1, 2015 was 11%.
Wisconsin.
The medical care ratio of the Wisconsin health plan
increased
to
86.8%
in
2014
, compared with
79.7%
in
2013
.
Molina Medicaid Solutions Segment
2015 Compared with 2014
Service revenue declined
$15 million
in 2015 compared with 2014, primarily due to an extension of the Idaho contract under which we are now amortizing certain deferred revenues over a longer term. Service margin was consistent between
2015
and
2014
, with
2015
showing a
$2 million
increase.
2014 Compared with 2013
Service margin improved
$9 million
for the year ended
December 31, 2014
, compared with
2013
, primarily the result of increased revenues due to higher Medicaid transaction volumes and lower cost of services overall.
Other Segment
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
The Other segment service margin for the year ended December 31, 2015, was insignificant.
Consolidated Expenses
General and Administrative Expenses.
General and administrative expenses increased slightly to
8.1%
of revenue in
2015
, from
7.9%
in
2014
, primarily the result of dramatic growth in our Marketplace membership.
Excluding Marketplace broker and exchange fees from both years, the general and administrative expense ratio decreased to 7.5% in 2015 from 7.9% in 2014.
General and administrative expenses decreased to
7.9%
of revenue in
2014
, from
10.1%
in
2013
. The significant decline in the ratio of general and administrative expenses relative to total revenue was primarily the result of improved leverage of fixed administrative expenses over higher total revenue.
Premium Tax Expense.
The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) decreased to
2.9%
in
2015
, from
3.2%
in
2014
. This decrease was primarily due to the current year increase in MMP revenues, which are not subject to premium taxes.
The premium tax ratio increased to
3.2%
in
2014
, from
2.7%
in
2013
. In June 2014, the state of Michigan instituted a 6% use tax on medical premiums. That state agreed to fund this tax through rate increases; as a result, we recorded approximately $30 million in additional premium revenue in 2014, as well as corresponding premium tax expense.
Health Insurer Fee (HIF) Revenue and Expenses.
For our Medicaid program, actuarial standards require that we be reimbursed by state Medicaid agencies for both the expense associated with the HIF and the absence of tax deductibility for that expense. During 2015, we secured full reimbursement for our expenses under the HIF (including the absence of tax deductibility) and as a result HIF revenue, as a percentage of premium revenue, increased to
2.0%
in
2015
, from
1.3%
in
2014
. During 2015, we recognized approximately $20 million of HIF premium revenue meant to reimburse us for the cost of HIF expense recognized in 2014. Health insurer fee expenses, as a percentage of premium revenue, were
1.2%
in
2015
, compared with
1.0%
in
2014
.
In addition, both HIF revenue and expenses increased over the prior year proportionally to the increase in the total HIF tax base, which is assessed to all insurers. This base increased to $11.3 billion in 2015, from $8.0 billion in 2014. Refer to "Liquidity and Capital Resources—Financial Condition" below, for further discussion of the HIF.
51
Depreciation and Amortization.
The following table presents all depreciation and amortization recorded in our consolidated statements of income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as cost of service revenue.
|
Year Ended December 31,
|
|||||||||||||
|
2015
|
2014
|
||||||||||||
|
Amount
|
% of Total
Revenue
|
Amount
|
% of Total
Revenue
|
||||||||||
|
(Dollar amounts in millions)
|
|||||||||||||
|
Depreciation, and amortization of capitalized software, continuing operations
|
$
|
87
|
|
0.6
|
%
|
$
|
75
|
|
0.8
|
%
|
|||
|
Amortization of intangible assets, continuing operations
|
17
|
|
0.1
|
|
18
|
|
0.2
|
|
|||||
|
Depreciation and amortization, continuing operations
|
104
|
|
0.7
|
|
93
|
|
1.0
|
|
|||||
|
Amortization recorded as reduction of service revenue
|
1
|
|
—
|
|
3
|
|
—
|
|
|||||
|
Amortization of capitalized software recorded as cost of service revenue
|
21
|
|
0.1
|
|
38
|
|
0.4
|
|
|||||
|
Depreciation and amortization reported in statement of cash flows
|
$
|
126
|
|
0.8
|
%
|
$
|
134
|
|
1.4
|
%
|
|||
|
Year Ended December 31,
|
|||||||||||||
|
2014
|
2013
|
||||||||||||
|
Amount
|
% of Total
Revenue
|
Amount
|
% of Total
Revenue
|
||||||||||
|
(Dollar amounts in millions)
|
|||||||||||||
|
Depreciation, and amortization of capitalized software, continuing operations
|
$
|
75
|
|
0.8
|
%
|
$
|
55
|
|
0.8
|
%
|
|||
|
Amortization of intangible assets, continuing operations
|
18
|
|
0.2
|
|
18
|
|
0.3
|
|
|||||
|
Depreciation and amortization, continuing operations
|
93
|
|
1.0
|
|
73
|
|
1.1
|
|
|||||
|
Amortization recorded as reduction of service revenue
|
3
|
|
—
|
|
3
|
|
—
|
|
|||||
|
Amortization of capitalized software recorded as cost of service revenue
|
38
|
|
0.4
|
|
18
|
|
0.3
|
|
|||||
|
Depreciation and amortization reported in statement of cash flows
|
$
|
134
|
|
1.4
|
%
|
$
|
94
|
|
1.4
|
%
|
|||
Interest Expense.
Interest expense increased to
$66 million
for the year ended
December 31, 2015
, compared with
$57 million
for the year ended
December 31, 2014
. The increase was due primarily to our issuance of
$700 million
aggregate principal amount of senior notes (5.375% Notes) due November 15, 2022, in the fourth quarter of 2015. For further details regarding this transaction, please refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
12
, "
Debt
."
Interest expense increased to
$57 million
for the year ended
December 31, 2014
, compared with
$52 million
for the year ended
December 31, 2013
. The increase was due primarily to our 3.75% Notes exchange transaction and related issuance of 1.625% Notes in 2014, and lease financing transactions executed in 2013. For further details regarding these transactions, please refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
12
, "
Debt
."
Interest expense includes non-cash interest expense relating to the amortization of the discount on our long-term debt obligations, which amounted to
$30 million
,
$27 million
and
$23 million
for the years ended
December 31, 2015
,
2014
, and
2013
, respectively.
We expect interest expense to continue to increase in the future due to interest on the 5.375% Notes which were issued in November 2015.
Income Taxes.
The provision for income taxes in continuing operations is recorded at an effective rate of
55.5%
for the year ended
December 31, 2015
, compared with
53.8%
for the year ended
December 31, 2014
. The effective tax rate for 2015 is higher than 2014 primarily as a result of certain discrete tax benefits recorded in 2014 that were not recurring in 2015.
The provision for income taxes in continuing operations was recorded at an effective rate of
53.8%
for the year ended
December 31, 2014
, compared with
44.8%
for the year ended
December 31, 2013
. The increase is primarily due to the nondeductible health insurer fee in 2014 that did not exist in 2013.
52
Liquidity and Capital Resources
Introduction
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.
Our regulated subsidiaries generate significant cash flows from premium revenue. Such cash flows are our primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related health care services. A majority of the assets held by our regulated subsidiaries are in the form of cash, cash equivalents, and investments. After considering expected cash flows from operating activities, we generally invest cash of regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board approved investment policies which conform to applicable state laws and regulations.
Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may invest. These investment policies require that our investments have final maturities of 10 years or less (excluding variable rate securities, for which interest rates are periodically reset) and that the average maturity be three years or less. Professional portfolio managers operating under documented guidelines manage our investments and a portion of our cash equivalents. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. As of
December 31, 2015
, a substantial portion of our cash was invested in a portfolio of highly liquid money market securities, and our investments consisted primarily of investment-grade debt securities. All of our investments are classified as current assets, except for our restricted investments, which are classified as non-current assets. Our restricted investments are invested principally in certificates of deposit and U.S. treasury securities.
Investment income increased to
$18 million
for the year ended
December 31, 2015
, compared with
$8 million
for the year ended
December 31, 2014
, primarily due to the increase in invested assets. Our annualized portfolio yields for the year ended
December 31, 2015
was 0.5%, and for both years ended December 31,
2014
and
2013
, was 0.4%.
Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. We have the ability to hold our restricted investments until maturity. Declines in interest rates over time will reduce our investment income.
Cash in excess of the capital needs of our regulated health plans is generally paid to our unregulated parent company in the form of dividends, when and as permitted by applicable regulations, for general corporate use. We received
$125 million
in dividends from our regulated health plan subsidiaries, and $17 million in dividends from our unregulated subsidiaries during 2015. We did not receive any dividends from our regulated health plan subsidiaries during the year ended December 31, 2014, because significant growth across all of our health plans necessitated that the plans retain their cash to meet increasing net worth requirements. See further discussion in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
19
, "
Commitments and Contingencies
," under the subheading "Regulatory Capital and Dividend Restrictions," and Note
22
, "
Condensed Financial Information of Registrant
," under "Note C - Dividends and Capital Contributions."
Liquidity
A condensed schedule of cash flows to facilitate our discussion of liquidity follows:
|
Year Ended December 31,
|
|||||||||||||||||||
|
2015
|
2014
|
2013
|
2014 to 2015 Change
|
2013 to 2014 Change
|
|||||||||||||||
|
(In millions)
|
|||||||||||||||||||
|
Net cash provided by operating activities
|
$
|
1,125
|
|
$
|
1,060
|
|
$
|
190
|
|
$
|
65
|
|
$
|
870
|
|
||||
|
Net cash used in investing activities
|
(1,420
|
)
|
(536
|
)
|
(543
|
)
|
(884
|
)
|
7
|
|
|||||||||
|
Net cash provided by financing activities
|
1,085
|
|
79
|
|
493
|
|
1,006
|
|
(414
|
)
|
|||||||||
|
Net increase in cash and cash equivalents
|
$
|
790
|
|
$
|
603
|
|
$
|
140
|
|
$
|
187
|
|
$
|
463
|
|
||||
Operating Activities
. Cash provided by operating activities was
$1,125 million
in
2015
compared with
$1,060 million
in
2014
, an increase of
$65 million
. This increase was due primarily to increased net income of
$81 million
, and collection of premiums receivable at our California health plan in the first quarter of 2015. These sources of cash were partially offset by:
|
•
|
A decrease in amounts due to government agencies of
$268 million
, primarily due to a fourth quarter 2015 Medicaid expansion-related payment to the state of Washington's Medicaid authority of $247 million. Changes in this account
|
53
relate primarily to Health Plans segment programs that contain medical cost floors or medical cost corridors. Under such programs, a portion of certain Medicaid, Medicare, and Marketplace premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs; and
|
•
|
The change in medical claims and benefits payable, which resulted in the use of
$49 million
, primarily because membership and related medical costs grew at a higher rate in 2014 than in 2015, resulting in a lower year-over-year change in 2015.
|
In
2014
, cash provided by operating activities was
$1,060 million
compared with
$190 million
for
2013
, an increase of
$870 million
. This increase was primarily due to a
$442 million
increase in amounts due to government agencies because of a significant increase in amounts accrued for medical cost floor contract provisions, primarily associated with our Medicaid expansion membership. In addition, medical claims and benefits payable increased
$356 million
due to significant membership growth in 2014.
Investing Activities.
Cash used in investing activities increased to
$1,420 million
in
2015
, compared with
$536 million
in
2014
, an increase of
$884 million
. This increase was due in part to higher purchases of investments, net of sales and maturities, amounting to
$477 million
, a result of cash generated from 2015 financing activities, described below.
In addition, cash paid for business acquisitions increased
$406 million
. As described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
1
,"
Basis of Presentation
," we closed several business acquisitions in 2015. Additionally,
we announced several Health Plans acquisitions in 2015 that did not close until January 1, 2016. Because the closing dates for these acquisitions fell on January 1, 2016, a holiday, approximately
$101 million
was recorded to prepaid expenses and other assets as of December 31, 2015, for purchase price amounts funded in December 2015. Such amounts are reported in investing activities in the accompanying consolidated statements of cash flows.
In
2014
, cash used in investing activities was
$536 million
, comparable with
$543 million
in
2013
.
Financing Activities.
Cash provided by financing activities was
$1,085 million
in 2015, primarily due to net proceeds from our fiscal 2015 offerings of 5.375% Notes, amounting to
$689 million
, and common stock, amounting to
$373 million
. In 2014, cash provided by financing activities was
$79 million
, which included primarily
$123 million
net proceeds from our fiscal 2014 offering of 1.625% Notes, partially offset by
$50 million
paid to settle contingent consideration liabilities associated with our 2013 business acquisitions. In 2013, net proceeds from our 1.125% Notes offering and lease financing transactions provided
$623 million
, which was partially offset by
$53 million
used to purchase treasury stock and
$88 million
to repay debt.
Financial Condition
We believe that our cash resources and internally generated funds will be sufficient to support our operations, regulatory requirements, and capital expenditures for at least the next 12 months.
On a consolidated basis, at
December 31, 2015
, our working capital was
$1,484 million
compared with
$1,028 million
at
December 31, 2014
. At
December 31, 2015
, our cash and investments amounted to
$4,241 million
, compared with
$2,666 million
of cash and investments at
December 31, 2014
.
Regulatory Capital.
Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us.
Based upon current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately
$1,229 million
at
December 31, 2015
, and
$859 million
at
December 31, 2014
. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to
$612 million
and
$203 million
as of
December 31, 2015
, and
2014
, respectively.
Debt Ratings
. Our 5.375% Notes are rated "BB" by Standard & Poor's, and "Ba3" by Moody's Investor Service, Inc. A significant downgrade in our ratings could adversely affect our borrowing capacity and costs.
Health Insurer Fee
. Effective January 1, 2014, the ACA requires most health plans to pay a fee based on premium revenue (the Health Insurer Fee, or HIF). The HIF is not tax deductible. Actuarial standards require that states reimburse us for the HIF we incur related to Medicaid revenue, in addition to paying us a "tax gross up" to compensate us for incremental income taxes we pay because the HIF is not tax deductible. During 2015, we secured full reimbursement for our expenses under the HIF.
54
The following table provides the details of our HIF revenue reimbursement by health plan to date in 2015 (in millions):
|
HIF Reimbursement Revenue, Gross
(1)
|
|||||||||||||||||||||||
|
Year Ended December 31, 2015
|
|||||||||||||||||||||||
|
Recognized
|
Necessary for Full Reimbursement
|
||||||||||||||||||||||
|
Q1 2015
|
Q2 2015
|
Q3 2015
|
Q4 2015
|
Total
|
|||||||||||||||||||
|
2015 HIF:
|
|||||||||||||||||||||||
|
California
|
$
|
—
|
|
$
|
17
|
|
$
|
6
|
|
$
|
8
|
|
$
|
31
|
|
$
|
31
|
|
|||||
|
Florida
|
2
|
|
2
|
|
2
|
|
2
|
|
8
|
|
8
|
|
|||||||||||
|
Illinois
|
1
|
|
1
|
|
1
|
|
1
|
|
4
|
|
4
|
|
|||||||||||
|
Michigan
|
—
|
|
—
|
|
21
|
|
7
|
|
28
|
|
28
|
|
|||||||||||
|
New Mexico
|
7
|
|
8
|
|
8
|
|
7
|
|
30
|
|
30
|
|
|||||||||||
|
Ohio
|
12
|
|
12
|
|
12
|
|
12
|
|
48
|
|
48
|
|
|||||||||||
|
South Carolina
|
3
|
|
3
|
|
3
|
|
3
|
|
12
|
|
12
|
|
|||||||||||
|
Texas
|
6
|
|
6
|
|
6
|
|
5
|
|
23
|
|
23
|
|
|||||||||||
|
Utah
|
—
|
|
—
|
|
4
|
|
2
|
|
6
|
|
6
|
|
|||||||||||
|
Washington
|
11
|
|
11
|
|
6
|
|
9
|
|
37
|
|
37
|
|
|||||||||||
|
Wisconsin
|
1
|
|
1
|
|
1
|
|
2
|
|
5
|
|
5
|
|
|||||||||||
|
Subtotal, Medicaid
|
43
|
|
61
|
|
70
|
|
58
|
|
232
|
|
232
|
|
|||||||||||
|
Marketplace
|
—
|
|
—
|
|
1
|
|
1
|
|
2
|
|
2
|
|
|||||||||||
|
Medicare
|
6
|
|
4
|
|
4
|
|
5
|
|
19
|
|
19
|
|
|||||||||||
|
49
|
|
65
|
|
75
|
|
64
|
|
253
|
|
$
|
253
|
|
|||||||||||
|
2014 HIF:
|
|||||||||||||||||||||||
|
California
|
—
|
|
12
|
|
—
|
|
—
|
|
12
|
|
|||||||||||||
|
Michigan
|
—
|
|
—
|
|
7
|
|
—
|
|
7
|
|
|||||||||||||
|
Utah
|
—
|
|
—
|
|
1
|
|
—
|
|
1
|
|
|||||||||||||
|
$
|
49
|
|
$
|
77
|
|
$
|
83
|
|
$
|
64
|
|
$
|
273
|
|
|||||||||
|
Recognized in:
|
|||||||||||||||||||||||
|
Health insurer fee revenue
|
$
|
48
|
|
$
|
74
|
|
$
|
81
|
|
$
|
61
|
|
$
|
264
|
|
||||||||
|
Premium tax revenue
|
1
|
|
3
|
|
2
|
|
3
|
|
9
|
|
|||||||||||||
|
$
|
49
|
|
$
|
77
|
|
$
|
83
|
|
$
|
64
|
|
$
|
273
|
|
|||||||||
_____________
|
(1)
|
Amounts in the table include our estimate of the full economic impact of the excise tax including premium tax and the income tax effect.
|
Future Sources and Uses of Liquidity
Shelf Registration Statement.
We have a shelf registration statement on file with the Securities and Exchange Commission to register an unlimited amount of any combination of debt or equity securities in one or more offerings. Specific information regarding the terms and securities being offered will be provided at the time of an offering. Proceeds from future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, investments in or extensions of credit to our subsidiaries and the financing of possible acquisitions or business expansion.
Credit Facility.
In June 2015, we
entered into an unsecured
$250 million
revolving credit facility (Credit Facility). Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. The Credit Facility has a term of five years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to
$350 million
. Our ability to borrow under the Credit Facility is subject to compliance with certain covenants. As of
December 31, 2015
, outstanding letters of credit amounting to
$6 million
reduced the borrowing capacity to
$244 million
, and
no
amounts were outstanding under the Credit Facility.
55
Announced Acquisitions.
As described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
1
, "
Basis of Presentation
,"
we announced several Health Plans acquisitions in 2015 that did not close until January 1, 2016. Because the closing dates for these acquisitions fell on January 1, 2016, a holiday, approximately
$101 million
was recorded to prepaid expenses and other assets as of December 31, 2015, for purchase price amounts funded in December 2015. Such amounts are reported in investing activities in the accompanying consolidated statements of cash flows.
The total aggregate purchase price for these acquisitions amounted to approximately
$115 million
.
Convertible Senior Notes.
In February 2013, we issued $550 million aggregate principal amount of 1.125% cash convertible senior notes due January 15, 2020, unless earlier repurchased or converted. We refer to these notes as our 1.125% Notes. In September 2014, we issued $302 million aggregate principal amount of 1.625% convertible senior notes due August 14, 2044, unless earlier repurchased, redeemed, or converted. We refer to these notes as our 1.625% Notes. As of
December 31, 2015
, the aggregate outstanding principal amount of our 1.125% Notes and our 1.625% Notes was
$550 million
and
$302 million
, respectively. Both our 1.125% Notes and our 1.625% Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger. The 1.125% Notes met the stock price trigger in the quarter ended
December 31, 2015
, and are convertible to cash through at least March 31, 2016. Because the 1.125% Notes may be converted into cash within 12 months, the
$448 million
carrying amount is reported in current portion of long-term debt as of
December 31, 2015
. In addition, holders of our 1.625% Notes may convert their notes into cash during any calendar quarter (and only during such calendar quarter) if the last reported sales price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to $75.51 per share. The last reported sale price of our common stock as reported on the New York Stock Exchange on
February 23, 2016
was $62.28 per share. As of
December 31, 2015
, our 1.625% Notes were not convertible. If conversion requests are received, the settlement of the notes must be paid primarily in cash pursuant to the terms of the relevant indentures.
For economic reasons related to the trading market for our 1.125% Notes, we believe that the amount of the notes that may be converted over the next twelve months, if any, will not be significant. However, if the trading market for our 1.125% Notes becomes closed or restricted due to market turmoil or other reasons such that the notes cannot be traded, or if the trading price of our 1.125% Notes, which normally trade at a marginal premium to the underlying composite stock-and-interest economic value, no longer includes that marginal premium, holders of our 1.125% Notes may elect to convert the notes to cash. As of
December 31, 2015
, we had sufficient available cash, combined with borrowing capacity available under our Credit Facility, to fund such conversions.
States' Budgets
. From time to time the states in which our health plans operate may delay premium payments. For example, the state of Illinois is currently operating without a budget for its fiscal year ending June 30, 2016. As of
December 31, 2015
, our Illinois health plan served approximately
98,000
members, and recognized premium revenue of approximately
$397 million
for the year ended
December 31, 2015
. As of
February 23, 2016
, Illinois is current with its premium payments.
In another example, the Commonwealth of Puerto Rico has reported that it may lack sufficient resources to fund all necessary governmental programs including health care-related programs, as well as meet its debt obligations for its fiscal year ending June 30, 2016. Our Puerto Rico health plan became operational on April 1, 2015. As of
December 31, 2015
, the plan served approximately
348,000
members and recognized premium revenue of approximately
$192 million
in the fourth quarter of 2015, or approximately
$64 million
per month. As of
February 23, 2016
, the Commonwealth continues to pay us weekly for current membership.
It is the practice of the Commonwealth to pay us for eligible members only after those members have been assigned to us, and our plan has sent electronic confirmation of the receipt of eligibility. Particularly in the early stages of our contract with Puerto Rico, the plan's confirmation of eligibility of certain members was not accepted by the Commonwealth as a result of various technical issues. The plan has continued to pay for medical services for all members in question, but the Commonwealth is withholding payment of approximately $12 million of premium revenue related to those members. We believe we have a valid claim to all of the premiums withheld and we are in discussions with the Commonwealth regarding this matter.
It has been our practice in the past, and will remain so in the future, to continue to serve our members and pay health care providers for services rendered in circumstances where state (or Commonwealth) governments are temporarily unable to pay us, so long as we continue to believe that such state (or Commonwealth) governments will ultimately pay us.
56
Critical Accounting Estimates
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. Actual results could differ from these estimates. Our most significant accounting estimates relate to:
|
•
|
Health Plans segment medical claims and benefits payable
(see discussion below).
|
|
•
|
Health Plans segment contractual provisions that may adjust or limit revenue or profit.
For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
2
, "
Significant Accounting Policies
."
|
|
•
|
Health Plans segment quality incentives.
For a comprehensive discussion of this topic, including amounts recorded in our consolidated financial statements, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
2
, "
Significant Accounting Policies
."
|
|
•
|
Molina Medicaid Solutions segment revenue and cost recognition.
For a comprehensive discussion of this topic, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
2
, "
Significant Accounting Policies
."
|
Medical Claims and Benefits Payable — Health Plans Segment
The following table provides the details of our medical claims and benefits payable as of the dates indicated:
|
December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Fee-for-service claims incurred but not paid (IBNP)
|
$
|
1,191
|
|
$
|
871
|
|
$
|
424
|
|
||
|
Pharmacy payable
|
88
|
|
71
|
|
45
|
|
|||||
|
Capitation payable
|
140
|
|
28
|
|
20
|
|
|||||
|
Other (1)
|
266
|
|
231
|
|
181
|
|
|||||
|
$
|
1,685
|
|
$
|
1,201
|
|
$
|
670
|
|
|||
|
(1)
|
"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. As of
December 31, 2015
,
2014
and
2013
, we recorded non-risk provider payables relating to such intermediary arrangements of approximately
$167 million
,
$119 million
and
$151 million
, respectively.
|
The determination of our liability for medical claims and benefits payable is particularly important to the determination of our financial position and results of operations in any given period. Such determination of our liability requires the application of a significant degree of judgment by our management.
As a result, the determination of our liability for medical claims and benefits payable is subject to an inherent degree of uncertainty. 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. Such medical care cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.
The most important element in estimating our medical care costs is our estimate for fee-for-service claims which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been paid at the reporting date are collectively referred to as medical costs that are incurred but not paid (IBNP). Our IBNP, as reported on our balance sheet, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors. As indicated in the table above, our estimated IBNP liability represented
$1,191 million
of our total medical claims and benefits payable of
$1,685 million
as of
December 31, 2015
.
The factors we consider when estimating our IBNP include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring point through the calculation of a base estimate of IBNP, a further provision for adverse
57
claims deviation, and an estimate of the administrative costs of settling all claims incurred through the reporting date. The base estimate of IBNP is derived through application of claims payment completion factors and trended PMPM cost estimates.
For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to measure the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting date, based on historical payment patterns.
The following table reflects the hypothetical change in our estimate of claims liability as of
December 31, 2015
that would have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2015
, by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
Increase (Decrease) in Estimated Completion Factors
|
Increase (Decrease) in
Medical Claims and
Benefits Payable
|
||
|
(6)%
|
$
|
348
|
|
|
(4)%
|
232
|
|
|
|
(2)%
|
116
|
|
|
|
2%
|
(116
|
)
|
|
|
4%
|
(232
|
)
|
|
|
6%
|
(348
|
)
|
|
For the four months of service immediately prior to the reporting date, actual claims paid are not a reliable measure of our ultimate liability, given the inherent delay between the patient/physician encounter and the actual submission of a claim for payment. For these months of service, we estimate our claims liability based on trended PMPM cost estimates. These estimates are designed to reflect recent trends in payments and expense, utilization patterns, authorized services, and other relevant factors. The following table reflects the hypothetical change in our estimate of claims liability as of
December 31, 2015
that would have resulted had we altered our trend factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in millions.
|
(Decrease) Increase in Trended Per member Per Month Cost Estimates
|
(Decrease) Increase in
Medical Claims and
Benefits Payable
|
||
|
(6)%
|
$
|
(202
|
)
|
|
(4)%
|
(135
|
)
|
|
|
(2)%
|
(67
|
)
|
|
|
2%
|
67
|
|
|
|
4%
|
135
|
|
|
|
6%
|
202
|
|
|
The following per-share amounts are based on a combined federal and state statutory tax rate of 37%, and
56 million
diluted shares outstanding for the year ended
December 31, 2015
. Assuming a hypothetical 1% change in completion factors from those used in our calculation of IBNP at
December 31, 2015
, net income for the year ended
December 31, 2015
would increase or decrease by approximately $37 million, or $0.66 per diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at
December 31, 2015
, net income for the year ended
December 31, 2015
would increase or decrease by approximately $21 million, or $0.38 per diluted share. The corresponding figures for a 5% change in completion factors and PMPM cost estimates would be $183 million, or $3.29 per diluted share, and $106 million, or $1.91 per diluted share, respectively.
It is important to note that any change in the estimate of either completion factors or trended PMPM costs would usually be accompanied by a change in the estimate of the other component, and that a change in one component would almost always compound rather than offset the resulting distortion to net income. When completion factors are
overestimated
, trended PMPM costs tend to be
underestimated
. Both circumstances will create an overstatement of net income. Likewise, when completion factors are
underestimated
, trended PMPM costs tend to be
overestimated
, creating an understatement of net income. In other words, errors in estimates involving both completion factors and trended PMPM costs will usually act to drive estimates of claims liabilities and medical care costs in the same direction. If completion factors were overestimated by 1%, resulting in an overstatement of net income by approximately $37 million, it is likely that trended PMPM costs would be underestimated, resulting in an additional overstatement of net income.
58
After we have established our base IBNP reserve through the application of completion factors and trended PMPM cost estimates, we then compute an additional liability, once again using actuarial techniques, to account for adverse deviation in our claims payments which the base actuarial model is not intended to and does not account for. We refer to this additional liability as the provision for adverse claims deviation. The provision for adverse claims deviation is a component of our overall determination of the adequacy of our IBNP. It is intended to capture the potential inadequacy of our IBNP estimate as a result of our inability to adequately assess the impact of factors such as changes in the speed of claims receipt and payment, the relative magnitude or severity of claims, known outbreaks of disease such as influenza, our entry into new geographical markets, our provision of services to new populations such as the aged, blind or disabled, changes to state-controlled fee schedules upon which a large proportion of our provider payments are based, modifications and upgrades to our claims processing systems and practices, and increasing medical costs. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNP after considering the base actuarial model reserves and the provision for adverse claims deviation.
We also include in our IBNP liability an estimate of the administrative costs of settling all claims incurred through the reporting date.
The development of IBNP is a continuous process that we monitor and refine on a monthly basis as additional claims payment information becomes available. As additional information becomes known to us, we adjust our actuarial model accordingly.
On a monthly basis, we review and update our estimated IBNP and the methods used to determine that liability. Any adjustments, if appropriate, are reflected in the period known. While we believe our current estimates are adequate, we have in the past been required to increase significantly our claims reserves for periods previously reported, and may be required to do so again in the future. Any significant increases to prior period claims reserves would materially decrease reported earnings for the period in which the adjustment is made.
In our judgment, the estimates for completion factors will likely prove to be more accurate than trended PMPM cost estimates because estimated completion factors are subject to fewer variables in their determination. Specifically, completion factors are developed over long periods of time, and are most likely to be affected by changes in claims receipt and payment experience and by provider billing practices. Trended PMPM cost estimates, while affected by the same factors, will also be influenced by health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, outbreaks of disease or increased incidence of illness, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. As discussed above, however, errors in estimates involving trended PMPM costs will almost always be accompanied by errors in estimates involving completion factors, and vice versa. In such circumstances, errors in estimation involving both completion factors and trended PMPM costs will act to drive estimates of claims liabilities (and therefore medical care costs) in the same direction.
Refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
11
, "
Medical Claims and Benefits Payable
," for additional information regarding the specific factors used to determine our changes in estimates of IBNP for all periods presented in the accompanying consolidated financial statements.
59
The following table presents the components of the change in our medical claims and benefits payable from continuing and discontinued operations combined for the periods indicated. The amounts presented for "Components of medical care costs related to: Prior periods" represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.
|
Year ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(Dollars in millions, except
per-member amounts)
|
|||||||||||
|
Balances at beginning of period
|
$
|
1,201
|
|
$
|
670
|
|
$
|
495
|
|
||
|
Components of medical care costs related to:
|
|||||||||||
|
Current period
|
11,935
|
|
8,123
|
|
5,434
|
|
|||||
|
Prior periods (1)
|
(141
|
)
|
(46
|
)
|
(53
|
)
|
|||||
|
Total medical care costs
|
11,794
|
|
8,077
|
|
5,381
|
|
|||||
|
Change in non-risk provider payables
|
48
|
|
(32
|
)
|
111
|
|
|||||
|
Payments for medical care costs related to:
|
|||||||||||
|
Current period
|
10,448
|
|
7,064
|
|
4,932
|
|
|||||
|
Prior periods
|
910
|
|
450
|
|
385
|
|
|||||
|
Total paid
|
11,358
|
|
7,514
|
|
5,317
|
|
|||||
|
Balances at end of period
|
$
|
1,685
|
|
$
|
1,201
|
|
$
|
670
|
|
||
|
Benefit from prior periods as a percentage of:
|
|||||||||||
|
Balance at beginning of period
|
11.8
|
%
|
6.9
|
%
|
10.7
|
%
|
|||||
|
Premium revenue
|
1.1
|
%
|
0.5
|
%
|
0.9
|
%
|
|||||
|
Medical care costs
|
1.2
|
%
|
0.6
|
%
|
1.0
|
%
|
|||||
|
Claims Data:
|
|||||||||||
|
Days in claims payable, fee for service
|
48
|
|
49
|
|
43
|
|
|||||
|
Number of members at end of period
|
3,533,000
|
|
2,623,000
|
|
1,931,000
|
|
|||||
|
Number of claims in inventory at end of period
|
380,800
|
|
307,700
|
|
145,800
|
|
|||||
|
Billed charges of claims in inventory at end of period
|
$
|
816
|
|
$
|
719
|
|
$
|
277
|
|
||
|
Claims in inventory per member at end of period
|
0.11
|
|
0.12
|
|
0.08
|
|
|||||
|
Billed charges of claims in inventory per member end of period
|
$
|
230.91
|
|
$
|
273.92
|
|
$
|
143.19
|
|
||
|
Number of claims received during the period
|
40,173,300
|
|
27,597,000
|
|
21,317,500
|
|
|||||
|
Billed charges of claims received during the period
|
$
|
46,211
|
|
$
|
30,316
|
|
$
|
21,415
|
|
||
Commitments and Contingencies
We are not a party to off-balance sheet financing arrangements, except for operating leases which are disclosed in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
19
,"
Commitments and Contingencies
."
Contractual Obligations
In the table below, we present our contractual obligations
as of December 31, 2015
. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future periods may vary from those reflected in the table.
Additionally, we have a variety of other contractual agreements related to acquiring services used in our operations. However, we believe these other agreements do not contain material noncancelable commitments.
60
|
Total
(1)
|
2016
|
2017-2018
|
2019-2020
|
2021 and Beyond
|
|||||||||||||||
|
(In millions)
|
|||||||||||||||||||
|
Medical claims and benefits payable
|
$
|
1,685
|
|
$
|
1,685
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
|
Principal amount of senior notes (2)
|
1,552
|
|
—
|
|
—
|
|
550
|
|
1,002
|
|
|||||||||
|
Amounts due government agencies
|
729
|
|
729
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Interest on long-term debt
|
424
|
|
49
|
|
97
|
|
91
|
|
187
|
|
|||||||||
|
Lease financing obligations
|
403
|
|
15
|
|
32
|
|
33
|
|
323
|
|
|||||||||
|
Operating leases
|
232
|
|
49
|
|
88
|
|
56
|
|
39
|
|
|||||||||
|
Purchase commitments
|
15
|
|
11
|
|
4
|
|
—
|
|
—
|
|
|||||||||
|
$
|
5,040
|
|
$
|
2,538
|
|
$
|
221
|
|
$
|
730
|
|
$
|
1,551
|
|
|||||
_______________________________
|
(1)
|
As of December 31, 2015
, we have recorded approximately $9 million of unrecognized tax benefits. The table does not contain this amount because we cannot reasonably estimate when or if such amount may be settled. For further information, refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
14
, "
Income Taxes
."
|
|
(2)
|
Represents the principal amounts due on our 5.375% Senior Notes due 2022, 1.125% Cash Convertible Senior Notes due 2020, and our 1.625% Convertible Senior Notes due 2044 (1.625% Notes). The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, as described in Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, Note
12
, "
Debt
."
|
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
Refer to Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
2
, "
Significant Accounting Policies
," Note
5
, "
Fair Value Measurements
," and Note
6
, "
Investments
."
Inflation
We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of health care services. Through these contracted providers, our health plans emphasize preventive health care and appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product introductions, demands from health care providers and customers, applicable regulations, or other factors may affect our ability to control health care costs.
Compliance Costs
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
61
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
MOLINA HEALTHCARE, INC.
|
|
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of Molina Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of Molina Healthcare, Inc. (the Company) as of
December 31, 2015
and
2014
, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2015
. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Molina Healthcare, Inc. at
December 31, 2015
and
2014
, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2015
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Molina Healthcare, Inc.’s internal control over financial reporting as of
December 31, 2015
, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 26, 2016
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 26, 2016
63
MOLINA HEALTHCARE, INC.
|
December 31,
|
|||||||
|
2015
|
2014
|
||||||
|
(Amounts in millions,
except per-share data)
|
|||||||
|
ASSETS
|
|||||||
|
Current assets:
|
|||||||
|
Cash and cash equivalents
|
$
|
2,329
|
|
$
|
1,539
|
|
|
|
Investments
|
1,801
|
|
1,019
|
|
|||
|
Receivables
|
597
|
|
596
|
|
|||
|
Income taxes refundable
|
13
|
|
—
|
|
|||
|
Prepaid expenses and other current assets
|
192
|
|
49
|
|
|||
|
Derivative asset
|
374
|
|
—
|
|
|||
|
Total current assets
|
5,306
|
|
3,203
|
|
|||
|
Property, equipment, and capitalized software, net
|
393
|
|
341
|
|
|||
|
Deferred contract costs
|
81
|
|
54
|
|
|||
|
Intangible assets, net
|
122
|
|
89
|
|
|||
|
Goodwill
|
519
|
|
272
|
|
|||
|
Restricted investments
|
109
|
|
102
|
|
|||
|
Derivative asset
|
—
|
|
329
|
|
|||
|
Deferred income taxes
|
18
|
|
15
|
|
|||
|
Other assets
|
28
|
|
30
|
|
|||
|
$
|
6,576
|
|
$
|
4,435
|
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current liabilities:
|
|||||||
|
Medical claims and benefits payable
|
$
|
1,685
|
|
$
|
1,201
|
|
|
|
Amounts due government agencies
|
729
|
|
527
|
|
|||
|
Accounts payable and accrued liabilities
|
362
|
|
242
|
|
|||
|
Deferred revenue
|
223
|
|
196
|
|
|||
|
Income taxes payable
|
—
|
|
9
|
|
|||
|
Current maturities of long-term debt
|
449
|
|
—
|
|
|||
|
Derivative liability
|
374
|
|
—
|
|
|||
|
Total current liabilities
|
3,822
|
|
2,175
|
|
|||
|
Senior notes
|
962
|
|
690
|
|
|||
|
Lease financing obligations
|
198
|
|
157
|
|
|||
|
Lease financing obligations - related party
|
—
|
|
40
|
|
|||
|
Derivative liability
|
—
|
|
329
|
|
|||
|
Other long-term liabilities
|
37
|
|
34
|
|
|||
|
Total liabilities
|
5,019
|
|
3,425
|
|
|||
|
Stockholders’ equity:
|
|||||||
|
Common stock, $0.001 par value; 150 shares authorized; outstanding: 56 shares at December 31, 2015 and 50 shares at December 31, 2014
|
—
|
|
—
|
|
|||
|
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding
|
—
|
|
—
|
|
|||
|
Additional paid-in capital
|
803
|
|
396
|
|
|||
|
Accumulated other comprehensive loss
|
(4
|
)
|
(1
|
)
|
|||
|
Retained earnings
|
758
|
|
615
|
|
|||
|
Total stockholders’ equity
|
1,557
|
|
1,010
|
|
|||
|
$
|
6,576
|
|
$
|
4,435
|
|
||
See accompanying notes.
64
MOLINA HEALTHCARE, INC.
|
|
Year Ended December 31,
|
||||||||||
|
|
2015
|
2014
|
2013
|
||||||||
|
|
(In millions, except per-share data)
|
||||||||||
|
Revenue:
|
|||||||||||
|
Premium revenue
|
$
|
13,241
|
|
$
|
9,023
|
|
$
|
6,179
|
|
||
|
Service revenue
|
253
|
|
210
|
|
205
|
|
|||||
|
Premium tax revenue
|
397
|
|
294
|
|
172
|
|
|||||
|
Health insurer fee revenue
|
264
|
|
120
|
|
—
|
|
|||||
|
Investment income
|
18
|
|
8
|
|
7
|
|
|||||
|
Other revenue
|
5
|
|
12
|
|
26
|
|
|||||
|
Total revenue
|
14,178
|
|
9,667
|
|
6,589
|
|
|||||
|
Operating expenses:
|
|||||||||||
|
Medical care costs
|
11,794
|
|
8,076
|
|
5,380
|
|
|||||
|
Cost of service revenue
|
193
|
|
157
|
|
161
|
|
|||||
|
General and administrative expenses
|
1,146
|
|
765
|
|
666
|
|
|||||
|
Premium tax expenses
|
397
|
|
294
|
|
172
|
|
|||||
|
Health insurer fee expenses
|
157
|
|
89
|
|
—
|
|
|||||
|
Depreciation and amortization
|
104
|
|
93
|
|
73
|
|
|||||
|
Total operating expenses
|
13,791
|
|
9,474
|
|
6,452
|
|
|||||
|
Operating income
|
387
|
|
193
|
|
137
|
|
|||||
|
Other expenses, net:
|
|||||||||||
|
Interest expense
|
66
|
|
57
|
|
52
|
|
|||||
|
Other (income) expense, net
|
(1
|
)
|
1
|
|
4
|
|
|||||
|
Total other expenses, net
|
65
|
|
58
|
|
56
|
|
|||||
|
Income from continuing operations before income tax expense
|
322
|
|
135
|
|
81
|
|
|||||
|
Income tax expense
|
179
|
|
73
|
|
36
|
|
|||||
|
Income from continuing operations
|
143
|
|
62
|
|
45
|
|
|||||
|
Income from discontinued operations, net of tax expense (benefit) of $0, $0, and $(10), respectively
|
—
|
|
—
|
|
8
|
|
|||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
|
Basic net income per share:
|
|||||||||||
|
Income from continuing operations
|
$
|
2.75
|
|
$
|
1.34
|
|
$
|
0.98
|
|
||
|
(Loss) income from discontinued operations
|
—
|
|
(0.01
|
)
|
0.18
|
|
|||||
|
Basic net income per share
|
$
|
2.75
|
|
$
|
1.33
|
|
$
|
1.16
|
|
||
|
Diluted net income per share:
|
|||||||||||
|
Income from continuing operations
|
$
|
2.58
|
|
$
|
1.30
|
|
$
|
0.96
|
|
||
|
(Loss) income from discontinued operations
|
—
|
|
(0.01
|
)
|
0.17
|
|
|||||
|
Diluted net income per share
|
$
|
2.58
|
|
$
|
1.29
|
|
$
|
1.13
|
|
||
|
Weighted average shares outstanding:
|
|||||||||||
|
Basic
|
52
|
|
47
|
|
46
|
|
|||||
|
Diluted
|
56
|
|
48
|
|
47
|
|
|||||
See accompanying notes.
65
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Year Ended December 31,
|
||||||||||
|
|
2015
|
2014
|
2013
|
||||||||
|
|
(In millions)
|
||||||||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
|
Other comprehensive income (loss):
|
|||||||||||
|
Unrealized investment loss
|
(5
|
)
|
—
|
|
(1
|
)
|
|||||
|
Effect of income tax benefit
|
2
|
|
—
|
|
—
|
|
|||||
|
Other comprehensive loss, net of tax
|
(3
|
)
|
—
|
|
(1
|
)
|
|||||
|
Comprehensive income
|
$
|
140
|
|
$
|
62
|
|
$
|
52
|
|
||
See accompanying notes.
66
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury
Stock
|
||||||||||||||||||||||
|
Outstanding
|
Amount
|
Total
|
||||||||||||||||||||||||
|
(In millions)
|
||||||||||||||||||||||||||
|
Balance at January 1, 2013
|
47
|
|
$
|
—
|
|
$
|
285
|
|
$
|
—
|
|
$
|
500
|
|
$
|
(3
|
)
|
$
|
782
|
|
||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
53
|
|
—
|
|
53
|
|
||||||||||||
|
Other comprehensive loss, net
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
(1
|
)
|
||||||||||||
|
Purchase of treasury stock
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(53
|
)
|
(53
|
)
|
||||||||||||
|
Retirement of treasury stock
|
—
|
|
—
|
|
(56
|
)
|
—
|
|
—
|
|
56
|
|
—
|
|
||||||||||||
|
Issuance of warrants
|
—
|
|
—
|
|
79
|
|
—
|
|
—
|
|
—
|
|
79
|
|
||||||||||||
|
Share-based compensation
|
1
|
|
—
|
|
31
|
|
—
|
|
—
|
|
—
|
|
31
|
|
||||||||||||
|
Tax benefit from share-based compensation
|
—
|
|
—
|
|
2
|
|
—
|
|
—
|
|
—
|
|
2
|
|
||||||||||||
|
Balance at December 31, 2013
|
46
|
|
—
|
|
341
|
|
(1
|
)
|
553
|
|
—
|
|
893
|
|
||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
62
|
|
—
|
|
62
|
|
||||||||||||
|
Convertible senior notes transactions, including issuance costs
|
2
|
|
—
|
|
22
|
|
—
|
|
—
|
|
—
|
|
22
|
|
||||||||||||
|
Share-based compensation
|
2
|
|
—
|
|
30
|
|
—
|
|
—
|
|
—
|
|
30
|
|
||||||||||||
|
Tax benefit from share-based compensation
|
—
|
|
—
|
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
||||||||||||
|
Balance at December 31, 2014
|
50
|
|
—
|
|
396
|
|
(1
|
)
|
615
|
|
—
|
|
1,010
|
|
||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
143
|
|
—
|
|
143
|
|
||||||||||||
|
Other comprehensive loss, net
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
(3
|
)
|
||||||||||||
|
Common stock offering, including issuance costs
|
6
|
|
—
|
|
373
|
|
—
|
|
—
|
|
—
|
|
373
|
|
||||||||||||
|
Share-based compensation
|
—
|
|
—
|
|
26
|
|
—
|
|
—
|
|
—
|
|
26
|
|
||||||||||||
|
Tax benefit from share-based compensation
|
—
|
|
—
|
|
8
|
|
—
|
|
—
|
|
—
|
|
8
|
|
||||||||||||
|
Balance at December 31, 2015
|
56
|
|
$
|
—
|
|
$
|
803
|
|
$
|
(4
|
)
|
$
|
758
|
|
$
|
—
|
|
$
|
1,557
|
|
||||||
See accompanying notes.
67
MOLINA HEALTHCARE, INC.
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Operating activities:
|
|||||||||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||||
|
Depreciation and amortization
|
126
|
|
134
|
|
94
|
|
|||||
|
Deferred income taxes
|
(7
|
)
|
(2
|
)
|
(32
|
)
|
|||||
|
Share-based compensation
|
23
|
|
22
|
|
29
|
|
|||||
|
Amortization of convertible senior notes and lease financing obligations
|
30
|
|
27
|
|
23
|
|
|||||
|
Other, net
|
19
|
|
7
|
|
18
|
|
|||||
|
Changes in operating assets and liabilities, net of effects from acquisitions:
|
|||||||||||
|
Receivables
|
56
|
|
(298
|
)
|
(149
|
)
|
|||||
|
Prepaid expenses and other current assets
|
(35
|
)
|
(20
|
)
|
(23
|
)
|
|||||
|
Medical claims and benefits payable
|
482
|
|
531
|
|
175
|
|
|||||
|
Amounts due government agencies
|
202
|
|
470
|
|
28
|
|
|||||
|
Accounts payable and accrued liabilities
|
84
|
|
11
|
|
33
|
|
|||||
|
Deferred revenue
|
24
|
|
74
|
|
(20
|
)
|
|||||
|
Income taxes
|
(22
|
)
|
42
|
|
(39
|
)
|
|||||
|
Net cash provided by operating activities
|
1,125
|
|
1,060
|
|
190
|
|
|||||
|
Investing activities:
|
|||||||||||
|
Purchases of investments
|
(1,923
|
)
|
(953
|
)
|
(770
|
)
|
|||||
|
Proceeds from sales and maturities of investments
|
1,126
|
|
633
|
|
400
|
|
|||||
|
Purchases of equipment
|
(132
|
)
|
(115
|
)
|
(98
|
)
|
|||||
|
Increase in restricted investments
|
(6
|
)
|
(34
|
)
|
(19
|
)
|
|||||
|
Net cash paid in business combinations
|
(450
|
)
|
(44
|
)
|
(62
|
)
|
|||||
|
Other, net
|
(35
|
)
|
(23
|
)
|
6
|
|
|||||
|
Net cash used in investing activities
|
(1,420
|
)
|
(536
|
)
|
(543
|
)
|
|||||
|
Financing activities:
|
|||||||||||
|
Proceeds from senior notes offerings, net of issuance costs
|
689
|
|
123
|
|
538
|
|
|||||
|
Proceeds from common stock offering, net of issuance costs
|
373
|
|
—
|
|
—
|
|
|||||
|
Proceeds from sale-leaseback transactions
|
—
|
|
—
|
|
159
|
|
|||||
|
Purchase of call option
|
—
|
|
—
|
|
(149
|
)
|
|||||
|
Proceeds from issuance of warrants
|
—
|
|
—
|
|
75
|
|
|||||
|
Contingent consideration liabilities settled
|
—
|
|
(50
|
)
|
—
|
|
|||||
|
Treasury stock purchases
|
—
|
|
—
|
|
(53
|
)
|
|||||
|
Principal payments on term loan
|
—
|
|
—
|
|
(48
|
)
|
|||||
|
Repayment of amount borrowed under credit facility
|
—
|
|
—
|
|
(40
|
)
|
|||||
|
Proceeds from employee stock plans
|
18
|
|
14
|
|
9
|
|
|||||
|
Principal payments on convertible senior notes
|
—
|
|
(10
|
)
|
—
|
|
|||||
|
Other, net
|
5
|
|
2
|
|
2
|
|
|||||
|
Net cash provided by financing activities
|
1,085
|
|
79
|
|
493
|
|
|||||
|
Net increase in cash and cash equivalents
|
790
|
|
603
|
|
140
|
|
|||||
|
Cash and cash equivalents at beginning of period
|
1,539
|
|
936
|
|
796
|
|
|||||
|
Cash and cash equivalents at end of period
|
$
|
2,329
|
|
$
|
1,539
|
|
$
|
936
|
|
||
See accompanying notes.
68
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(Amounts in millions)
|
|||||||||||
|
Supplemental cash flow information:
|
|||||||||||
|
Cash paid during the period for:
|
|||||||||||
|
Income taxes
|
$
|
197
|
|
$
|
30
|
|
$
|
95
|
|
||
|
Interest
|
$
|
38
|
|
$
|
29
|
|
$
|
35
|
|
||
|
Schedule of non-cash investing and financing activities:
|
|||||||||||
|
Senior notes exchange transaction
|
$
|
—
|
|
$
|
177
|
|
$
|
—
|
|
||
|
Retirement of treasury stock
|
$
|
—
|
|
$
|
—
|
|
$
|
56
|
|
||
|
Increase in non-cash lease financing obligation - related party
|
$
|
—
|
|
$
|
14
|
|
$
|
27
|
|
||
|
Common stock used for stock-based compensation
|
$
|
(15
|
)
|
$
|
(9
|
)
|
$
|
(8
|
)
|
||
|
Details of business combinations:
|
|||||||||||
|
Fair value of assets acquired
|
$
|
(389
|
)
|
$
|
(52
|
)
|
$
|
(122
|
)
|
||
|
Fair value of liabilities assumed
|
41
|
|
—
|
|
—
|
|
|||||
|
Fair value of contingent consideration liabilities incurred
|
—
|
|
—
|
|
60
|
|
|||||
|
Payable to seller
|
—
|
|
8
|
|
—
|
|
|||||
|
Amounts advanced for acquisitions
|
(102
|
)
|
—
|
|
—
|
|
|||||
|
Net cash paid in business combinations
|
$
|
(450
|
)
|
$
|
(44
|
)
|
$
|
(62
|
)
|
||
|
Details of change in fair value of derivatives, net:
|
|||||||||||
|
Gain on 1.125% Notes Call Option
|
$
|
45
|
|
$
|
143
|
|
$
|
37
|
|
||
|
Loss on 1.125% Notes Conversion Option
|
(45
|
)
|
(143
|
)
|
(37
|
)
|
|||||
|
Loss on 1.125% Warrants
|
—
|
|
—
|
|
(4
|
)
|
|||||
|
Change in fair value of derivatives, net
|
$
|
—
|
|
$
|
—
|
|
$
|
(4
|
)
|
||
See accompanying notes.
69
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
.
Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality health care to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program.
We have
three
reportable segments. These segments include our Health Plans and Molina Medicaid Solutions segments, which comprise the vast majority of our operations, and our Other segment. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015, which is reported in Other.
See Note
20
, "
Segment Information
," for further details.
Our Health Plans segment consists of health plans in
11
states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of
December 31, 2015
, these health plans served over
3.5 million
members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. Additionally, we serve Health Insurance Marketplace members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate.
Our health plans’ state Medicaid contracts generally have terms of
three
to
four
years. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Our health plan subsidiaries have generally been successful in retaining their contracts, but such contracts are subject to risk of loss when a state issues a new request for proposals (RFP) open 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.
In addition to contract renewal, our state Medicaid contracts may be periodically amended 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 (ABD); and regions or service areas.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
Market Update—Other
Pathways.
On
November 1, 2015, we acquired all of the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways), formerly known as Providence Human Services, LLC. Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia.
See Note
4
, "
Business Combinations
," for further information.
Market Updates—Health Plans
Medicare-Medicaid Plans
.
To coordinate care for those who qualify to receive both Medicare and Medicaid services (the "dual eligible"), and to deliver services to these individuals in a more financially efficient manner, some states have undertaken demonstration programs to integrate Medicare and Medicaid services for dual eligible individuals. The health plans participating in such demonstrations are referred to as Medicare-Medicaid Plans (MMPs). We operate MMPs in six states. Our MMPs in California, Illinois, and Ohio offered coverage beginning in 2014; our MMPs in South Carolina and Texas offered coverage beginning in the first quarter of 2015; and our MMP in Michigan offered coverage beginning in the second quarter of 2015. At
December 31, 2015
, our membership included approximately
51,000
integrated MMP members.
Florida.
On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to operation of the Medicaid business, of Integral Health Plan, Inc.
See Note
4
, "
Business Combinations
," for further information.
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Preferred Medical Plan, Inc.
See Note
4
, "
Business Combinations
," for further information.
70
Illinois.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. We assumed approximately
58,000
Medicaid members in this acquisition.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Loyola Physician Partners, LLC. We assumed approximately
21,000
Medicaid members in this acquisition.
On November 30, 2015, we announced that our Illinois health plan entered into an agreement to assume the membership and certain Medicaid assets of Better Health Network, LLC (Better Health). As of November 30, 2015, Better Health served approximately
40,000
members in the Medicaid Family Health program in Cook County. Subject to regulatory approvals and the satisfaction of other closing conditions, we expect the transaction to close during the first half of 2016.
Michigan.
On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. We assumed approximately
81,000
Medicaid and MIChild members in this acquisition.
In October 2015, the Michigan Department of Health and Human Services announced that Molina Healthcare of Michigan was recommended to serve the state's Medicaid members under Michigan's Comprehensive Health Plan, which commenced on January 1, 2016. The new contract has a
five
-year term with
three
one
-year extensions, and covers Regions 2 through 6, and 8 through 10 of the state, representing an expansion into
18
additional counties compared with the previous Michigan Medicaid contract.
On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and certain provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc.
See Note
4
, "
Business Combinations
," for further information.
Puerto Rico.
Effective April 1, 2015, our Puerto Rico health plan served its first members. As of
December 31, 2015
, our Puerto Rico plan enrollment amounted to approximately
348,000
members.
Washington.
In November 2015, our Washington health plan was selected by the Washington State Health Care Authority (HCA) to negotiate and enter into managed care contracts for the Southwest region of the state's Apple Health Fully Integrated Managed Care Program. Molina Healthcare of Washington was selected by HCA pursuant to the request for proposal HCA issued in August 2015. The start date for the new contract is scheduled for April 1, 2016.
On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid membership and certain Medicaid assets of Columbia United Providers, Inc. We assumed approximately
57,000
Medicaid members in this acquisition.
Market Update—Molina Medicaid Solutions
New Jersey.
On April 9, 2015, the state of New Jersey announced its selection of Molina Medicaid Solutions to design and operate that state's new Medicaid management information system (MMIS). The new contract was effective May 1, 2015, and has a term of
10
years with
three
one
-year renewal options. Molina Medicaid Solutions was the state's incumbent MMIS provider, and was awarded the new contract as a result of Molina Medicaid Solutions' submission in response to the state of New Jersey's request for proposals.
Consolidation
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. See Note
18
, "
Variable Interest Entities (VIEs)
," for more information regarding these variable interest entities. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the periods presented have been included; such adjustments consist of normal recurring adjustments. All significant inter-company balances and transactions have been eliminated in consolidation. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.
Presentation and Reclassifications
Beginning in 2013, after our Medicaid contract with the state of Missouri expired, we have reported the results relating to the Missouri health plan as discontinued operations for all periods presented.
Additionally, we abandoned our equity interests in the Missouri health plan during the second quarter of 2013, resulting in the recognition of a tax benefit of
$10 million
, which is also included in discontinued operations in the consolidated statements of income. The Missouri health plan's premium revenues were insignificant for all periods presented.
71
We have reclassified certain amounts in the 2014 consolidated balance sheet to conform to the 2015 presentation relating to the presentation of deferred taxes and debt issuance costs. Both reclassifications are a result of recently adopted accounting pronouncements. See Note
2
, "
Significant Accounting Policies
," for further information.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
|
•
|
The determination of medical claims and benefits payable of our Health Plans segment;
|
|
•
|
Health plan contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
|
|
•
|
Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
|
|
•
|
Molina Medicaid Solutions segment revenue and cost recognition;
|
|
•
|
Settlements under risk or savings sharing programs;
|
|
•
|
The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and goodwill for impairment;
|
|
•
|
The determination of professional and general liability claims, and reserves for potential absorption of claims unpaid by insolvent providers;
|
|
•
|
The determination of reserves for the outcome of litigation;
|
|
•
|
The determination of valuation allowances for deferred tax assets; and
|
|
•
|
The determination of unrecognized tax benefits.
|
2
.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of
three months or less
on the date of purchase.
Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and held-to-maturity securities are included in the determination of net income. The cost of securities sold is determined using the specific-identification method.
Our investment policy requires that all of our investments have final maturities of
10
years or less (excluding variable rate securities where interest rates may be periodically reset), and that the average maturity be
three
years or less. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. Declines in interest rates over time will reduce our investment income.
In general, our available-for-sale securities are classified as current assets without regard to the securities’ contractual maturity dates because they may be readily liquidated. We monitor our investments for other-than-temporary impairment. For comprehensive discussions of the fair value and classification of our current and non-current investments, see Note
5
, "
Fair Value Measurements
," Note
6
, "
Investments
," and Note
10
, "
Restricted Investments
."
Receivables
Receivables are readily determinable and because our creditors are primarily state governments, our allowance for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determination is made. See Note
7
, "
Receivables
."
72
Property, Equipment, and Capitalized Software
Property and equipment are stated at historical cost. Replacements and major improvements are capitalized, and repairs and maintenance are charged to expense as incurred. Furniture and equipment are generally depreciated using the straight-line method over estimated useful lives ranging from
three
to
seven
years. Software developed for internal use is capitalized. Software is generally amortized over its estimated useful life of
three
years. Leasehold improvements are amortized over the term of the lease, or over their useful lives from
five
to
10
years, whichever is shorter. Buildings are depreciated over their estimated useful lives of
31.5
to
40
years. See Note
8
, "
Property, Equipment, and Capitalized Software
."
As discussed below, the costs associated with certain of our Molina Medicaid Solutions segment equipment and software are capitalized and recorded as deferred contract costs. Such costs are amortized on a straight-line basis over the shorter of the useful life or the contract period.
Depreciation and Amortization
Depreciation and amortization related to our Health Plans segment is all recorded in "Depreciation and amortization" in the consolidated statements of income. Depreciation and amortization related to our Molina Medicaid Solutions segment is recorded within three different headings in the consolidated statements of income as follows:
|
•
|
Amortization of purchased intangibles relating to customer relationships is reported as amortization within the heading "Depreciation and amortization;"
|
|
•
|
Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of "Service revenue;" and
|
|
•
|
Amortization of capitalized software is recorded within the heading "Cost of service revenue."
|
The following table presents all depreciation and amortization recorded in our consolidated statements of income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as cost of service revenue.
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Depreciation, and amortization of capitalized software, continuing operations
|
$
|
87
|
|
$
|
75
|
|
$
|
55
|
|
||
|
Amortization of intangible assets, continuing operations
|
17
|
|
18
|
|
18
|
|
|||||
|
Depreciation and amortization, continuing operations
|
104
|
|
93
|
|
73
|
|
|||||
|
Amortization recorded as reduction of service revenue
|
1
|
|
3
|
|
3
|
|
|||||
|
Amortization of capitalized software recorded as cost of service revenue
|
21
|
|
38
|
|
18
|
|
|||||
|
Depreciation and amortization reported in the statement of cash flows
|
$
|
126
|
|
$
|
134
|
|
$
|
94
|
|
||
Long-Lived Assets, including Intangible Assets
Long-lived assets consist primarily of property, equipment, capitalized software and intangible assets. Finite-lived, separately-identified intangible assets acquired in business combinations are assets that represent future expected benefits but lack physical substance (such as purchased contract rights and provider contracts). Intangible assets are initially recorded at fair value and are then amortized on a straight-line basis over their expected useful lives, generally between
two
and
15
years.
Our intangible assets are subject to impairment tests when events or circumstances indicate that a finite-lived intangible asset’s (or asset group’s) carrying value may not be recoverable. Consideration is given to a number of potential impairment indicators. For example, our health plan subsidiaries have generally been successful in obtaining the renewal by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that these contracts will continue to be renewed.
Following the identification of any potential impairment indicators, to determine whether an impairment exists, we would compare the carrying amount of a finite-lived intangible asset with the undiscounted cash flows that are expected to result from the use of the asset or related group of assets. If it is determined that the carrying amount of the asset is not recoverable, the amount by which the carrying value exceeds the estimated fair value is recorded as an impairment.
No significant impairment charges relating to long-lived assets, including intangible assets, were recorded in the years ended
December 31, 2015
,
2014
, and
2013
.
73
Goodwill
Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment test. Tests are performed more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
To determine whether goodwill is impaired, we measure the fair values of our reporting units and compare them to the carrying values of the respective units, including goodwill. If the fair value is less than the carrying value of the reporting unit, then the implied value of goodwill would be calculated and compared with the carrying amount of goodwill to determine whether goodwill is impaired.
We estimate the fair values of our reporting units using discounted cash flows. To determine fair values, we must make assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), long-term growth rates for determining terminal value, and discount rates.
No impairment charges relating to goodwill were recorded in the years ended
December 31, 2015
,
2014
, and
2013
.
Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income. Refer to Note
4
, "
Business Combinations
," for further details regarding our 2015 acquisitions.
Restricted Investments
Restricted investments, which consist of certificates of deposit and U.S. treasury securities, are designated as held-to-maturity and are carried at amortized cost, which approximates fair value. The use of these funds is limited to specific purposes as required by regulation in the various states in which we operate, or as protection against the insolvency of capitated providers. We have the ability to hold our restricted investments until maturity and, as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. See Note
10
, "
Restricted Investments
."
Delegated Provider Insolvency
Circumstances may arise where providers to whom we have delegated risk are unable to pay claims they have incurred with third parties in connection with referral services (including hospital inpatient services) provided to our members. The inability of delegated providers to pay referral claims presents us with both immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually assumed such risk. Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do so. To reduce the risk that delegated providers are unable to pay referral claims, we monitor the operational and financial performance of such providers. We also maintain contingency plans that include transferring members to other providers in response to potential network instability.
In certain instances, we have required providers to place funds on deposit with us as protection against their potential insolvency. These reserves are frequently in the form of segregated funds received from the provider and held by us or placed in a third-party financial institution. These funds may be used to pay claims that are the financial responsibility of the provider in the event the provider is unable to meet these obligations. Additionally, we have recorded liabilities for estimated losses arising from provider instability or insolvency in excess of provider funds on deposit with us. Such liabilities were not material at
December 31, 2015
and
2014
.
Premium Revenue - Health Plans
Premium revenue is generated primarily from our Medicaid, Medicare and Marketplace contracts, including agreements with other managed care organizations for which we operate as a subcontractor. Premium revenue is generally received based on per member per month (PMPM) rates established in advance of the periods covered. These premium revenues are recognized in the month that members are entitled to receive health care services, and premiums collected in advance are deferred. The state Medicaid programs and the federal Medicare program periodically adjust premium. Additionally, many of our contracts contain provisions that may adjust or limit revenue or profit, as described below. Consequently, we recognize premium revenue as it is
74
earned under such provisions.
The following table summarizes premium revenue from continuing operations for the periods indicated:
|
Year Ended December 31,
|
||||||||||||||||||||
|
2015
|
2014
|
2013
|
||||||||||||||||||
|
Amount
|
% of Total
|
Amount
|
% of Total
|
Amount
|
% of Total
|
|||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||
|
California
|
$
|
2,200
|
|
16.6
|
%
|
$
|
1,523
|
|
16.9
|
%
|
$
|
750
|
|
12.1
|
%
|
|||||
|
Florida
|
1,199
|
|
9.0
|
|
439
|
|
4.9
|
|
265
|
|
4.3
|
|
||||||||
|
Illinois
|
397
|
|
3.0
|
|
153
|
|
1.7
|
|
8
|
|
0.1
|
|
||||||||
|
Michigan
|
1,067
|
|
8.1
|
|
781
|
|
8.7
|
|
676
|
|
11.0
|
|
||||||||
|
New Mexico
|
1,237
|
|
9.3
|
|
1,076
|
|
11.9
|
|
447
|
|
7.2
|
|
||||||||
|
Ohio
|
2,034
|
|
15.4
|
|
1,553
|
|
17.2
|
|
1,099
|
|
17.8
|
|
||||||||
|
Puerto Rico
|
567
|
|
4.3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
South Carolina
|
348
|
|
2.6
|
|
381
|
|
4.2
|
|
—
|
|
—
|
|
||||||||
|
Texas
|
1,961
|
|
14.8
|
|
1,318
|
|
14.6
|
|
1,291
|
|
20.9
|
|
||||||||
|
Utah
|
331
|
|
2.5
|
|
310
|
|
3.4
|
|
311
|
|
5.0
|
|
||||||||
|
Washington
|
1,602
|
|
12.1
|
|
1,305
|
|
14.5
|
|
1,168
|
|
18.9
|
|
||||||||
|
Wisconsin
|
261
|
|
2.0
|
|
156
|
|
1.7
|
|
143
|
|
2.3
|
|
||||||||
|
Direct delivery
|
37
|
|
0.3
|
|
28
|
|
0.3
|
|
21
|
|
0.4
|
|
||||||||
|
$
|
13,241
|
|
100.0
|
%
|
$
|
9,023
|
|
100.0
|
%
|
$
|
6,179
|
|
100.0
|
%
|
||||||
Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid
Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums):
A portion of certain premiums received by our health plans may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of
$224 million
and
$392 million
at
December 31, 2015
and
December 31, 2014
, respectively, to amounts due government agencies. Approximately
$208 million
of the liability accrued at
December 31, 2015
relates to our participation in Medicaid expansion programs.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. We had
$3 million
recorded at
December 31, 2015
relating to such provisions.
No
such receivables were recorded at
December 31, 2014
.
Profit Sharing and Profit Ceiling:
Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage, in some cases in accordance with a tiered rebate schedule. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. As a result of profits in excess of the amount we are allowed to retain, we recorded a liability of
$10 million
at
December 31, 2015
. The amount recorded at
December 31, 2014
was insignificant.
Retroactive Premium Adjustments:
In New Mexico, when members are retroactively enrolled into our health plan we earn revenue only to the extent of the actual medical costs incurred by us for services provided during those retroactive periods, plus a small percentage of that medical cost for administration and profit. This cost plus arrangement for members retroactively enrolled in our health plan first became effective July 1, 2014 (retroactive to January 1, 2014). We are paid normal monthly capitation rates for the retroactive eligibility periods, and the difference between those capitation rates and the amounts due us on a cost plus basis are periodically settled with the state. To date, no such settlement has been made with the state. Our New Mexico contract is not specific as to the definition of retroactive membership, and the amount we owe the state (or that the state owes us) for the difference between capitation received and amounts due us under the cost plus arrangement varies widely depending upon the definition of retroactive membership.
In August 2015 the state provided us with a request for payment under the terms of this contract provision for the period January 1, 2014 through December 31, 2014. That request was based upon definitions of retroactive membership that were at odds with our interpretations of that term. The New Mexico health plan reduced revenue by approximately
$24 million
in 2015
75
as a result of aligning more closely our definition of retroactive membership with the state's definition. Using the state's definition of retroactive membership, however, we estimate that the state will ultimately seek repayment of an amount that ranges from
$15 million
to
$20 million
higher than what we have accrued. We do not believe that any reasonable definition of retroactive membership supports the state's position, and expect to resolve this matter with payment of the amount we have accrued at December 31, 2015. We are currently engaged in discussions with the state regarding the appropriate amount, if any, owed to the state under this contract term.
Medicare
Risk Adjustment:
Based on member encounter data that we submit to the Centers for Medicare and Medicaid Services (CMS), our Medicare premiums are subject to retroactive increase or decrease based upon member medical conditions for up to
two
years after the original year of service. We estimate the amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health care utilization patterns and CMS practices. Based on our knowledge of member health care utilization patterns and expenses, we have recorded a net payable of
$4 million
and a net receivable of
$8 million
for anticipated Medicare risk adjustment premiums at
December 31, 2015
and
December 31, 2014
, respectively.
Marketplace
Premium Stabilization Programs:
The Affordable Care Act (ACA) established Marketplace premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the "3R's," include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program.
|
•
|
Permanent risk adjustment program: Under this permanent program, our health plans' risk scores are compared to the overall average risk score for the relevant state and market pool. Generally, our health plans will pay into the pool if their risk scores are below the average risk score, and will receive funds from the pool if their risk scores are above the average risk score. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income.
|
|
•
|
Transitional reinsurance program: This program is designed to provide reimbursement to insurers for high cost members. Our health plans pay an annual contribution on a per-member basis, and are eligible for recoveries if claims for individual members exceed a specified threshold, up to a maximum amount. This three-year program will end on December 31, 2016. We recognize the assessments to fund the transitional reinsurance program as a reduction to premium revenue in our consolidated statements of income. We recognize recoveries under the reinsurance program as a reduction to medical care costs in our consolidated statements of income.
|
|
•
|
Temporary risk corridor program: This program is intended to limit gains and losses of insurers by comparing allowable costs to a target amount as defined by the U.S. Department of Health and Human Services (HHS). Variances from the target amount exceeding certain thresholds may result in amounts due to or receivables due from HHS. This three-year program will end on December 31, 2016. Due to uncertainties as to the amount of federal funding available to support the risk corridor program, we do not recognize amounts receivable under this program. All liabilities are recognized as incurred. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk corridor program as an adjustment to premium revenue in our consolidated statements of income.
|
Additionally, the ACA established a minimum annual medical loss ratio (Minimum MLR) of
80%
for the Marketplace. The medical loss ratio represents medical costs as a percentage of premium revenue. What constitutes medical costs and premium revenue are specifically defined by federal regulations. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. Each of the 3R programs is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.
We record receivables or payables related to the 3R programs and the Minimum MLR when the amounts are reasonably estimable as described above, and, for receivables, collection is reasonably assured.
76
Our receivables (payables) for each of these programs, as of the dates indicated, were as follows (in millions):
|
December 31, 2015
|
December 31, 2014
|
||||||
|
Risk adjustment
|
$
|
(214
|
)
|
$
|
(5
|
)
|
|
|
Reinsurance
|
36
|
|
5
|
|
|||
|
Risk corridor
|
(10
|
)
|
—
|
|
|||
|
Minimum MLR
|
(3
|
)
|
—
|
|
|||
Quality Incentives
At several of our health plans, revenue ranging from approximately
1%
to
4%
of certain health plan premiums is earned if certain performance measures are met.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the period presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of
December 31, 2015
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
December 31, 2015
.
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Maximum available quality incentive premium - current period
|
$
|
118
|
|
$
|
90
|
|
$
|
63
|
|
||
|
Amount of quality incentive premium revenue recognized in current period:
|
|||||||||||
|
Earned current period
|
$
|
66
|
|
$
|
40
|
|
$
|
46
|
|
||
|
Earned prior periods
|
13
|
|
4
|
|
9
|
|
|||||
|
Total
|
$
|
79
|
|
$
|
44
|
|
$
|
55
|
|
||
|
Total premium revenue recognized for state health plans with quality incentive premiums
|
$
|
11,107
|
|
$
|
7,084
|
|
$
|
2,980
|
|
||
Medical Care Costs - Health Plans
Expenses related to medical care services are captured in the following categories:
|
•
|
Fee-for-service expenses:
Nearly all hospital services and the majority of our primary care and physician specialist services and LTSS costs are paid on a fee-for-service basis. Under fee-for-service arrangements, we retain the financial responsibility for medical care provided and incur costs based on actual utilization of services. Such expenses are recorded in the period in which the related services are dispensed. The costs of drugs administered in a physician or hospital setting that are not billed through our pharmacy benefit manager are included in fee-for-service costs.
|
|
•
|
Pharmacy expenses:
All drug, injectibles, and immunization costs paid through our pharmacy benefit manager are classified as pharmacy expenses. As noted above, drugs and injectibles not paid through our pharmacy benefit manager are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.
|
|
•
|
Capitation expenses:
Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitated basis. Under capitation arrangements, we pay a fixed amount PMPM to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under capitated arrangements, we remain liable for the provision of certain health care services. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.
|
|
•
|
Direct delivery expenses:
All costs associated with our direct delivery of medical care are separately identified.
|
|
•
|
Other medical expenses:
All medically related administrative costs, certain provider incentive costs, and other health care expenses are classified as other medical expenses. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, care coordination, disease management,
|
77
and 24-hour on-call nurses. Salary and benefit costs are a substantial portion of these expenses. For the years ended
December 31, 2015
,
2014
, and
2013
, medically related administrative costs were
$398 million
,
$263 million
,
and
$153 million
,
respectively.
The following table provides the details of our consolidated medical care costs from continuing operations for the periods indicated (dollars in millions, except PMPM amounts):
|
|
Year Ended December 31,
|
|||||||||||||||||||||||||||||||
|
|
2015
|
2014
|
2013
|
|||||||||||||||||||||||||||||
|
Amount
|
PMPM
|
% of
Total
|
Amount
|
PMPM
|
% of
Total
|
Amount
|
PMPM
|
% of
Total
|
||||||||||||||||||||||||
|
Fee-for-service
|
$
|
8,572
|
|
$
|
218.35
|
|
72.7
|
%
|
$
|
5,673
|
|
$
|
202.87
|
|
70.2
|
%
|
$
|
3,612
|
|
$
|
160.43
|
|
67.1
|
%
|
||||||||
|
Pharmacy
|
1,610
|
|
41.01
|
|
13.7
|
|
1,273
|
|
45.54
|
|
15.8
|
|
935
|
|
41.54
|
|
17.4
|
|
||||||||||||||
|
Capitation
|
982
|
|
25.02
|
|
8.3
|
|
748
|
|
26.77
|
|
9.3
|
|
604
|
|
26.83
|
|
11.2
|
|
||||||||||||||
|
Direct delivery
|
128
|
|
3.26
|
|
1.1
|
|
96
|
|
3.44
|
|
1.2
|
|
48
|
|
2.14
|
|
0.9
|
|
||||||||||||||
|
Other
|
502
|
|
12.79
|
|
4.2
|
|
286
|
|
10.22
|
|
3.5
|
|
181
|
|
8.05
|
|
3.4
|
|
||||||||||||||
|
Total
|
$
|
11,794
|
|
$
|
300.43
|
|
100.0
|
%
|
$
|
8,076
|
|
$
|
288.84
|
|
100.0
|
%
|
$
|
5,380
|
|
$
|
238.99
|
|
100.0
|
%
|
||||||||
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. Such medical care cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.
The most important element in estimating our medical care costs is our estimate for fee-for-service claims which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been paid at the reporting date are collectively referred to as medical costs that are incurred but not paid (IBNP). Our IBNP claims reserve, as reported in our balance sheet, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors. For further information, see Note
11
, "
Medical Claims and Benefits Payable
."
We report reinsurance premiums as a reduction to premium revenue, while related reinsurance recoveries are reported as a reduction to medical care costs. We limit our risk of catastrophic losses by maintaining high deductible reinsurance coverage. Such reinsurance coverage does not relieve us of our primary obligation to our policyholders. We do not consider this coverage to be material because the cost is not significant and the likelihood that coverage will apply is low.
Taxes Based on Premiums
Health Insurer Fee.
The federal government under the ACA imposes an annual fee, or excise tax, on health insurers for each calendar year. The HIF is based on a company's share of the industry's net premiums written during the preceding calendar year, and is non-deductible for income tax purposes. We recognize expense for the HIF over the year on a straight-line basis. Because we primarily serve individuals in government-sponsored programs, we must secure additional reimbursement from our state partners for this added cost. We recognize the related revenue when we have obtained a contractual commitment or payment from a state to reimburse us for the HIF; such HIF revenue is recognized ratably throughout the year.
Premium and Use Tax.
Certain of our health plans are assessed a tax based on premium revenue collected. The premium revenues we receive from these states include the premium tax assessment. We have reported these taxes on a gross basis, as premium tax revenue and as premium tax expense in the consolidated statements of income.
Premium Deficiency Reserves on Loss Contracts
We assess the profitability of our contracts for providing medical care services to our members and identify those contracts where current operating results or forecasts indicate probable future losses. Anticipated future premiums are compared to anticipated medical care costs, including the cost of processing claims. If the anticipated future costs exceed the premiums, a loss contract accrual is recognized. No such accrual was recorded as of
December 31, 2015
or
2014
.
78
Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of multiple services. The first of these is the design, development and implementation (DDI) of a Medicaid management information system (MMIS). An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing (BPO) arrangement. When providing BPO services (which include claims payment and eligibility processing) we also provide the state with other services including both hosting and support, and maintenance.
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, and are therefore multiple-element service arrangements.
Additionally, we evaluate each required deliverable under our multiple-element service arrangements to determine whether it qualifies as a separate unit of accounting. Such evaluation is generally based on whether the deliverable has standalone value to the customer. If the deliverable has standalone value, 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 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. 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. Therefore, absent any contingencies as discussed in the following paragraph, or contract extensions, we would recognize all revenue associated with those contracts over the initial contract period. When a contract is extended, we generally consider the extension to be a continuation of the single unit of accounting; therefore, the deferred revenue as of the extension date is recognized prospectively over the new remaining term of the contract. 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.
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, for example. 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;
|
79
|
•
|
Costs incurred in maintaining and processing member and provider eligibility; and
|
|
•
|
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.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state and Puerto Rico taxes, nondeductible expenses under the Affordable Care Act Health Insurer Fee (HIF), nondeductible compensation and other general and administrative expenses. The effective tax rate may be subject to fluctuations during the year, particularly as a result of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers. For further discussion and disclosure, see Note
14
, "
Income Taxes
."
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash in the PFM Funds Prime Series — Institutional Class, and the PFM Funds Government Series. These funds represent a portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC (PFM), a Virginia business trust registered as an open-end management investment fund. As of
December 31, 2015
and
2014
, our investments with PFM amounted to approximately
$605 million
and
$321 million
, respectively. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with a maximum maturity of
10
years and an average duration of
three
years or less. Restricted investments are invested principally in certificates of deposit and U.S. treasury securities. Concentration of credit risk with respect to accounts receivable is limited because our payors consist principally of the governments of each state in which our health plan subsidiaries operate.
Risks and Uncertainties
Our profitability depends in large part on our ability to accurately predict and effectively manage medical care costs. We continually review our medical costs in light of our underlying claims experience and revised actuarial data. However, several factors could adversely affect medical care costs. These factors, which include changes in health care practices, inflation, new technologies, major epidemics, natural disasters, and malpractice litigation, are beyond our control and may have an adverse effect on our ability to accurately predict and effectively control medical care costs. Costs in excess of those anticipated could have a material adverse effect on our financial condition, results of operations, or cash flows.
We operate health plans primarily as a direct contractor with the states (or Commonwealth), and in Los Angeles County, California, as a subcontractor to another health plan holding a direct contract with the state. We are therefore dependent upon a small number of contracts to support our revenue. The loss of any one of those contracts could have a material adverse effect on our financial position, results of operations, or cash flows. Our ability to arrange for the provision of medical services to our members is dependent upon our ability to develop and maintain adequate provider networks. Our inability to develop or maintain such networks might, in certain circumstances, have a material adverse effect on our financial position, results of operations, or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
Leases.
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ASU 2016-02,
Leases
. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The ASU is effective for us beginning in the first quarter of 2019, and requires a modified retrospective transition approach. Early adoption is permitted; we are currently evaluating the potential effects of the adoption to our financial statements.
80
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which will require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Also, entities will have to assess the realizability of a deferred tax asset related to an available for sale debt security in combination with the entity’s other deferred tax assets. Effective for us in the first quarter of 2018, ASU 2016-01 is applied prospectively with a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Early adoption is permitted in regards to certain provisions of the standard; we are evaluating the potential effects of the adoption to our financial statements.
Revenue Recognition.
In July 2015, the FASB affirmed its proposal to defer the effective date of ASU 2014-09,
Revenue from Contracts with Customers,
for all entities by one year. As a result, public business entities will apply the new revenue standard to annual reporting periods beginning after December 15, 2017, and for interim reporting periods within annual reporting periods beginning after December 15, 2017. We intend to adopt this standard on January 1, 2018. We are currently evaluating our plan for adoption and its impact to our revenue recognition policies, procedures and control framework, and the resulting impact to our consolidated financial position, results of operations and cash flows.
Short-Duration Contracts.
In May 2015, the FASB issued ASU 2015-09,
Disclosures about Short-Duration Contracts
, which will require additional disclosure on the liability for unpaid claims and claim adjustment expenses. We intend to adopt this standard effective for our annual report for the year ending December 31, 2016, and for interim periods thereafter. It requires additional disclosure only and will not have a significant impact to our consolidated financial statements.
Software Licenses.
In April 2015, the FASB issued ASU 2015-05,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
, which will require customers to determine whether a cloud computing arrangement includes the license of software by applying the same guidance cloud service providers use to make this determination. The ASU also eliminates the existing requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. This ASU will be effective for us in the first quarter of 2016, and is applied either prospectively or retrospectively. We are evaluating the potential effects of adoption to our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.
Recent Accounting Pronouncements Adopted
Income Taxes.
In the fourth quarter of 2015, we early adopted ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires deferred tax assets and liabilities to be classified as non-current, in a classified statement of financial position. We have applied the guidance retrospectively to all periods presented. Such retrospective adoption had an insignificant impact to our consolidated balance sheets, and had no impact to our consolidated statements of income, stockholders’ equity, and cash flows.
Business Combinations.
In the fourth quarter of 2015, we early adopted ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
, which requires acquirers to recognize adjustments to provisional amounts identified during the measurement period (a reasonable time period after the acquisition date) in the reporting period in which such adjustment amounts are determined. For the year ended December 31, 2015, there was no impact to our consolidated financial statements.
Debt Issuance Costs.
In the fourth quarter of 2015, we early adopted ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability, consistent with debt discounts. In a subsequent Staff Announcement, the SEC announced that it would not object to the deferral and presentation of debt issuance costs relating to line-of-credit arrangements as an asset. We have applied the guidance retrospectively to all periods presented. Such retrospective adoption had an insignificant impact to our consolidated balance sheets, and had no impact to our consolidated statements of income, stockholders’ equity, and cash flows.
81
3
.
Net Income per Share
The following table sets forth the calculation of the denominators used to compute basic and diluted net income per share:
|
December 31,
|
||||||||
|
2015
|
2014
|
2013
|
||||||
|
(In millions)
|
||||||||
|
Shares outstanding at the beginning of the period
|
49
|
|
46
|
|
47
|
|
||
|
Weighted-average number of shares:
|
||||||||
|
Issued:
|
||||||||
|
Common stock offering
|
3
|
|
—
|
|
—
|
|
||
|
Convertible senior notes
|
—
|
|
1
|
|
—
|
|
||
|
Repurchased
|
—
|
|
—
|
|
(1
|
)
|
||
|
Denominator for basic net income per share
|
52
|
|
47
|
|
46
|
|
||
|
Effect of dilutive securities:
|
||||||||
|
Share-based compensation
|
1
|
|
—
|
|
1
|
|
||
|
Convertible senior notes (1)
|
1
|
|
1
|
|
—
|
|
||
|
1.125% Warrants (1)
|
2
|
|
—
|
|
—
|
|
||
|
Denominator for diluted net income per share
|
56
|
|
48
|
|
47
|
|
||
|
Potentially dilutive common shares excluded from calculations (2):
|
||||||||
|
1.125% Warrants
|
—
|
|
13
|
|
12
|
|
||
_______________________________
|
(1)
|
For more information regarding the convertible senior notes, including the 1.625% Notes, 3.75% Notes, and 3.75% Exchange, refer to Note
12
, "
Debt
." For more information regarding the 1.125% Warrants, refer to Note
13
, "
Derivatives
."
|
|
(2)
|
The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the years ended December 31,
2014
and
2013
, the 1.125% Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
|
4
.
Business Combinations
During 2015, we closed on business combinations in both the Health Plans and Other segments. For all of these transactions we applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to tangible and intangible assets acquired, and liabilities assumed based on their respective fair values. For Health Plans acquisitions, in general, only intangible assets are acquired. All of the 2015 acquisitions were funded using available cash.
Health Plans
Consistent with our strategy to grow in our existing markets, we closed the following Health Plans acquisitions in 2015:
Florida.
On November 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to operation of the Medicaid business, of Integral Health Plan, Inc.
The final purchase price was
$67 million
, and the Florida health plan added approximately
101,000
members in the Northwest and Southwest regions of Florida as a result of this transaction. On the closing date, we withheld
10%
, or approximately
$7 million
, of the purchase price to establish an indemnification amount held as security for the seller's indemnification obligations under the purchase agreement. We have recorded the indemnification amount to restricted assets, which will be settled in November 2016. If we do not have any claims against the seller on or before the settlement date, we will pay the full withhold amount to the seller. As of December 31, 2015, we had not made any claims against the withhold amount.
On August 1, 2015, our Florida health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Preferred Medical Plan, Inc.
The final purchase price was
$8 million
, and the Florida health plan added approximately
23,000
members as a result of this transaction.
82
Michigan.
On September 1, 2015, our Michigan health plan closed on its acquisition of the Medicaid and MIChild contracts, and certain provider agreements, of HealthPlus of Michigan and its subsidiary, HealthPlus Partners, Inc.
The purchase price was
$47 million
, and the Michigan health plan added approximately
68,000
members as a result of this transaction.
For the Health Plans acquisitions closed in 2015, we recorded goodwill amounting to
$90 million
in the aggregate, which relates to future economic benefits arising from expected synergies to be achieved. Such synergies include use of our existing infrastructure to support the added membership. The amount recorded as goodwill represents intangible assets that do not qualify for separate recognition as identifiable intangible assets. The entire amount recorded as goodwill is deductible for income tax purposes. Refer to the table below for a summary of the intangible assets identified, and their economic lives.
Announced Acquisitions.
As described in Note
1
, "
Basis of Presentation
,"
we announced several Health Plans acquisitions in 2015 that did not close until January 1, 2016. Because the closing dates for these acquisitions fell on January 1, 2016, a holiday, approximately
$101 million
was recorded to prepaid expenses and other assets as of December 31, 2015, for purchase price amounts funded in December 2015. Such amounts are reported in investing activities in the accompanying consolidated statements of cash flows.
The total aggregate purchase price for these acquisitions amounted to approximately
$115 million
, which will be allocated among goodwill and intangible assets. The initial accounting for these transactions is incomplete.
Transaction costs associated with the Health Plans acquisitions were insignificant.
Other
Pathways.
Consistent with our strategy to acquire and develop new products and capabilities, on
November 1, 2015, we acquired all of the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways), formerly known as Providence Human Services, LLC. Pathways is one of the largest national providers of accessible, outcome-based behavioral/mental health and social services with operations in 23 states and the District of Columbia.
The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of acquisition.
|
November 1, 2015
|
|||
|
(In millions)
|
|||
|
Assets:
|
|||
|
Cash and cash equivalents
|
$
|
20
|
|
|
Receivables
|
52
|
|
|
|
Prepaid expenses and other current assets
|
4
|
|
|
|
Property and equipment
|
14
|
|
|
|
Intangible assets
|
19
|
|
|
|
Goodwill
|
155
|
|
|
|
Other assets
|
1
|
|
|
|
Liabilities:
|
|||
|
Medical claims and benefits payable
|
(2
|
)
|
|
|
Accounts payable and accrued liabilities
|
(23
|
)
|
|
|
Deferred revenue
|
(2
|
)
|
|
|
Other long-term liabilities
|
(7
|
)
|
|
|
Total purchase price
|
$
|
231
|
|
As of December 31, 2015, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments is finalized, including tax assets and liabilities. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized, including expected medical cost synergies to be achieved, and the workforce acquired. Such synergies include the achievement of better outcomes for our members through more effective care coordination and integration, and our retention of the net profit margin captured by the mental health provider. The workforce acquired is a significant component of goodwill because it represents primarily the patient-facing employees, now employed by us, who provide the behavioral/mental health and social services. Approximately
10%
of the goodwill recorded at December 31, 2015, is deductible for income tax purposes. This percentage may increase if certain tax elections are completed in 2016.
83
The gross contractual amount of receivables, at the acquisition date, was approximately
$61 million
. At the acquisition date, the best estimate of contractual cash flows not expected to be collected was approximately
$9 million
.
In connection with this acquisition, we incurred approximately
$3 million
in transaction costs, which are recorded in general and administrative expenses.
The following table presents the intangible assets identified, by segment. The weighted-average amortization period for the Health Plans identified intangible assets, in the aggregate, is
6.4 years
. The weighted-average amortization period for the Other identified intangible assets, in the aggregate, is
4.2 years
.
|
Fair Value
|
Life (years)
|
||||
|
(In millions)
|
|||||
|
Intangible asset type
|
|||||
|
Health Plans:
|
|||||
|
Contract rights - member list
|
$
|
23
|
|
5
|
|
|
Provider network
|
9
|
|
10
|
||
|
Other:
|
|||||
|
Contract licenses
|
5
|
|
2
|
||
|
Contract rights - member list
|
14
|
|
5
|
||
|
$
|
51
|
|
|||
5
.
Fair Value Measurements
We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including derivatives and current portion of long-term debt) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs
Level 1 financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
Level 2 — Directly or Indirectly Observable Inputs
Level 2 financial instruments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs
Level 3 financial instruments are valued using unobservable inputs that represent management's best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include the following:
Derivative financial instruments
. Derivative financial instruments include the
1.125%
Call Option derivative asset and the 1.125% Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of
December 31, 2015
included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note
13
, "
Derivatives
," the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated. The changes in Level 3 instruments for the year ended
December 31, 2015
were insignificant.
84
Our financial instruments measured at fair value on a recurring basis at
December 31, 2015
, were as follows:
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
|
(In millions)
|
||||||||||||||
|
Corporate debt securities
|
$
|
1,184
|
|
$
|
—
|
|
$
|
1,184
|
|
$
|
—
|
|
|||
|
Government-sponsored enterprise securities (GSEs)
|
211
|
|
211
|
|
—
|
|
—
|
|
|||||||
|
Municipal securities
|
185
|
|
—
|
|
185
|
|
—
|
|
|||||||
|
Certificates of deposit
|
80
|
|
—
|
|
80
|
|
—
|
|
|||||||
|
U.S. treasury notes
|
78
|
|
78
|
|
—
|
|
—
|
|
|||||||
|
Asset-backed securities
|
63
|
|
—
|
|
63
|
|
—
|
|
|||||||
|
Subtotal - current investments
|
1,801
|
|
289
|
|
1,512
|
|
—
|
|
|||||||
|
1.125% Call Option derivative asset
|
374
|
|
—
|
|
—
|
|
374
|
|
|||||||
|
Total assets measured at fair value on a recurring basis
|
$
|
2,175
|
|
$
|
289
|
|
$
|
1,512
|
|
$
|
374
|
|
|||
|
1.125% Conversion Option derivative liability
|
$
|
374
|
|
$
|
—
|
|
$
|
—
|
|
$
|
374
|
|
|||
|
Total liabilities measured at fair value on a recurring basis
|
$
|
374
|
|
$
|
—
|
|
$
|
—
|
|
$
|
374
|
|
|||
Our financial instruments measured at fair value on a recurring basis at
December 31, 2014
, were as follows:
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
|
(In millions)
|
||||||||||||||
|
Corporate debt securities
|
$
|
641
|
|
$
|
—
|
|
$
|
641
|
|
$
|
—
|
|
|||
|
GSEs
|
122
|
|
122
|
|
—
|
|
—
|
|
|||||||
|
Municipal securities
|
127
|
|
—
|
|
127
|
|
—
|
|
|||||||
|
Certificates of deposit
|
69
|
|
—
|
|
69
|
|
—
|
|
|||||||
|
U.S. treasury notes
|
60
|
|
60
|
|
—
|
|
—
|
|
|||||||
|
Subtotal - current investments
|
1,019
|
|
182
|
|
837
|
|
—
|
|
|||||||
|
1.125% Call Option derivative asset
|
329
|
|
—
|
|
—
|
|
329
|
|
|||||||
|
Total assets measured at fair value on a recurring basis
|
$
|
1,348
|
|
$
|
182
|
|
$
|
837
|
|
$
|
329
|
|
|||
|
1.125% Conversion Option derivative liability
|
$
|
329
|
|
$
|
—
|
|
$
|
—
|
|
$
|
329
|
|
|||
|
Total liabilities measured at fair value on a recurring basis
|
$
|
329
|
|
$
|
—
|
|
$
|
—
|
|
$
|
329
|
|
|||
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our senior notes, which are classified as Level 2 financial instruments, are indicated in the following table. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. As described in Note
2
, "
Significant Accounting Policies
," the carrying amount of debt has been reduced by deferred issuance costs for all periods presented.
|
|
December 31, 2015
|
December 31, 2014
|
|||||||||||||
|
|
Carrying
|
Total Fair Value
|
Carrying
|
Total Fair Value
|
|||||||||||
|
|
Amount
|
Amount
|
|||||||||||||
|
|
(In millions)
|
||||||||||||||
|
5.375% Notes
|
$
|
689
|
|
$
|
700
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
1.125% Convertible Notes
|
448
|
|
865
|
|
426
|
|
767
|
|
|||||||
|
1.625% Convertible Notes
|
273
|
|
365
|
|
264
|
|
337
|
|
|||||||
|
|
$
|
1,410
|
|
$
|
1,930
|
|
$
|
690
|
|
$
|
1,104
|
|
|||
85
6
.
Investments
The following tables summarize our investments as of the dates indicated:
|
December 31, 2015
|
|||||||||||||||
|
Amortized
|
Gross
Unrealized
|
Estimated
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
|
(In millions)
|
|||||||||||||||
|
Corporate debt securities
|
$
|
1,189
|
|
$
|
—
|
|
$
|
5
|
|
$
|
1,184
|
|
|||
|
GSEs
|
212
|
|
—
|
|
1
|
|
211
|
|
|||||||
|
Municipal securities
|
186
|
|
—
|
|
1
|
|
185
|
|
|||||||
|
Certificates of deposit
|
80
|
|
—
|
|
—
|
|
80
|
|
|||||||
|
U.S. treasury notes
|
78
|
|
—
|
|
—
|
|
78
|
|
|||||||
|
Asset-backed securities
|
63
|
|
—
|
|
—
|
|
63
|
|
|||||||
|
$
|
1,808
|
|
$
|
—
|
|
$
|
7
|
|
$
|
1,801
|
|
||||
|
December 31, 2014
|
|||||||||||||||
|
Amortized
|
Gross
Unrealized
|
Estimated
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
|
(In millions)
|
|||||||||||||||
|
Corporate debt securities
|
$
|
643
|
|
$
|
—
|
|
$
|
2
|
|
$
|
641
|
|
|||
|
GSEs
|
122
|
|
—
|
|
—
|
|
122
|
|
|||||||
|
Municipal securities
|
127
|
|
—
|
|
—
|
|
127
|
|
|||||||
|
Certificates of deposit
|
69
|
|
—
|
|
—
|
|
69
|
|
|||||||
|
U.S. treasury notes
|
60
|
|
—
|
|
—
|
|
60
|
|
|||||||
|
$
|
1,021
|
|
$
|
—
|
|
$
|
2
|
|
$
|
1,019
|
|
||||
The contractual maturities of our investments as of
December 31, 2015
are summarized below:
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
|
(In millions)
|
|||||||
|
Due in one year or less
|
$
|
830
|
|
$
|
829
|
|
|
|
Due after one year through five years
|
967
|
|
962
|
|
|||
|
Due after five years through ten years
|
11
|
|
10
|
|
|||
|
$
|
1,808
|
|
$
|
1,801
|
|
||
Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the years ended
December 31, 2015
,
2014
and
2013
were insignificant.
We have determined that unrealized gains and losses at
December 31, 2015
and
2014
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.
86
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, 2015
.
|
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 Positions
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Total Number of Positions
|
||||||||||||||||
|
|
(Dollars in millions)
|
||||||||||||||||||||
|
Corporate debt securities
|
$
|
825
|
|
$
|
4
|
|
588
|
|
$
|
119
|
|
$
|
1
|
|
87
|
|
|||||
|
GSEs
|
182
|
|
1
|
|
77
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Municipal securities
|
128
|
|
1
|
|
181
|
|
5
|
|
—
|
|
12
|
|
|||||||||
|
Certificates of deposit
|
53
|
|
—
|
|
218
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
U.S. treasury notes
|
53
|
|
—
|
|
32
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Asset-backed securities
|
55
|
|
—
|
|
47
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
$
|
1,296
|
|
$
|
6
|
|
1,143
|
|
$
|
124
|
|
$
|
1
|
|
99
|
|
||||||
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, 2014
.
|
In a Continuous Loss Position
for Less than 12 Months
|
In a Continuous Loss Position
for 12 Months or More
|
||||||||||||||||||||
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Total Number of Positions
|
Estimated
Fair
Value
|
Unrealized
Losses
|
Total Number of Positions
|
||||||||||||||||
|
|
(Dollars in millions)
|
||||||||||||||||||||
|
Corporate debt securities
|
$
|
379
|
|
$
|
1
|
|
265
|
|
$
|
29
|
|
$
|
1
|
|
10
|
|
|||||
|
GSEs
|
75
|
|
—
|
|
22
|
|
3
|
|
—
|
|
3
|
|
|||||||||
|
Municipal securities
|
54
|
|
—
|
|
64
|
|
11
|
|
—
|
|
13
|
|
|||||||||
|
Certificates of deposit
|
13
|
|
—
|
|
52
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
U.S. treasury notes
|
19
|
|
—
|
|
13
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
$
|
540
|
|
$
|
1
|
|
416
|
|
$
|
43
|
|
$
|
1
|
|
26
|
|
||||||
87
7
.
Receivables
Receivables consist primarily of amounts due from government Medicaid agencies, which may be subject to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for doubtful accounts is immaterial. The information below is presented by segment.
|
December 31,
|
|||||||
|
2015
|
2014
|
||||||
|
(In millions)
|
|||||||
|
California
|
$
|
104
|
|
$
|
311
|
|
|
|
Florida
|
22
|
|
2
|
|
|||
|
Illinois
|
35
|
|
32
|
|
|||
|
Michigan
|
39
|
|
20
|
|
|||
|
New Mexico
|
51
|
|
50
|
|
|||
|
Ohio
|
66
|
|
45
|
|
|||
|
Puerto Rico
|
33
|
|
—
|
|
|||
|
South Carolina
|
6
|
|
4
|
|
|||
|
Texas
|
56
|
|
29
|
|
|||
|
Utah
|
18
|
|
6
|
|
|||
|
Washington
|
53
|
|
43
|
|
|||
|
Wisconsin
|
22
|
|
8
|
|
|||
|
Direct delivery and other
|
6
|
|
11
|
|
|||
|
Total Health Plans segment
|
511
|
|
561
|
|
|||
|
Molina Medicaid Solutions segment
|
37
|
|
35
|
|
|||
|
Other segment
|
49
|
|
—
|
|
|||
|
$
|
597
|
|
$
|
596
|
|
||
8
.
Property, Equipment, and Capitalized Software
A summary of property, equipment, and capitalized software is as follows:
|
|
December 31,
|
||||||
|
|
2015
|
2014
|
|||||
|
|
(In millions)
|
||||||
|
Land
|
$
|
16
|
|
$
|
15
|
|
|
|
Building and improvements
|
153
|
|
195
|
|
|||
|
Furniture and equipment
|
250
|
|
141
|
|
|||
|
Capitalized software
|
336
|
|
267
|
|
|||
|
755
|
|
618
|
|
||||
|
Less: accumulated depreciation and amortization on building and improvements, furniture and equipment
|
(167
|
)
|
(129
|
)
|
|||
|
Less: accumulated amortization for capitalized software
|
(195
|
)
|
(148
|
)
|
|||
|
(362
|
)
|
(277
|
)
|
||||
|
Property, equipment, and capitalized software, net
|
$
|
393
|
|
$
|
341
|
|
|
Depreciation recognized for building and improvements, and furniture and equipment was
$49 million
,
$35 million
, and
$27 million
for the years ended
December 31, 2015
,
2014
and
2013
, respectively. Amortization of capitalized software was
$52 million
,
$59 million
, and
$46 million
for the years ended
December 31, 2015
,
2014
and
2013
, respectively.
Molina Center.
We acquired the Molina Center in December 2011. Subsequently, in June 2013 we entered into a sale-leaseback transaction for the Molina Center. Due to our continuing involvement with the leased property, the sale did not qualify for sales recognition and we remain the "accounting owner" of the property. See Note
12
, "
Debt
."
88
Future minimum rental income on noncancelable leases from third party tenants of the Molina Center is sublease rental income, and is reported in other revenue in our consolidated statements of income. The future minimum rental income is as follows:
|
2016
|
2017
|
2018
|
2019
|
2020
|
Thereafter
|
Total
|
||||||||||||||||
|
(In millions)
|
||||||||||||||||||||||
|
Future minimum rentals
|
$
|
4
|
|
4
|
|
4
|
|
2
|
|
2
|
|
1
|
|
$
|
17
|
|
||||||
9
.
Goodwill and Intangible Assets
The following table provides the details of identified intangible assets, by major class, for the periods indicated:
|
Cost
|
Accumulated
Amortization
|
Net
Balance
|
|||||||||
|
|
(In millions)
|
||||||||||
|
Intangible assets:
|
|||||||||||
|
Contract rights and licenses
|
$
|
224
|
|
$
|
120
|
|
$
|
104
|
|
||
|
Customer relationships
|
25
|
|
23
|
|
2
|
|
|||||
|
Contract backlog
|
24
|
|
24
|
|
—
|
|
|||||
|
Provider networks
|
27
|
|
11
|
|
16
|
|
|||||
|
Balance at December 31, 2015
|
$
|
300
|
|
$
|
178
|
|
$
|
122
|
|
||
|
Intangible assets:
|
|||||||||||
|
Contract rights and licenses
|
$
|
182
|
|
$
|
105
|
|
$
|
77
|
|
||
|
Customer relationships
|
25
|
|
23
|
|
2
|
|
|||||
|
Contract backlog
|
24
|
|
23
|
|
1
|
|
|||||
|
Provider networks
|
18
|
|
9
|
|
9
|
|
|||||
|
Balance at December 31, 2014
|
$
|
249
|
|
$
|
160
|
|
$
|
89
|
|
||
Based on the balances of our identifiable intangible assets as of
December 31, 2015
, we estimate that our intangible asset amortization will be
$25 million
in
2016
,
$25 million
in
2017
,
$22 million
in
2018
,
$18 million
in
2019
, and
$13 million
in
2020
. For a presentation of our goodwill and intangible assets by reportable segment, refer to Note
20
, "
Segment Information
."
The following table presents the balances of goodwill as of
December 31, 2015
and
2014
:
|
December 31, 2014
|
Acquisitions by Segment
|
December 31, 2015
|
|||||||||||||
|
Health Plans
|
Other
|
||||||||||||||
|
(In millions)
|
|||||||||||||||
|
Goodwill, gross
|
$
|
330
|
|
$
|
90
|
|
$
|
157
|
|
$
|
577
|
|
|||
|
Accumulated impairment losses
|
(58
|
)
|
—
|
|
—
|
|
(58
|
)
|
|||||||
|
Goodwill, net
|
$
|
272
|
|
$
|
90
|
|
$
|
157
|
|
$
|
519
|
|
|||
The changes in the carrying amounts of goodwill and intangible assets, at cost, in
2015
were due to the acquisitions described in Note
4
, "
Business Combinations
."
89
10
.
Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. In connection with a Molina Medicaid Solutions segment state contract, we maintained restricted investments as collateral for a letter of credit as of December 31, 2014. The following table presents the balances of restricted investments:
|
December 31,
|
|||||||
|
2015
|
2014
|
||||||
|
(In millions)
|
|||||||
|
Florida
|
$
|
34
|
|
$
|
29
|
|
|
|
Michigan
|
1
|
|
1
|
|
|||
|
New Mexico
|
43
|
|
35
|
|
|||
|
Ohio
|
12
|
|
13
|
|
|||
|
Puerto Rico
|
10
|
|
5
|
|
|||
|
South Carolina
|
—
|
|
6
|
|
|||
|
Texas
|
4
|
|
3
|
|
|||
|
Utah
|
4
|
|
4
|
|
|||
|
Wisconsin
|
1
|
|
—
|
|
|||
|
Other
|
—
|
|
1
|
|
|||
|
Total Health Plans segment
|
109
|
|
97
|
|
|||
|
Molina Medicaid Solutions segment
|
—
|
|
5
|
|
|||
|
$
|
109
|
|
$
|
102
|
|
||
The contractual maturities of our held-to-maturity restricted investments as of
December 31, 2015
are summarized below.
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
|
(In millions)
|
|||||||
|
Due in one year or less
|
$
|
100
|
|
$
|
100
|
|
|
|
Due one year through five years
|
9
|
|
9
|
|
|||
|
$
|
109
|
|
$
|
109
|
|
||
11
.
Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated.
|
December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Fee-for-service claims incurred but not paid (IBNP)
|
$
|
1,191
|
|
$
|
871
|
|
$
|
424
|
|
||
|
Pharmacy payable
|
88
|
|
71
|
|
45
|
|
|||||
|
Capitation payable
|
140
|
|
28
|
|
20
|
|
|||||
|
Other
|
266
|
|
231
|
|
181
|
|
|||||
|
$
|
1,685
|
|
$
|
1,201
|
|
$
|
670
|
|
|||
"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Non-risk provider payables amounted to
$167 million
,
$119 million
and
$151 million
, as of
December 31, 2015
,
2014
and
2013
, respectively.
The following table presents the components of the change in our medical claims and benefits payable from continuing and discontinued operations combined for the periods indicated. The amounts presented for "Components of medical care costs
90
related to: Prior periods" represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(Dollars in millions)
|
|||||||||||
|
Balances at beginning of period
|
$
|
1,201
|
|
$
|
670
|
|
$
|
495
|
|
||
|
Components of medical care costs related to:
|
|||||||||||
|
Current period
|
11,935
|
|
8,123
|
|
5,434
|
|
|||||
|
Prior periods
|
(141
|
)
|
(46
|
)
|
(53
|
)
|
|||||
|
Total medical care costs
|
11,794
|
|
8,077
|
|
5,381
|
|
|||||
|
Change in non-risk provider payables
|
48
|
|
(32
|
)
|
111
|
|
|||||
|
Payments for medical care costs related to:
|
|||||||||||
|
Current period
|
10,448
|
|
7,064
|
|
4,932
|
|
|||||
|
Prior periods
|
910
|
|
450
|
|
385
|
|
|||||
|
Total paid
|
11,358
|
|
7,514
|
|
5,317
|
|
|||||
|
Balances at end of period
|
$
|
1,685
|
|
$
|
1,201
|
|
$
|
670
|
|
||
That portion of our total medical claims and benefits payable liability that is most subject to variability in the estimate is fee-for-service claims incurred but not paid (IBNP). Our IBNP, as included in medical claims and benefits payable, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using actuarial methods based on a number of factors.
Assuming that our initial estimate of IBNP is accurate, we believe that amounts ultimately paid would generally be between
8%
and
10%
less than the IBNP liability recorded at the end of the period as a result of the inclusion in that liability of the provision for adverse claims deviation and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate—we only know when the circumstances for any one or more factors are out of the ordinary.
The use of a consistent methodology in estimating our liability for medical claims and benefits payable minimizes the degree to which the under– or overestimation of that liability at the close of one period may affect consolidated results of operations in subsequent periods. In particular, the use of a consistent methodology should result in the replenishment of reserves during any given period in a manner that generally offsets the benefit of favorable prior period development in that period. Facts and circumstances unique to the estimation process at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent periods. Any absence of adverse claims development (as well as the expensing through general and administrative expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate.
As indicated above, the amounts ultimately paid out on our medical claims and benefits payable liabilities in fiscal years
2015
,
2014
, and
2013
were less than what we had expected when we had established those liabilities. The differences between our original estimates and the amounts ultimately paid out (or now expected to be ultimately paid out) for the most part related to IBNP. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
2015
We believe that the most significant factors that will determine the accuracy of our IBNP estimates at
December 31, 2015
are:
|
•
|
A new version of diagnosis codes was required for all claims with dates of service October 1, 2015 and later. As a result, payment was delayed for a significant number of claims due to the use of diagnosis codes that were no longer valid. Due to the resulting variability in the ratio of paid to billed amounts, the reserves are subject to more than the usual amount of uncertainty.
|
91
|
•
|
At our Illinois, Puerto Rico and Wisconsin health plans, we overpaid certain provider and outpatient facility claims due to a system configuration error. For this reason, the reserves are subject to more than the usual amount of uncertainty.
|
|
•
|
Our Michigan health plan added approximately
68,000
new members under an acquisition in the third quarter of 2015. Because these new members may have different utilization patterns than our legacy members, the reserves are subject to more than the usual amount of uncertainty.
|
|
•
|
Our Puerto Rico health plan started operations on April 1, 2015. Because we lack sufficient historical claims data, our reserves as of December 31, 2015 are based on a combination of claims payment experience and the expected claims in the pricing assumptions. For this reason, the reserves are subject to more than the usual amount of uncertainty.
|
We recognized favorable prior period claims development in the amount of
$141 million
for the year ended
December 31, 2015
. This amount represents our estimate as of
December 31, 2015
, of the extent to which our initial estimate of medical claims and benefits payable at
December 31, 2014
was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
|
•
|
At our Ohio and California health plans, approximately
61,000
and
100,000
members, respectively, were enrolled in the new Medicaid expansion program during 2014. Also in Ohio, approximately
17,000
members were enrolled in the new MMP program in 2014. Because we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a number of factors that included pricing assumptions provided by the state; our expectations regarding pent up demand; our beliefs about the speed at which new members would utilize health care services; and other factors. Our actual costs were ultimately less than expected.
|
|
•
|
At our New Mexico health plan, the state implemented a retroactive increase to the provider fee schedules in mid-2014. As a result, many claims that were previously settled were reopened, and subject to, additional payment. Because our reserving methodology is most accurate when claims payment patterns are consistent and predictable, the payment of additional amounts on claims that in some cases had been settled more than six months before added a substantial degree of complexity to our liability estimation process. Due to the difficulties in addressing that added complexity, liabilities recorded as of December 31, 2014, were in excess of amounts ultimately paid.
|
|
•
|
At our Washington health plan, in 2015 we collected amounts related to certain claims paid in 2013. Such collections were not anticipated in our reserves as of December 31, 2014.
|
2014
We recognized favorable prior period claims development in the amount of
$46 million
for the year ended December 31, 2014. This amount represented our estimate as of December 31, 2014, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2013 was more than the amount that was ultimately paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
|
•
|
At our Ohio health plan, we entered new regions in the state, and a new product, ABD Kids, in July 2013. Because we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a number of factors that included pricing assumptions provided by the state; our expectations regarding pent up demand; our beliefs about the speed at which new members would utilize health care services; and other factors. Our actual costs were ultimately less than expected.
|
|
•
|
At our Michigan health plan, we overestimated the impact of certain unpaid potentially high-dollar claims. In addition, we overestimated the impact of the flu season on the outpatient claims for November and December 2013, which caused an overestimation in our outpatient reserve liability as of December 31, 2013.
|
2013
We recognized favorable prior period claims development in the amount of
$53 million
for the year ended December 31, 2013. This amount represented our estimate as of December 31, 2013, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2012 was more than the amount that was ultimately paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
|
•
|
At our Washington health plan certain high-cost newborns, as well as other high-cost disabled members, were covered by the health plan effective July 1, 2012. Because we lacked sufficient historical claims data, we initially estimated the reserves for these new members based upon a number of factors. Our actual costs were ultimately less than expected.
|
|
•
|
At our New Mexico health plan, we overestimated the impact of certain high-dollar outstanding claim payments as of December 31, 2012.
|
92
|
•
|
At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to our ABD members.
|
12
.
Debt
As of
December 31, 2015
, contractual maturities of debt for the years ending December 31 are as follows (in millions):
|
Total
|
2016
|
2017
|
2018
|
2019
|
2020
|
Thereafter
|
|||||||||||||||||||||
|
5.375% Notes
|
$
|
700
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
700
|
|
||||||
|
1.125% Convertible Notes
|
550
|
|
—
|
|
—
|
|
—
|
|
—
|
|
550
|
|
—
|
|
|||||||||||||
|
1.625% Convertible Notes (1)
|
302
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
302
|
|
|||||||||||||
|
Other
|
1
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||||||
|
$
|
1,553
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
550
|
|
$
|
1,002
|
|
|||||||
|
(1)
|
The 1.625% Notes have a contractual maturity date in 2044; however, on specified dates beginning in 2018 as described below, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, or we may redeem any or all of the 1.625% Notes.
|
Substantially all of our debt is held at the parent, which is reported in the Other segment. The principal amounts, unamortized discount (net of premium related to 1.625% Notes), unamortized issuance costs, and net carrying amounts of debt were as follows:
|
Principal Balance
|
Unamortized Discount
|
Unamortized Issuance Costs
|
Net Carrying Amount
|
||||||||||||
|
|
(In millions)
|
||||||||||||||
|
December 31, 2015:
|
|||||||||||||||
|
5.375% Notes
|
$
|
700
|
|
$
|
—
|
|
$
|
11
|
|
$
|
689
|
|
|||
|
1.125% Convertible Notes
|
550
|
|
95
|
|
7
|
|
448
|
|
|||||||
|
1.625% Convertible Notes
|
302
|
|
25
|
|
4
|
|
273
|
|
|||||||
|
Other
|
1
|
|
—
|
|
—
|
|
1
|
|
|||||||
|
$
|
1,553
|
|
$
|
120
|
|
$
|
22
|
|
$
|
1,411
|
|
||||
|
December 31, 2014:
|
|||||||||||||||
|
1.125% Convertible Notes
|
$
|
550
|
|
$
|
115
|
|
$
|
9
|
|
$
|
426
|
|
|||
|
1.625% Convertible Notes
|
302
|
|
33
|
|
5
|
|
264
|
|
|||||||
|
$
|
852
|
|
$
|
148
|
|
$
|
14
|
|
$
|
690
|
|
||||
|
Years Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Interest cost recognized for the period relating to:
|
|||||||||||
|
Contractual interest coupon rate
|
$
|
17
|
|
$
|
13
|
|
$
|
13
|
|
||
|
Amortization of the discount
|
29
|
|
26
|
|
22
|
|
|||||
|
$
|
46
|
|
$
|
39
|
|
$
|
35
|
|
|||
5.375% Senior Notes due 2022.
On November 10, 2015, we completed the private offering of
$700 million
aggregate principal amount of senior notes (
5.375%
Notes) due November 15, 2022, unless earlier redeemed. Interest is payable semiannually in arrears on May 15 and November 15, beginning on May 15, 2016. The 5.375% Notes are not convertible into our common stock or any other securities.
The 5.375% Notes are guaranteed by certain of our wholly owned subsidiaries. The 5.375% Notes and the guarantees are effectively subordinated to all existing and future secured debt of us and our guarantors to the extent of the assets securing such debt. In addition, the 5.375% Notes and the guarantees are structurally subordinated to all indebtedness and other liabilities and preferred stock of our subsidiaries that do not guarantee the 5.375% Notes.
We may redeem some or all of the 5.375% Notes at any time, and prior to August 15, 2022, at a price equal to
100%
of the principal amount redeemed plus accrued and unpaid interest thereon, plus a "make-whole" premium. Thereafter, we may redeem some or all of the 5.375% Notes at a price equal to 100% of the principal amount redeemed plus accrued and unpaid
93
interest thereon. The 5.375% Notes contain customary non-financial covenants and change of control provisions.
In connection with the issuance and sale of the 5.375% Notes, we entered into a registration rights agreement. Under this agreement, we will use commercially reasonable efforts to register substantially identical notes (the Exchange Notes) with the SEC in 2016. We will then offer such freely tradable Exchange Notes in exchange for the 5.375% Notes. We will pay additional interest on the 5.375% Notes if the Exchange Notes offering is not completed timely.
Credit Facility.
In June 2015, we
entered into an unsecured
$250 million
revolving credit facility (Credit Facility). The Credit Facility has a term of five years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to
$350 million
. As of
December 31, 2015
, outstanding letters of credit amounting to
$6 million
reduced the borrowing capacity to
$244 million
, and
no
amounts were outstanding under the Credit Facility.
Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. 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.
Although the Credit Facility is not secured by any of our assets, certain of our wholly owned subsidiaries have jointly and severally guaranteed our obligations under the Credit Facility.
The Credit Facility contains customary non-financial and financial covenants, including a minimum fixed charge coverage ratio, a maximum debt-to-EBITDA ratio and minimum statutory net worth. At
December 31, 2015
, we were in compliance with all financial covenants under the Credit Facility.
1.125% Cash Convertible Senior Notes due 2020.
In February 2013, we issued
$550 million
aggregate principal amount of
1.125%
cash convertible senior notes (1.125% Notes) due January 15, 2020, unless earlier repurchased or converted. Interest is payable semiannually in arrears on January 15 and July 15.
The 1.125% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.125% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate for the 1.125% Notes is
24.5277
shares of our common stock per $1,000 principal amount of the 1.125% Notes. This represents an initial conversion price of approximately
$40.77
per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount of 1.125% Notes, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Notes prior to the maturity date. Holders may convert their 1.125% Notes only under the following circumstances:
|
•
|
during any calendar quarter commencing after the calendar quarter ending on
June 30, 2013
(and only during such calendar quarter), if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
•
|
during the
five
business day period immediately after any
five
consecutive trading day period (the measurement period) in which the trading price per
$1,000
principal amount of 1.125% Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
|
|
•
|
upon the occurrence of specified corporate events; or
|
|
•
|
at any time on or after
July 15, 2019
until the close of business on the second scheduled trading day immediately preceding the maturity date.
|
The 1.125% Notes met the stock price trigger in the quarter ended December 31, 2015, and are convertible into cash through at least March 31, 2016. Because the 1.125% Notes may be converted to cash within 12 months, the
$448 million
carrying amount is reported in current portion of long-term debt as of December 31, 2015.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% Conversion Option), which was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option settles or expires. The initial fair value liability of the 1.125% Conversion Option simultaneously reduced the carrying value of the 1.125% Notes (effectively an original issuance discount).
94
This discount is amortized to the 1.125% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate of approximately
6%
. As of
December 31, 2015
, the 1.125% Notes have a remaining amortization period of
4.0
years. The 1.125% Notes' if-converted value exceeded their principal amount by approximately
$332 million
and
$93 million
as of
December 31, 2015
and
December 31, 2014
, respectively.
1.625% Convertible Senior Notes due 2044.
In September 2014, we issued
$125 million
principal amount of 1.625% convertible senior notes (1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed or converted. Combined with the 1.625% Notes issued in connection with the 3.75% Exchange described below, the aggregate principal amount issued under the 1.625% Notes was
$302 million
.
Interest is payable
semiannually
in arrears on February 15 and August 15. In addition, beginning with the semiannual interest period commencing immediately following the interest payment date on August 15, 2018, contingent interest will accrue on the 1.625% Notes during any semiannual interest period in which certain conditions or events occur, or under certain events of default. For example, additional interest of
0.25
% per year will be payable on the 1.625% Notes for any semiannual interest period for which the principal amount of 1.625% Notes outstanding is less than $
100 million
.
The 1.625% Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 1.625% Notes; equal in right of payment to any of our unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of our subsidiaries.
The initial conversion rate for the 1.625% Notes is
17.2157
shares of our common stock per $1,000 principal amount of the 1.625% Notes. This represents an initial conversion price of approximately $
58.09
per share of our common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as defined in the related indenture).
Holders may convert their 1.625% Notes only under the following circumstances:
|
•
|
during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
•
|
during the
five
business day period after any
five
consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of 1.625% Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
|
|
•
|
upon the occurrence of specified corporate events;
|
|
•
|
if we call any 1.625% Notes for redemption, at any time until the close of business on the business day immediately preceding the redemption date;
|
|
•
|
during the period from, and including, May 15, 2018 to the close of business on the business day immediately preceding August 19, 2018; or
|
|
•
|
at any time on or after February 15, 2044 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 1.625% Notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
|
As of
December 31, 2015
, the 1.625% Notes were not convertible.
We may not redeem the 1.625% Notes prior to
August 19, 2018
. On or after August 19, 2018, we may redeem for cash all or part of the 1.625% Notes, except for the 1.625% Notes we are required to repurchase in connection with a fundamental change or on any specified repurchase date. The redemption price for the 1.625% Notes will equal
100%
of the principal amount of the 1.625% Notes being redeemed, plus accrued and unpaid interest. In addition, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes for cash on
August 19, 2018
,
August 19, 2024
,
August 19, 2029
,
August 19, 2034
and
August 19, 2039
, in each case, at a specified price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and unpaid interest.
Because the 1.625% Notes are net share settled and have cash settlement features, we have allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt discount that is amortized back to the 1.625% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. The expected life of the debt is approximately
four
years, beginning on the issuance date and
95
ending on the first date we may redeem the notes in August 2018. As of
December 31, 2015
, the 1.625% Notes have a remaining amortization period of
2.6
years. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately
5%
. The outstanding 1.625% Notes’ if-converted value exceeded their principal amount by approximately
$10 million
as of
December 31, 2015
, and did not exceed their principal amount as of
December 31, 2014
. At
December 31, 2015
and
December 31, 2014
, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $
23 million
.
3.75% Exchange.
In August 2014, we entered into separate, privately negotiated, exchange agreements (the 3.75% Exchange) with certain holders of our outstanding
3.75%
convertible senior notes due 2014 (the 3.75% Notes). In this transaction, we exchanged $
177 million
aggregate principal amount of the 3.75% Notes for $
177 million
principal amount of 1.625% convertible senior notes due 2044, approximately
2 million
shares of our common stock, and payment of accrued interest on the exchanged 3.75% Notes; additionally, we issued approximately
81,000
shares of common stock for services rendered in connection with the 3.75% Exchange. We did not receive any proceeds from the 3.75% Exchange.
3.75% Notes.
As described above, we entered into the 3.75% Exchange transaction in August 2014, under which we exchanged
$177 million
of the outstanding principal amount of the 3.75% Notes for the 1.625% Notes. The remaining
$10 million
principal amount was repaid in full in October 2014.
Lease Financing Obligations.
In 2013, we entered into a sale-leaseback transaction for the Molina Center located in Long Beach, California, and our Ohio health plan office building located in Columbus, Ohio. Due to our continuing involvement with these leased properties, the sale did not qualify for sales recognition and we remain the "accounting owner" of the properties. These assets continue to be included in our consolidated balance sheets, and also continue to be depreciated over their remaining useful lives. The lease financing obligation is amortized over the
25
-year lease term such that there will be no gain or loss recorded if the lease is not extended at the end of its term. Rent will increase
3%
per year through the initial term. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest amounted to
$13 million
for both years ended
December 31, 2015
and
2014
.
As described and defined in further detail in Note
17
, "
Related Party Transactions
," we entered into a lease for office space in February 2013 consisting of
two
office buildings. We have concluded that we are the accounting owner of the buildings due to our continuing involvement with the properties. We have recorded
$36 million
to property, equipment and capitalized software, net, in the accompanying consolidated balance sheet as of
December 31, 2015
, which represents the total cost incurred by the Landlord for the construction of the buildings, net of accumulated depreciation. As of
December 31, 2015
and
December 31, 2014
, the aggregate amount recorded to lease financing obligations, including the current portion, amounted to
$40 million
and
$41 million
, respectively. Payments under the lease adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income. Such interest expense was
$4 million
and
$3 million
for the year ended
December 31, 2015
and
2014
, respectively. In addition to the capitalization of the costs incurred by the Landlord, we impute and record rent expense relating to the ground leases for the property sites. Such rent expense is computed based on the fair value of the land and our incremental borrowing rate, and was
$1 million
for both years ended
December 31, 2015
and
2014
. For information regarding the future minimum lease obligation, refer to Note
19
, "
Commitments and Contingencies
."
13
.
Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets:
|
December 31,
|
|||||||||
|
Balance Sheet Location
|
2015
|
2014
|
|||||||
|
|
(In millions)
|
||||||||
|
Derivative asset:
|
|||||||||
|
1.125% Call Option
|
Current assets: Derivative asset
|
$
|
374
|
|
$
|
—
|
|
||
|
Non-current assets: Derivative asset
|
$
|
—
|
|
$
|
329
|
|
|||
|
Derivative liability:
|
|||||||||
|
1.125% Conversion Option
|
Current liabilities: Derivative liability
|
$
|
374
|
|
$
|
—
|
|
||
|
Non-current liabilities: Derivative liability
|
$
|
—
|
|
$
|
329
|
|
|||
Our derivative financial instruments do not qualify for hedge treatment, therefore the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in other expense, net. Gains and losses for our derivative financial instruments are presented individually in the consolidated statements of cash flows, supplemental cash flow information.
96
1.125% Notes Call Spread Overlay.
Concurrent with the issuance of the 1.125% Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments in excess of the principal amount of the notes due upon any conversion of the 1.125% Notes.
1.125% Call Option.
The
1.125%
Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note
5
, "
Fair Value Measurements
."
1.125% Conversion Option.
The embedded cash conversion option within the
1.125%
Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note
5
, "
Fair Value Measurements
."
As of
December 31, 2015
, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Notes may be converted within 12 months of
December 31, 2015
, as described in Note
12
, "
Debt
."
14
.
Income Taxes
The provision for income taxes for continuing operations consisted of the following:
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Current:
|
|||||||||||
|
Federal
|
$
|
172
|
|
$
|
72
|
|
$
|
67
|
|
||
|
State
|
8
|
|
3
|
|
—
|
|
|||||
|
Foreign
|
6
|
|
—
|
|
—
|
|
|||||
|
Total current
|
186
|
|
75
|
|
67
|
|
|||||
|
Deferred:
|
|||||||||||
|
Federal
|
(10
|
)
|
—
|
|
(25
|
)
|
|||||
|
State
|
4
|
|
(2
|
)
|
(6
|
)
|
|||||
|
Foreign
|
(1
|
)
|
—
|
|
—
|
|
|||||
|
Total deferred
|
(7
|
)
|
(2
|
)
|
(31
|
)
|
|||||
|
$
|
179
|
|
$
|
73
|
|
$
|
36
|
|
|||
A reconciliation of the U.S. federal statutory income tax rate to the combined effective income tax rate for continuing operations is as follows:
|
Year Ended December 31,
|
||||||||
|
2015
|
2014
|
2013
|
||||||
|
Statutory federal tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||
|
State income taxes, net of federal benefit
|
2.4
|
|
0.4
|
|
(0.5
|
)
|
||
|
Change in unrecognized tax benefits
|
0.9
|
|
(0.1
|
)
|
(3.7
|
)
|
||
|
Nondeductible health insurer fee (HIF)
|
17.0
|
|
22.9
|
|
—
|
|
||
|
Nondeductible compensation
|
0.6
|
|
(4.1
|
)
|
9.6
|
|
||
|
Nondeductible fair value of 1.125% Warrants
|
—
|
|
—
|
|
2.4
|
|
||
|
Other
|
(0.4
|
)
|
(0.3
|
)
|
2.0
|
|
||
|
Effective tax rate
|
55.5
|
%
|
53.8
|
%
|
44.8
|
%
|
||
Our effective tax rate is based on expected income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant management estimates and judgments are required in determining our
97
effective tax rate. We are routinely under audit by federal, state, or local authorities regarding the timing and amount of deductions, nexus of income among various tax jurisdictions, and compliance with federal, state, foreign, and local tax laws.
During 2014, the Internal Revenue Service (IRS) issued final regulations related to compensation deduction limitations applicable to certain health insurance issuers. Pursuant to these final regulations, we reversed amounts treated as nondeductible in 2013 and recognized a tax benefit during 2014.
During
2015
,
2014
, and
2013
, excess tax benefits from share-based compensation amounted to
$8 million
,
$3 million
, and
$2 million
, respectively. These amounts were recorded as a decrease to income taxes payable and an increase to additional paid-in capital.
Deferred tax assets and liabilities are classified as non-current. Significant components of our deferred tax assets and liabilities as of
December 31, 2015
and
2014
were as follows:
|
December 31,
|
|||||||
|
2015
|
2014
|
||||||
|
(In millions)
|
|||||||
|
Accrued expenses
|
$
|
37
|
|
$
|
13
|
|
|
|
Reserve liabilities
|
14
|
|
4
|
|
|||
|
Other accrued medical costs
|
5
|
|
4
|
|
|||
|
Net operating losses
|
7
|
|
3
|
|
|||
|
Unrealized losses
|
2
|
|
1
|
|
|||
|
Unearned premiums
|
21
|
|
22
|
|
|||
|
Lease financing obligation
|
35
|
|
34
|
|
|||
|
Deferred compensation
|
8
|
|
10
|
|
|||
|
Tax credit carryover
|
8
|
|
8
|
|
|||
|
Valuation allowance
|
(9
|
)
|
(6
|
)
|
|||
|
Total deferred income tax assets, net of valuation allowance
|
128
|
|
93
|
|
|||
|
Prepaid expenses
|
(9
|
)
|
(6
|
)
|
|||
|
Depreciation and amortization
|
(83
|
)
|
(57
|
)
|
|||
|
Basis in debt
|
(18
|
)
|
(15
|
)
|
|||
|
Total deferred income tax liabilities
|
(110
|
)
|
(78
|
)
|
|||
|
Net deferred income tax asset - long term
|
$
|
18
|
|
$
|
15
|
|
|
At
December 31, 2015
, we had state net operating loss carryforwards of
$180 million
, which begin expiring in 2016.
At
December 31, 2015
, we had California enterprise zone tax credit carryovers of
$11 million
, which will begin to expire in 2024, and foreign tax credit carryovers of
$1 million
, which expire in 2025.
We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry forward tax credits and losses, available tax planning strategies and future income, including reversal of temporary differences. We have determined that as of
December 31, 2015
,
$9 million
of deferred tax assets did not satisfy the recognition criteria due to uncertainty regarding the realization of some of our state tax operating loss and foreign tax credit carryforwards. Therefore, we increased our valuation allowance by
$3 million
, from
$6 million
at
December 31, 2014
, to
$9 million
as of
December 31, 2015
.
We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to income taxes in the United States, Puerto Rico, and numerous state jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
98
The roll forward of our unrecognized tax benefits is as follows:
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Gross unrecognized tax benefits at beginning of period
|
$
|
(3
|
)
|
$
|
(8
|
)
|
$
|
(11
|
)
|
||
|
Increases in tax positions for current year
|
(1
|
)
|
—
|
|
—
|
|
|||||
|
Increases in tax positions for prior years
|
(5
|
)
|
(1
|
)
|
(2
|
)
|
|||||
|
Decreases in tax positions for prior years
|
—
|
|
—
|
|
5
|
|
|||||
|
Settlements
|
—
|
|
6
|
|
—
|
|
|||||
|
Gross unrecognized tax benefits at end of period
|
$
|
(9
|
)
|
$
|
(3
|
)
|
$
|
(8
|
)
|
||
The total amount of unrecognized tax benefits at
December 31, 2015
,
2014
and
2013
that, if recognized, would affect the effective tax rates is
$7 million
,
$2 million
and
$6 million
, respectively. We expect that during the next
12
months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as
$1 million
due to the normal expiration of statutes of limitation.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Amounts accrued for the payment of interest and penalties as of
December 31, 2015
, and
2014
were insignificant.
We are under examination by the IRS for calendar year 2011 and may be subject to examination for calendar years 2012 through 2014. We are under examination, or may be subject to examination, in Puerto Rico and certain state and local jurisdictions, with the major state jurisdictions being California, Utah, and Michigan, for the years 2010 through 2014.
15
.
Stockholders' Equity
Stockholders' equity increased
$547 million
during the year ended
December 31, 2015
. The increase was primarily due to the common stock offering described below, net income of
$143 million
, and
$34 million
related to share-based compensation transactions.
Common Stock Offering.
In June 2015, we completed an underwritten public offering of
5,750,000
shares of our common stock, including the over-allotment option. Net of issuance costs, proceeds from the offering amounted to
$373 million
, or
$64.90
per share, resulting in an increase to additional paid-in capital. We are using the proceeds to finance working capital needs, acquisitions, capital expenditures, and other general corporate activities.
1.125% Warrants.
In connection with the 1.125% Notes Call Spread Overlay transaction described in Note
13
, "
Derivatives
," in 2013, we issued
13,490,236
warrants with a strike price of
$53.8475
per share. The number of warrants and the strike price are subject to adjustment under certain circumstances. If the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the
160
trading day measurement period (beginning on April 15, 2020) under the
1.125%
Warrants, we will be obligated to issue to the Counterparties a number of shares equal in value to the product of the amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of our common stock underlying the 1.125% Warrants, subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note
3
, "
Net Income per Share
," for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised.
Securities Repurchase Programs.
Effective as of December 16, 2015, our board of directors authorized the repurchase of up to
$50 million
in aggregate of our common stock or senior notes. This newly authorized repurchase program extends through December 31, 2016.
In February 2015, our board of directors authorized the repurchase of up to
$50 million
in aggregate of our common stock. We did not repurchase any shares under this program, which expired December 31, 2015.
Stock Incentive Plans.
At
December 31, 2015
, we had employee equity incentives outstanding under
two
plans: (1) the 2011 Equity Incentive Plan (2011 Plan); and (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer awarded).
The 2011 Plan provides for the award of restricted shares and units, performance shares and units, stock options and stock bonuses to the company’s officers, employees, directors, consultants, advisers, and other service providers. The 2011 Plan provides for the issuance of up to
4.5 million
shares of common stock.
Restricted share awards are granted with a fair value equal to the market price of our common stock on the date of grant, and generally vest in equal annual installments over periods up to
four
years from the date of grant. Stock option awards have an
99
exercise price equal to the fair market value of our common stock on the date of grant, generally vest in equal annual installments over periods up to
four
years from the date of grant, and have a maximum term of
ten
years from the date of grant.
In connection with our stock plans, we issued approximately
830,000
shares of common stock, net of shares used to settle employees’ income tax obligations, in the year ended
December 31, 2015
.
The following table illustrates the components of our share-based compensation expense that are reported in general and administrative expenses in the consolidated statements of income:
|
Year Ended December 31,
|
|||||||||||||||||||||||
|
2015
|
2014
|
2013
|
|||||||||||||||||||||
|
(In millions)
|
|||||||||||||||||||||||
|
Pretax
Charges
|
Net-of-Tax
Amount
|
Pretax
Charges
|
Net-of-Tax
Amount
|
Pretax
Charges
|
Net-of-Tax
Amount
|
||||||||||||||||||
|
Restricted stock and performance awards
|
$
|
19
|
|
$
|
13
|
|
$
|
19
|
|
$
|
12
|
|
$
|
26
|
|
$
|
23
|
|
|||||
|
Employee stock purchase plan and stock options
|
4
|
|
3
|
|
3
|
|
2
|
|
3
|
|
2
|
|
|||||||||||
|
$
|
23
|
|
$
|
16
|
|
$
|
22
|
|
$
|
14
|
|
$
|
29
|
|
$
|
25
|
|
||||||
As of
December 31, 2015
, there was
$25 million
of total unrecognized compensation expense related to unvested restricted share awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of
1.6 years
. This unrecognized compensation cost assumes an estimated forfeiture rate of
6.5%
for non-executive employees as of
December 31, 2015
. As of
December 31, 2015
, the unrecognized compensation expense related to unvested stock options was insignificant.
Restricted stock.
Restricted and performance stock activity for the year ended
December 31, 2015
is summarized below:
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||
|
Unvested balance as of December 31, 2014
|
1,282,072
|
|
$
|
33.55
|
|
|
|
Granted - restricted shares
|
273,710
|
|
64.56
|
|
||
|
Granted - performance shares
|
162,827
|
|
63.90
|
|
||
|
Vested - restricted shares
|
(371,489
|
)
|
34.58
|
|
||
|
Vested - performance shares
|
(264,604
|
)
|
30.80
|
|
||
|
Forfeited
|
(47,759
|
)
|
37.51
|
|
||
|
Unvested balance as of December 31, 2015
|
1,034,757
|
|
46.68
|
|
||
The total fair value of restricted and performance share awards granted during the years ended
December 31, 2015
,
2014
, and
2013
was
$28 million
,
$25 million
, and
$33 million
, respectively. The total fair value of restricted share awards, including those with performance or market conditions which vested during the years ended
December 31, 2015
,
2014
, and
2013
was
$39 million
,
$24 million
, and
$22 million
, respectively.
In 2015, our named executive officers were granted approximately
163,000
restricted shares with performance and market conditions. The grant date fair value for the awards with market conditions were determined based on a Monte Carlo Simulation which projected Total Stockholder Return (TSR) over the performance period using correlations and volatilities of our ISS peer groups. The weighted-average grant date fair value per share of the 2015 performance awards based on three-year TSR was
$49.43
, determined using additional inputs as follows: risk-free interest rate of
0.8%
, dividend yield of
0%
, and expected life of
2.8
years.
As of December 31, 2015
, there were approximately
377,000
unvested restricted shares outstanding which contained one or more performance measures. In the event the vesting conditions are not achieved, the awards will lapse. Based on our assessment as of
December 31, 2015
, we expect the performance conditions relating to approximately
199,000
of these outstanding restricted share awards to be met in full.
In 2015, we reversed approximately
$3 million
in share-based compensation expense recognized from grant date through March 31, 2015, related to
178,000
of the awards granted in 2014, due to management's determination in the second quarter of 2015 that the achievement of the underlying performance conditions was not probable.
100
In December 2015, approximately
229,000
restricted stock awards with performance conditions, granted in 2013, vested due to achievement of the total revenue metric as defined in the terms of the grant.
Employee Stock Purchase Plan.
Under our employee stock purchase plan (ESPP), eligible employees may purchase common shares at
85%
of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. Each participant is limited to a maximum purchase of
$25,000
(as measured by the fair value of the stock acquired) per year through payroll deductions. We estimate the fair value of the stock issued using the Black-Scholes option pricing model. For the years ended
December 31, 2015
,
2014
, and
2013
, the inputs to this model were as follows: risk-free interest rates of approximately
0.1%
; expected volatilities ranging from approximately
30%
to
50%
, dividend yields of
0%
, and an average expected life of
0.5
years. We issued approximately
301,900
,
327,200
and
299,600
shares of our common stock under the ESPP during the years ended
December 31, 2015
,
2014
, and
2013
, respectively. The 2011 ESPP provides for the issuance of up to
three million
shares of common stock.
Stock Options.
No stock options were granted in
2015
and
2014
, and stock options outstanding as of
December 31, 2015
were insignificant. The grant date fair value per share of the stock options awarded to the new members of our board of directors during 2013 was
$14.67
. We estimated the fair value of each stock option award using the Black-Scholes option pricing model, with the following inputs: risk-free interest rate of
1.4%
, expected volatility of
41.3%
, dividend yield of
0%
, and expected life of
7
years. The total intrinsic value of options exercised during the years ended
December 31, 2015
,
2014
, and
2013
was
$6 million
,
$2 million
, and
$1 million
, respectively.
16
.
Employee Benefits
We sponsor defined contribution 401(k) plans that cover substantially all full-time salaried and hourly employees of our company and its subsidiaries. Eligible employees are permitted to contribute up to the maximum amount allowed by law. We match up to the first
4%
of compensation contributed by employees. Expense recognized in connection with our contributions to the 401(k) plans totaled
$27 million
,
$21 million
and
$13 million
in the years ended
December 31, 2015
,
2014
, and
2013
, respectively.
We also have a nonqualified deferred compensation plan for certain key employees. Under this plan, eligible participants may defer up to
100%
of their base salary and
100%
of their bonus to provide tax-deferred growth for retirement. The funds deferred are invested in corporate-owned life insurance, under a rabbi trust.
17
.
Related Party Transactions
Prior to December 22, 2015, we were the lessee under a lease with 6
th
& Pine Development, LLC (the Landlord) for
two
office buildings. The principal members of the Landlord were John C. Molina, our chief financial officer and a director of Molina Healthcare, Inc., and his wife. In addition, in connection with the development of the buildings being leased, John C. Molina pledged certain of his common stock holdings in Molina Healthcare, Inc. Dr. J. Mario Molina, our chief executive officer, president and chairman of the board of directors, holds a partial interest in such shares as trust beneficiary. On December 22, 2015, the Landlord assigned the lease to an unrelated third party. There were no significant changes to the lease other than the assignment to the new owner. As a result of the assignment, as of December 31, 2015, amounts previously reported as lease financing obligations - related party were reported in lease financing obligations on the accompanying consolidated balance sheets. For information regarding the lease financing obligation associated with this lease, refer to Note
12
, "
Debt
."
Our California health plan has entered into a provider agreement with Pacific Healthcare IPA (Pacific), which is
50%
owned by the brother-in-law of Dr. J. Mario Molina and John C. Molina. Under the terms of this provider agreement, the California health plan paid Pacific approximately
$1 million
in each of 2015 and 2014 for medical care provided to health plan members. Payments in 2013 were insignificant.
Refer to Note
18
, "
Variable Interest Entities (VIEs)
," for a discussion of the Joseph M. Molina, M.D. Professional Corporations.
101
18
.
Variable Interest Entities (VIEs)
Joseph M. Molina M.D., Professional Corporations
The
Joseph M. Molina, M.D. Professional Corporations (JMMPC) were created in 2012 to further advance our direct delivery business. JMMPC's primary shareholder is Dr. J. Mario Molina, our chief executive officer, president, and chairman of the board of directors. Dr. Molina is paid no salary and receives no dividends in connection with his work for, or ownership of, JMMPC. JMMPC provides primary care medical services through its employed physicians and other medical professionals. Beginning in 2014, JMMPC also provided certain specialty referral services to our California health plan members through a contracted provider network. Substantially all of the individuals served by JMMPC are members of our health plans. JMMPC does not have agreements to provide professional medical services with any other entities.
Our wholly owned subsidiary, Molina Medical Management, Inc. (MMM), has entered into services agreements with JMMPC to provide clinic facilities, clinic administrative support staff, patient scheduling services and medical supplies to JMMPC. The services agreements were designed such that JMMPC will operate at break even, ensuring the availability of quality care and access for our health plan members. The services agreements provide that the administrative fees charged to JMMPC by MMM are reviewed annually to assure the achievement of this goal.
Separately, our California, Florida, New Mexico, Utah and Washington health plans have entered into primary care services agreements with JMMPC. These agreements direct our health plans to perform a monthly reconciliation, to either fund JMMPC's operating deficits, or receive JMMPC's operating surpluses, such that JMMPC will derive no profit or loss. Because the MMM services agreements described above mitigate the likelihood of significant operating deficits or surpluses, such monthly reconciliation amounts are generally insignificant.
We have determined that JMMPC is a VIE, and that we are its primary beneficiary. We have reached this conclusion under the power and benefits criterion model according to GAAP. Specifically, we have the power to direct the activities that most significantly affect JMMPC's economic performance, and the obligation to absorb losses or right to receive benefits that are potentially significant to the VIE, under the agreements described above. Because we are its primary beneficiary, we have consolidated JMMPC. JMMPC's assets may be used to settle only JMMPC's obligations, and JMMPC's creditors have no recourse to the general credit of Molina Healthcare, Inc. As of
December 31, 2015
, JMMPC had total assets of
$17 million
, and total liabilities of
$17 million
. As of
December 31, 2014
, JMMPC had total assets of
$31 million
, and total liabilities of
$31 million
.
Our maximum exposure to loss as a result of our involvement with JMMPC is generally limited to the amounts needed to fund JMMPC's ongoing payroll, employee benefits and medical care costs associated with JMMPC's specialty referral activities. We believe that such loss exposures will be immaterial to our consolidated operating results and cash flows for the foreseeable future.
New Markets Tax Credit
In 2011, our New Mexico data center subsidiary entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (Wells Fargo), its wholly owned subsidiary New Mexico Healthcare Data Center Investment Fund, LLC (Investment Fund), and certain of Wells Fargo's affiliated Community Development Entities (CDEs), in connection with our participation in the federal government's New Markets Tax Credit Program (NMTC). The NMTC was established by Congress to facilitate new or increased investments in businesses and real estate projects in low-income communities. The NMTC attracts investment capital to low-income communities by permitting investors to receive a tax credit against their federal income tax return in exchange for equity investments in specialized financial institutions, called CDEs, which provide financing to qualified active businesses operating in low-income communities. The credit amounts to
39%
of the original investment amount and is claimed over a period of
seven
years (
five percent
for each of the first three years, and
six percent
for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the
seven
-year period.
In 2011, as a result of a series of simultaneous financing transactions, Wells Fargo contributed capital of
$6 million
to the Investment Fund, and Molina Healthcare, Inc. loaned the principal amount of $
16 million
to the Investment Fund. The Investment Fund then contributed the proceeds to certain CDEs, which, in turn, loaned the proceeds of
$21 million
to our New Mexico data center subsidiary. Wells Fargo will be entitled to claim the NMTC while we effectively received net loan proceeds equal to Wells Fargo's contribution to the Investment Fund, or approximately
$6 million
. Additionally, financing costs incurred in structuring the arrangement amounting to
$1 million
were deferred and will be recognized as expense over the term of the loans. This transaction also includes a put/call feature that becomes enforceable at the end of the seven-year compliance period. Wells Fargo may exercise its put option or we can exercise the call, both of which will serve to transfer the debt obligation to us. Incremental costs to maintain the structure during the compliance period will be recognized as incurred.
We have determined that the financing arrangement with Investment Fund and CDEs is a VIE, and that we are the primary beneficiary of the VIE. We reached this conclusion based on the following:
102
|
•
|
The ongoing activities of the VIE—collecting and remitting interest and fees and NMTC compliance—were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE;
|
|
•
|
Contractual arrangements obligate us to comply with NMTC rules and regulations and provide various other guarantees to Investment Fund and CDEs;
|
|
•
|
Wells Fargo lacks a material interest in the underling economics of the project; and
|
|
•
|
We are obligated to absorb losses of the VIE.
|
Because we are the primary beneficiary of the VIE, we have included it in our consolidated financial statements. Wells Fargo's contribution of
$6 million
is included in cash at
December 31, 2015
and
December 31, 2014
and the offsetting Wells Fargo's interest in the financing arrangement is included in other liabilities in the accompanying consolidated balance sheets.
As described above, this transaction also includes a put/call provision whereby we may be obligated or entitled to repurchase Wells Fargo's interest in the Investment Fund. The value attributed to the put/call is nominal. The NMTC is subject to
100%
recapture for a period of seven years as provided in the Internal Revenue Code and applicable U.S. Treasury regulations. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in Wells Fargo's projected tax benefits not being realized and, therefore, require us to indemnify Wells Fargo for any loss or recapture of NMTCs related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. We do not anticipate any credit recaptures will be required in connection with this arrangement.
19
.
Commitments and Contingencies
Certain Leasing Transactions.
As described in Note
12
, "
Debt
," we entered into certain leasing transactions that have been classified as lease financing obligations. Such leases have initial terms that range from
16.5 years
to
25 years
. Additionally, the leases provide for renewal options ranging from
10
years to
25
years in aggregate.
Operating Leases.
We lease administrative and clinic facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2025. Facility lease terms generally range from
five
to
10
years with
one
to
two
renewal options for extended terms. In most cases, we are required to make additional payments under facility operating leases for taxes, insurance and other operating expenses incurred during the lease period. Certain of our leases contain rent escalation clauses or lease incentives, including rent abatements and tenant improvement allowances. Rent escalation clauses and lease incentives are taken into account in determining total rent expense to be recognized during the lease term.
Future minimum lease payments by year and in the aggregate under all operating leases and lease financing obligations consist of the following approximate amounts:
|
Lease Financing Obligations
|
Operating Leases
|
Total
|
|||||||||
|
(In millions)
|
|||||||||||
|
2016
|
$
|
15
|
|
$
|
49
|
|
$
|
64
|
|
||
|
2017
|
16
|
|
47
|
|
63
|
|
|||||
|
2018
|
16
|
|
41
|
|
57
|
|
|||||
|
2019
|
16
|
|
32
|
|
48
|
|
|||||
|
2020
|
17
|
|
24
|
|
41
|
|
|||||
|
Thereafter
|
323
|
|
39
|
|
362
|
|
|||||
|
$
|
403
|
|
$
|
232
|
|
$
|
635
|
|
|||
Rental expense related to operating leases amounted to
$44 million
,
$32 million
, and
$25 million
for the years ended
December 31, 2015
,
2014
, and
2013
, respectively. The amounts reported in "Lease Financing Obligations" above represent our contractual lease commitments for the properties described in Note
12
, "
Debt
" under the subheading "Lease Financing Obligations." Payments under these leases adjust the lease financing obligation, and the imputed interest is recorded to interest expense in our consolidated statements of income.
103
Employment Agreements.
I
n 2002 we entered into employment agreements with our Chief Executive Officer and Chief Financial Officer, which were amended and restated in 2009. These employment agreements had initial terms of
one
to
three
years and are subject to automatic
one
-year extensions thereafter. Should the executives be terminated without cause or resign for good reason before a change of control, as defined, we will pay
one
year’s base salary and termination bonus, as defined, in addition to full vesting of equity compensation, and a cash payment for health and welfare benefits.
In 2013 we entered into employment agreements with our Chief Operating Officer, Chief Accounting Officer, and Chief Legal Officer. These agreements continue until terminated by us, or the executive resigns. If the executive’s employment is terminated by us without cause or the executive resigns for good reason, the executive will be entitled to receive
one
year’s base salary and termination bonus, as defined, full vesting of time-based equity compensation, and a cash payment for health and welfare benefits.
Payment of the severance benefits described above is contingent upon the executive’s signing a release agreement waiving claims against us. If the executives are terminated for cause, no further payments are due under the contracts.
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.
State of Louisiana.
On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys Corporation, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims.
We believe we have several meritorious defenses to the claims of the state, and any liability for the alleged claims is not currently probable or reasonably estimable.
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al.
On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by Relator, Anita Silingo, Case No. SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly turned a “blind eye” to these unlawful practices.
The Department of Justice has declined to intervene. The District Court dismissed this action as to Molina without leave to amend as to some allegations and with leave to amend as to other allegations. On October 22, 2015, the Relator filed a third amended complaint. We believe that we have several meritorious defenses to the claims of the Relator, and any liability for the alleged claims is not currently probable or reasonably estimable.
Hospital Management Contract.
During the fourth quarter of 2015, we recorded a contract settlement charge of approximately
$15 million
as a result of our termination of a hospital management agreement.
Professional Liability Insurance.
We carry medical professional liability insurance for health care services rendered in the primary care institutions that we manage. In addition, we also carry errors and omissions insurance for all Molina entities.
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.
104
States' Budgets.
From time to time the states in which our health plans operate may delay premium payments. For example, the state of Illinois is currently operating without a budget for its fiscal year ending June 30, 2016. As of
December 31, 2015
, our Illinois health plan served approximately
98,000
members, and recognized premium revenue of approximately
$397 million
for the year ended
December 31, 2015
. As of
February 23, 2016
, Illinois is current with its premium payments.
In another example, the Commonwealth of Puerto Rico has reported that it may lack sufficient resources to fund all necessary governmental programs including health care-related programs, as well as meet its debt obligations for its fiscal year ending June 30, 2016. Our Puerto Rico health plan became operational on April 1, 2015. As of
December 31, 2015
, the plan served approximately
348,000
members and recognized premium revenue of approximately
$192 million
in the fourth quarter of 2015, or approximately
$64 million
per month. As of
February 23, 2016
, the Commonwealth continues to pay us weekly for current membership.
It is the practice of the Commonwealth to pay us for eligible members only after those members have been assigned to us, and our plan has sent electronic confirmation of the receipt of eligibility. Particularly in the early stages of our contract with Puerto Rico, the plan's confirmation of eligibility of certain members was not accepted by the Commonwealth as a result of various technical issues. The plan has continued to pay for medical services for all members in question, but the Commonwealth is withholding payment of approximately $12 million of premium revenue related to those members. We believe we have a valid claim to all of the premiums withheld and we are in discussions with the Commonwealth regarding this matter.
It has been our practice in the past, and will remain so in the future, to continue to serve our members and pay health care providers for services rendered in circumstances where state (or Commonwealth) governments are temporarily unable to pay us, so long as we continue to believe that such state (or Commonwealth) governments will ultimately pay us.
Regulatory Capital and Dividend Restrictions.
Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us.
Based upon current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately
$1,229 million
at
December 31, 2015
, and
$859 million
at
December 31, 2014
. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to
$612 million
and
$203 million
as of
December 31, 2015
, and
2014
, respectively.
The National Association of Insurance Commissioners (NAIC), adopted rules effective December 31, 1998, which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (RBC) rules which may vary from state to state. All of the states in which our health plans operate, except California and Florida, have adopted these rules. California and Florida have not adopted NAIC risk-based capital requirements for HMOs, and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.
As of
December 31, 2015
, our health plans had aggregate statutory capital and surplus of approximately
$1,350 million
compared with the required minimum aggregate statutory capital and surplus of approximately
$776 million
. All of our health plans were in compliance with the minimum capital requirements at
December 31, 2015
. 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.
20
.
Segment Information
We have
three
reportable segments. These segments include our Health Plans and Molina Medicaid Solutions segments, which comprise the vast majority of our operations, and our Other segment. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015, which is reported in Other.
Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
The Health Plans segment consists of our health plans and our direct delivery business. Our health plans represent operating segments that have been aggregated for reporting purposes because they share similar economic characteristics. The Molina Medicaid Solutions segment provides MMIS design, development, implementation; business process outsourcing solutions; hosting services; and information technology support services to state Medicaid agencies.
Our Other segment includes other businesses, such as our Pathways behavioral health and social services provider, that do not meet the quantitative thresholds for a
105
reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
The following table presents gross margin as the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as "Medical margin," and for our Molina Medicaid Solutions and Other segments, as "Service margin." Medical margin represents the actual dollars earned by the Health Plans segment after medical costs are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue. One of the key metrics used to assess the performance of the Health Plans segment is the medical care ratio; therefore, the underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service margin is equal to service revenue minus cost of service revenue.
We previously reported our segment results to the operating income level, where we reported the cost of all centralized services within our most significant segment, the Health Plans segment.
The accounting policies of the segments are the same as those described in Note
2
, "
Significant Accounting Policies
."
|
Health Plans
|
Molina Medicaid Solutions
|
Other
|
Consolidated
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
2015
|
||||||||||||||||
|
Total revenue (1)
|
$
|
13,917
|
|
$
|
195
|
|
$
|
66
|
|
$
|
14,178
|
|
||||
|
Gross margin
|
1,447
|
|
55
|
|
5
|
|
1,507
|
|
||||||||
|
Depreciation and amortization (2)
|
95
|
|
25
|
|
6
|
|
126
|
|
||||||||
|
Goodwill, and intangible assets, net
|
393
|
|
73
|
|
175
|
|
641
|
|
||||||||
|
Total assets
|
4,707
|
|
213
|
|
1,656
|
|
6,576
|
|
||||||||
|
2014
|
||||||||||||||||
|
Total revenue (1)
|
9,449
|
|
210
|
|
8
|
|
9,667
|
|
||||||||
|
Gross margin
|
947
|
|
53
|
|
—
|
|
1,000
|
|
||||||||
|
Depreciation and amortization (2)
|
83
|
|
46
|
|
5
|
|
134
|
|
||||||||
|
Goodwill, and intangible assets, net
|
286
|
|
75
|
|
—
|
|
361
|
|
||||||||
|
Total assets
|
3,355
|
|
185
|
|
895
|
|
4,435
|
|
||||||||
|
2013
|
||||||||||||||||
|
Total revenue (1)
|
6,376
|
|
205
|
|
8
|
|
6,589
|
|
||||||||
|
Gross margin
|
799
|
|
44
|
|
—
|
|
843
|
|
||||||||
|
Depreciation and amortization (2)
|
60
|
|
28
|
|
6
|
|
94
|
|
||||||||
|
Goodwill, and intangible assets, net
|
249
|
|
81
|
|
—
|
|
330
|
|
||||||||
|
Total assets
|
1,921
|
|
176
|
|
891
|
|
2,988
|
|
||||||||
______________________
|
(1)
|
Total revenues consists primarily of premium revenue for the Health Plans segment, and service revenue for the Molina Medicaid Solutions and Other segments.
|
|
(2)
|
Depreciation and amortization reported in accompanying consolidated statements of cash flows.
|
106
The following table reconciles gross margin by segment to consolidated income from continuing operations before income tax expense:
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Gross margin:
|
|||||||||||
|
Health Plans
|
$
|
1,447
|
|
$
|
947
|
|
$
|
799
|
|
||
|
Molina Medicaid Solutions
|
55
|
|
53
|
|
44
|
|
|||||
|
Other
|
5
|
|
—
|
|
—
|
|
|||||
|
Other operating revenues (1)
|
684
|
|
434
|
|
205
|
|
|||||
|
Other operating expenses (2)
|
1,804
|
|
1,241
|
|
911
|
|
|||||
|
Operating income
|
387
|
|
193
|
|
137
|
|
|||||
|
Other expenses, net
|
65
|
|
58
|
|
56
|
|
|||||
|
Income from continuing operations before income tax expense
|
$
|
322
|
|
$
|
135
|
|
$
|
81
|
|
||
______________________
|
(1)
|
Other operating revenues include premium tax revenue, health insurer fee revenue, investment income and other revenue.
|
|
(2)
|
Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fee expenses and depreciation and amortization.
|
21
.
Quarterly Results of Operations
(Unaudited)
The following table summarizes quarterly unaudited results of operations for the years ended
December 31, 2015
and
2014
.
|
For The Quarter Ended
|
|||||||||||||||
|
March 31,
2015 |
June 30,
2015 |
September 30, 2015
|
December 31,
2015 |
||||||||||||
|
(In millions, except per-share data)
|
|||||||||||||||
|
Premium revenue
|
$
|
2,971
|
|
$
|
3,304
|
|
$
|
3,377
|
|
$
|
3,589
|
|
|||
|
Service revenue
|
52
|
|
47
|
|
47
|
|
107
|
|
|||||||
|
Operating income
|
82
|
|
116
|
|
113
|
|
76
|
|
|||||||
|
Income from continuing operations
|
28
|
|
39
|
|
46
|
|
30
|
|
|||||||
|
Net income
|
28
|
|
39
|
|
46
|
|
30
|
|
|||||||
|
Net income per share (1):
|
|||||||||||||||
|
Basic
|
$
|
0.58
|
|
$
|
0.78
|
|
$
|
0.84
|
|
$
|
0.54
|
|
|||
|
Diluted
|
$
|
0.56
|
|
$
|
0.72
|
|
$
|
0.77
|
|
$
|
0.52
|
|
|||
|
For The Quarter Ended
|
|||||||||||||||
|
March 31,
2014 |
June 30,
2014 |
September 30, 2014
|
December 31,
2014 |
||||||||||||
|
(In millions, except per-share data)
|
|||||||||||||||
|
Premium revenue
|
$
|
1,940
|
|
$
|
2,167
|
|
$
|
2,317
|
|
$
|
2,599
|
|
|||
|
Service revenue
|
54
|
|
50
|
|
52
|
|
54
|
|
|||||||
|
Operating income
|
24
|
|
32
|
|
40
|
|
97
|
|
|||||||
|
Income from continuing operations
|
4
|
|
8
|
|
16
|
|
34
|
|
|||||||
|
Net income
|
4
|
|
8
|
|
16
|
|
34
|
|
|||||||
|
Net income per share (1):
|
|||||||||||||||
|
Basic
|
$
|
0.10
|
|
$
|
0.17
|
|
$
|
0.34
|
|
$
|
0.70
|
|
|||
|
Diluted
|
$
|
0.09
|
|
$
|
0.16
|
|
$
|
0.33
|
|
$
|
0.69
|
|
|||
_______________________________
107
|
(1)
|
The dilutive effect of all potentially dilutive common shares is calculated using the treasury-stock method. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income per share because to do so would be anti-dilutive. For the year ended December 31,
2014
, the 1.125% Warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price of our common stock.
|
108
22
.
Condensed Financial Information of Registrant
The condensed balance sheets as of
December 31, 2015
and
2014
, and the related condensed statements of income, comprehensive income and cash flows for each of the three years in the period ended
December 31, 2015
for our parent company Molina Healthcare, Inc. (the Registrant), are presented below.
Condensed Balance Sheets
|
|
December 31,
|
||||||
|
|
2015
|
2014
|
|||||
|
|
(Amounts in millions, except per-share data)
|
||||||
|
ASSETS
|
|||||||
|
Current assets:
|
|
|
|||||
|
Cash and cash equivalents
|
$
|
360
|
|
$
|
75
|
|
|
|
Investments
|
252
|
|
126
|
|
|||
|
Income taxes refundable
|
7
|
|
13
|
|
|||
|
Due from affiliates
|
86
|
|
18
|
|
|||
|
Prepaid expenses and other current assets
|
46
|
|
33
|
|
|||
|
Derivative asset
|
374
|
|
—
|
|
|||
|
Total current assets
|
1,125
|
|
265
|
|
|||
|
Property, equipment, and capitalized software, net
|
267
|
|
265
|
|
|||
|
Goodwill and intangible assets, net
|
61
|
|
65
|
|
|||
|
Investments in subsidiaries
|
2,205
|
|
1,377
|
|
|||
|
Deferred income taxes
|
23
|
|
11
|
|
|||
|
Derivative asset
|
—
|
|
329
|
|
|||
|
Advances to related parties and other assets
|
36
|
|
43
|
|
|||
|
|
$
|
3,717
|
|
$
|
2,355
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current liabilities:
|
|
|
|||||
|
Accounts payable and accrued liabilities
|
$
|
157
|
|
$
|
107
|
|
|
|
Current portion of long-term debt
|
449
|
|
—
|
|
|||
|
Derivative liability
|
374
|
|
—
|
|
|||
|
Total current liabilities
|
980
|
|
107
|
|
|||
|
Senior notes
|
962
|
|
690
|
|
|||
|
Lease financing obligations
|
198
|
|
157
|
|
|||
|
Lease financing obligations - related party
|
—
|
|
40
|
|
|||
|
Derivative liability
|
—
|
|
329
|
|
|||
|
Other long-term liabilities
|
20
|
|
22
|
|
|||
|
Total liabilities
|
2,160
|
|
1,345
|
|
|||
|
Stockholders' equity:
|
|||||||
|
Common stock, $0.001 par value; 150 shares authorized; outstanding:
|
|
|
|||||
|
56 shares at December 31, 2015 and 50 shares at December 31, 2014
|
—
|
|
—
|
|
|||
|
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding
|
—
|
|
—
|
|
|||
|
Additional paid-in capital
|
803
|
|
396
|
|
|||
|
Accumulated other comprehensive loss
|
(4
|
)
|
(1
|
)
|
|||
|
Retained earnings
|
758
|
|
615
|
|
|||
|
Total stockholders' equity
|
1,557
|
|
1,010
|
|
|||
|
|
$
|
3,717
|
|
$
|
2,355
|
|
|
109
Condensed Statements of Income
|
|
Year Ended December 31,
|
||||||||||
|
|
2015
|
2014
|
2013
|
||||||||
|
|
(In millions)
|
||||||||||
|
Revenue:
|
|
|
|
||||||||
|
Management fees and other operating revenue
|
$
|
928
|
|
$
|
704
|
|
$
|
599
|
|
||
|
Investment income
|
3
|
|
2
|
|
3
|
|
|||||
|
Total revenue
|
931
|
|
706
|
|
602
|
|
|||||
|
Expenses:
|
|
|
|||||||||
|
Medical care costs
|
55
|
|
46
|
|
38
|
|
|||||
|
General and administrative expenses
|
797
|
|
583
|
|
504
|
|
|||||
|
Depreciation and amortization
|
82
|
|
73
|
|
51
|
|
|||||
|
Total operating expenses
|
934
|
|
702
|
|
593
|
|
|||||
|
Operating (loss) income
|
(3
|
)
|
4
|
|
9
|
|
|||||
|
Interest expense
|
66
|
|
57
|
|
51
|
|
|||||
|
Other expense
|
—
|
|
1
|
|
4
|
|
|||||
|
Loss before income taxes and equity in net income of subsidiaries
|
(69
|
)
|
(54
|
)
|
(46
|
)
|
|||||
|
Income tax benefit
|
(21
|
)
|
(27
|
)
|
(16
|
)
|
|||||
|
Net loss before equity in net income of subsidiaries
|
(48
|
)
|
(27
|
)
|
(30
|
)
|
|||||
|
Equity in net income of subsidiaries
|
191
|
|
89
|
|
83
|
|
|||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
Condensed Statements of Comprehensive Income
|
Year Ended December 31,
|
|||||||||||
|
2015
|
2014
|
2013
|
|||||||||
|
(In millions)
|
|||||||||||
|
Net income
|
$
|
143
|
|
$
|
62
|
|
$
|
53
|
|
||
|
Other comprehensive income (loss):
|
|||||||||||
|
Unrealized investment loss
|
(5
|
)
|
—
|
|
(1
|
)
|
|||||
|
Effect of income tax benefit
|
2
|
|
—
|
|
—
|
|
|||||
|
Other comprehensive loss, net of tax
|
(3
|
)
|
—
|
|
(1
|
)
|
|||||
|
Comprehensive income
|
$
|
140
|
|
$
|
62
|
|
$
|
52
|
|
||
110
Condensed Statements of Cash Flows
|
|
Year Ended December 31,
|
||||||||||
|
|
2015
|
2014
|
2013
|
||||||||
|
|
(In millions)
|
||||||||||
|
Operating activities:
|
|
|
|
||||||||
|
Net cash provided by operating activities
|
$
|
113
|
|
$
|
74
|
|
$
|
63
|
|
||
|
Investing activities:
|
|
|
|||||||||
|
Capital contributions to subsidiaries
|
(770
|
)
|
(292
|
)
|
(166
|
)
|
|||||
|
Dividends received from subsidiaries
|
142
|
|
—
|
|
24
|
|
|||||
|
Purchases of investments
|
(244
|
)
|
(129
|
)
|
(363
|
)
|
|||||
|
Proceeds from sales and maturities of investments
|
118
|
|
263
|
|
98
|
|
|||||
|
Purchases of equipment
|
(91
|
)
|
(94
|
)
|
(77
|
)
|
|||||
|
Change in amounts due to/from affiliates
|
(68
|
)
|
16
|
|
(6
|
)
|
|||||
|
Other, net
|
—
|
|
8
|
|
(6
|
)
|
|||||
|
Net cash used in investing activities
|
(913
|
)
|
(228
|
)
|
(496
|
)
|
|||||
|
Financing activities:
|
|
|
|||||||||
|
Proceeds from senior notes offerings, net of issuance costs
|
689
|
|
123
|
|
538
|
|
|||||
|
Proceeds from common stock offering, net of issuance costs
|
373
|
|
—
|
|
—
|
|
|||||
|
Proceeds from sale-leaseback transactions
|
—
|
|
—
|
|
159
|
|
|||||
|
Purchase of call option
|
—
|
|
—
|
|
(149
|
)
|
|||||
|
Proceeds from issuance of warrants
|
—
|
|
—
|
|
75
|
|
|||||
|
Treasury stock repurchases
|
—
|
|
—
|
|
(53
|
)
|
|||||
|
Principal payment on term loan of subsidiary
|
—
|
|
—
|
|
(47
|
)
|
|||||
|
Repayment of amount borrowed under credit facility
|
—
|
|
—
|
|
(40
|
)
|
|||||
|
Proceeds from employee stock plans
|
18
|
|
14
|
|
9
|
|
|||||
|
Principal payments on convertible senior notes
|
—
|
|
(11
|
)
|
—
|
|
|||||
|
Other, net
|
5
|
|
3
|
|
2
|
|
|||||
|
Net cash provided by financing activities
|
1,085
|
|
129
|
|
494
|
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
285
|
|
(25
|
)
|
61
|
|
|||||
|
Cash and cash equivalents at beginning of year
|
75
|
|
100
|
|
39
|
|
|||||
|
Cash and cash equivalents at end of year
|
$
|
360
|
|
$
|
75
|
|
$
|
100
|
|
||
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation
The Registrant was incorporated in 2002. Prior to that date, Molina Healthcare of California (formerly known as Molina Medical Centers) operated as a California health plan and as the parent company for three other state health plans. In June 2003, the employees and operations of the corporate entity were transferred from Molina Healthcare of California to the Registrant.
The Registrant's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The accompanying condensed financial information of the Registrant should be read in conjunction with the consolidated financial statements and accompanying notes.
Note B - Transactions with Subsidiaries
The Registrant provides certain centralized medical and administrative services to its subsidiaries pursuant to administrative services agreements, including medical affairs and quality management, health education, credentialing, management, financial, legal, information systems and human resources services. Fees are based on the fair market value of services rendered and are recorded as operating revenue. Payment is subordinated to the subsidiaries' ability to comply with minimum capital and other restrictive financial requirements of the states in which they operate. Charges in
2015
,
2014
, and
2013
for these services amounted to
$914 million
,
$692 million
, and
$592 million
, respectively, and are included in operating revenue.
111
During 2013, the Registrant used a portion of the proceeds from the sale of the Molina Center, described in Note
12
, "
Debt
," to repay the remaining principal balance of the related term loan, on behalf of a subsidiary of the Registrant.
The Registrant and its subsidiaries are included in the consolidated federal and state income tax returns filed by the Registrant. Income taxes are allocated to each subsidiary in accordance with an intercompany tax allocation agreement. The agreement allocates income taxes in an amount generally equivalent to the amount which would be expensed by the subsidiary if it filed a separate tax return. Net operating loss benefits are paid to the subsidiary by the Registrant to the extent such losses are utilized in the consolidated tax returns.
Note C - Dividends and Capital Contributions
When the Registrant receives dividends from its subsidiaries, such amounts are recorded as a reduction to the investments in the respective subsidiaries.
For all periods presented, the Registrant made capital contributions to certain subsidiaries primarily to comply with minimum net worth requirements and to fund contract acquisitions. Such amounts have been recorded as an increase in investment in the respective subsidiaries, net of insignificant returns of capital.
Note D - Related Party Transactions
The Registrant's related party transactions are described in Note
17
, "
Related Party Transactions
."
112
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures:
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (the "Exchange Act"). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission, and to process, summarize and disclose this information within the time periods specified in the rules of the Securities and Exchange Commission.
Evaluation of Disclosure Controls and Procedures:
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has conducted an evaluation of the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management’s Report on Internal Control over Financial Reporting:
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2015
. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework
(2013 framework)
.
Our management's evaluation did not include an assessment of the effectiveness of internal control over financial reporting at Pathways Health and Community Support LLC (Pathways), which was acquired on November 1, 2015. The total assets and net assets of Pathways included in our consolidated balance sheets at December 31, 2015, were $276 million and $231 million, respectively. Total revenue and net loss of Pathways included in our consolidated results of operations for the year ended December 31, 2015, were $57 million and $4 million, respectively. Our management has not had sufficient time to make an assessment of this subsidiary's internal control over financial reporting.
Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of
December 31, 2015
, based on the 2013 framework criteria.
Ernst & Young, LLP, the independent registered public accounting firm who audited the Company’s Consolidated Financial Statements included in this Form 10-K, has issued a report on the Company’s internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended
December 31,
2015
, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Other Information
None.
113
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of Molina Healthcare, Inc.
We have audited Molina Healthcare, Inc.’s (the "Company’s") internal control over financial reporting as of
December 31, 2015
, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Pathways Health and Community Support LLC (Pathways), which is included in the 2015 consolidated financial statements of Molina Healthcare, Inc. and constituted $276 million and $231 million of total and net assets, respectively, as of December 31, 2015, and $57 million and $4 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Molina Healthcare, Inc. also did not include an evaluation of the internal control over financial reporting of Pathways.
In our opinion, Molina Healthcare, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015
, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Molina Healthcare, Inc. as of
December 31, 2015
and
2014
, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2015
and our report dated
February 26, 2016
expressed an unqualified opinion thereon.
|
/s/ ERNST & YOUNG LLP
|
|
Los Angeles, California
February 26, 2016
114
Item 10.
Directors, Executive Officers, and Corporate Governance
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information regarding our executive officers is provided in Item 1 of Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant," and will also appear in our definitive proxy statement for our
2016
Annual Meeting of Stockholders. The remaining information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be included under the headings "Election of Directors," "Corporate Governance," and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for our
2016
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.
Item 11.
Executive Compensation
The information required by Items 402, 407(e)(4), and (e)(5) of Regulation S-K will be included under the headings "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in our definitive proxy statement for our
2016
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31,
2015
)
|
Plan Category
|
Number of Securities to be
Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
|
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
|
Number of Securities
Remaining Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
(c)
|
|
||||||
|
Equity compensation plans approved by security holders
|
121,711
|
|
(1)
|
$
|
25.40
|
|
4,058,668
|
|
(2)
|
|
_______________________________
|
(1)
|
Options to purchase shares of our common stock issued under the 2002 Equity Incentive Plan and 2011 Equity Incentive Plan. Further grants under the 2002 Equity Incentive Plan have been suspended.
|
|
(2)
|
Includes shares remaining available to issue under the 2011 Equity Incentive Plan, and the 2011 Employee Stock Purchase Plan.
|
The remaining information required by Item 403 of Regulation S-K will be included under the heading "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement for our
2016
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K will be included under the headings "Related Party Transactions," "Corporate Governance," and "Director Independence" in our definitive proxy statement for our
2016
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.
Additionally, refer to Part II, Item 8 of this Form 10-K, Notes to Consolidated Financial Statements, in Note
17
, "
Related Party Transactions
," and Note
18
, "
Variable Interest Entities (VIEs)
," under the subheading "Joseph M. Molina M.D., Professional Corporations."
Item 14.
Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A will be included under the heading "Disclosure of Auditor Fees" in our definitive proxy statement for our
2016
Annual Meeting of Stockholders, and such required information is incorporated herein by reference.
115
Item 15.
Exhibits and Financial Statement Schedules
|
(a)
|
The consolidated financial statements and exhibits listed below are filed as part of this report.
|
|
(1)
|
The financial statements included in Item 8 of this Form 10-K, Financial Statements and Supplementary Data, above are filed as part of this annual report.
|
|
(2)
|
Financial Statement Schedules
|
None of the schedules apply, or the information required is included in the Notes to the Consolidated Financial Statements.
|
(3)
|
Exhibits
|
Reference is made to the accompanying Index to Exhibits.
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the undersigned registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the
26th
day of February,
2016
.
|
MOLINA HEALTHCARE, INC.
|
|||
|
By:
|
/s/ Joseph M. Molina
|
||
|
Joseph M. Molina, M.D. (Dr. J. Mario Molina)
|
|||
|
Chief Executive Officer
(Principal Executive Officer)
|
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
117
|
Signature
|
Title
|
Date
|
||
|
/s/ Joseph M. Molina
|
Chairman of the Board, Chief Executive Officer, and President
|
February 26, 2016
|
||
|
Joseph M. Molina, M.D.
|
(Principal Executive Officer)
|
|||
|
/s/ John C. Molina
|
Director, Chief Financial Officer, and Treasurer
|
February 26, 2016
|
||
|
John C. Molina, J.D.
|
(Principal Financial Officer)
|
|||
|
/s/ Joseph W. White
|
Chief Accounting Officer
|
February 26, 2016
|
||
|
Joseph W. White
|
(Principal Accounting Officer)
|
|||
|
/s/ Garrey E. Carruthers
|
Director
|
February 26, 2016
|
||
|
Garrey E. Carruthers, Ph.D.
|
||||
|
/s/ Daniel Cooperman
|
Director
|
February 26, 2016
|
||
|
Daniel Cooperman
|
||||
|
/s/ Charles Z. Fedak
|
Director
|
February 26, 2016
|
||
|
Charles Z. Fedak
|
||||
|
/s/ Steven G. James
|
Director
|
February 26, 2016
|
||
|
Steven G. James
|
||||
|
/s/ Frank E. Murray
|
Director
|
February 26, 2016
|
||
|
Frank E. Murray, M.D.
|
||||
|
/s/ Steven J. Orlando
|
Director
|
February 26, 2016
|
||
|
Steven J. Orlando
|
||||
|
/s/ Ronna E. Romney
|
Director
|
February 26, 2016
|
||
|
Ronna E. Romney
|
||||
|
/s/ Richard M. Schapiro
|
Director
|
February 26, 2016
|
||
|
Richard M. Schapiro
|
||||
|
/s/ Dale B. Wolf
|
Director
|
February 26, 2016
|
||
|
Dale B. Wolf
|
||||
118
INDEX TO EXHIBITS
The following exhibits, which are furnished with this annual report or incorporated herein by reference, are filed as part of this annual report.
The agreements included or incorporated by reference as exhibits to this Annual Report on Form 10-K may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Annual Report on Form 10-K not misleading.
|
Number
|
Description
|
Method of Filing
|
||
|
2.1
|
Membership Interest Purchase Agreement, dated as of September 3, 2015, by and among The Providence Service Corporation, Ross Innovative Employment Solutions Corp., and Molina Healthcare, Inc.
|
Filed as Exhibit 2.1 to registrant's Form 8-K filed September 8, 2015.
|
||
|
2.2
|
Amendment to Membership Interest Purchase Agreement, dated as of October 30, 2015, by and among The Providence Service Corporation, Ross Innovative Employment Solutions Corp., and Molina Pathways, LLC, as assignee of all rights and obligations of Molina Healthcare, Inc.
|
Filed herewith.
|
||
|
3.1
|
Certificate of Incorporation
|
Filed as Exhibit 3.2 to registrant's Registration Statement on Form S-1 filed December 30, 2002.
|
||
|
3.2
|
Certificate of Amendment to Certificate of Incorporation
|
Filed as Exhibit 3.1 to registrant’s Form 8-K filed July 24, 2013.
|
||
|
3.3
|
Third Amended and Restated Bylaws of Molina Healthcare, Inc.
|
Filed as Exhibit 3.1 to registrant's Form 10-Q filed July 30, 2014.
|
||
|
4.1
|
Indenture, dated as of February 15, 2013, by and between Molina Healthcare, Inc. and U.S. Bank, National Association
|
Filed as Exhibit 4.1 to registrant's Form 8-K filed February 15, 2013.
|
||
|
4.2
|
Form of 1.125% Cash Convertible Senior Note due 2020
|
Included in Exhibit 4.1 to registrant's Form 8-K filed February 15, 2013.
|
||
|
4.3
|
Indenture, dated as of September 5, 2014, by and between Molina Healthcare, Inc. and U.S. Bank National Association
|
Filed as Exhibit 4.1 to registrant’s Form 8-K filed September 8, 2014.
|
||
|
4.4
|
Form of 1.625% Convertible Senior Note due 2044
|
Included in Exhibit 4.1 to registrant’s Form 8-K filed September 8, 2014.
|
||
|
4.5
|
Form of 1.625% Convertible Senior Notes Due 2044
Note Purchase Agreement, dated as of September 11, 2014, by and between Molina Healthcare, Inc. and certain institutional investors
|
Filed as Exhibit 10.1 to registrant’s Form 8-K filed September 12, 2014.
|
||
|
4.6
|
First Supplemental Indenture, dated as of September 16, 2014, by and between Molina Healthcare, Inc. and the U.S. Bank National Association
|
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
September 17, 2014.
|
||
|
4.7
|
Form of 1.625% Convertible Senior Note due 2044
|
Included in Exhibit 4.1 to registrant’s Form 8-K filed September 17, 2014.
|
||
|
4.8
|
Indenture dated November 10, 2015, by and among Molina Healthcare, Inc., the guarantor parties thereto and U.S. Bank National Association, as Trustee.
|
Filed as Exhibit 4.1 to registrant's Form 8-K filed November 10, 2015.
|
||
|
4.9
|
Form of 5.375% Senior Notes due 2022.
|
Filed as Exhibit 4.1 to registrant's Form 8-K filed November 10, 2015.
|
||
|
4.10
|
Form of Guarantee pursuant to Indenture dated November 10, 2015, by and among Molina Healthcare, Inc., the guarantor parties thereto and U.S. Bank National Association, as Trustee.
|
Filed as Exhibit 4.1 to registrant's Form 8-K filed November 10, 2015.
|
||
119
|
Number
|
Description
|
Method of Filing
|
||
|
4.11
|
Registration Rights Agreement dated November 10, 2015, by and among Molina Healthcare, Inc., the guarantor parties thereto and SunTrust Robinson Humphrey, Inc., as representative of the Initial Purchasers (as defined therein).
|
Filed as Exhibit 4.1 to registrant's Form 8-K filed November 10, 2015.
|
||
|
4.12
|
First Supplemental Indenture, dated February 18, 2016, by and among Molina Healthcare, Inc., the guarantor parties thereto and U.S. Bank National Association, as trustee.
|
Filed as Exhibit 4.1 to registrant’s Form 8-K filed February 18, 2016.
|
||
|
*10.1
|
2002 Equity Incentive Plan
|
Filed as Exhibit 10.13 to registrant's Form S-1 filed December 30, 2002.
|
||
|
*10.2
|
Molina Healthcare, Inc. Amended and Restated Deferred Compensation Plan (2013)
|
Filed as Exhibit 10.5 to registrant’s Form 10-K filed February 26, 2014.
|
||
|
*10.3
|
Amendment No. 1 to the Molina Healthcare, Inc.
Amended and Restated Deferred Compensation
Plan (2013)
|
Filed as Exhibit 10.6 to registrant’s Form 10-K filed February 26, 2014.
|
||
|
*10.4
|
Amendment No. 2 to the Molina Healthcare, Inc.
Amended and Restated Deferred Compensation Plan (2013)
|
Filed as Exhibit 10.4 to registrant's Form 10-K filed February 26, 2015.
|
||
|
*10.5
|
2011 Equity Incentive Plan
|
Filed as Exhibit 10.8 to registrant’s Form 10-K filed February 26, 2014.
|
||
|
*10.6
|
2011 Employee Stock Purchase Plan
|
Filed as Exhibit 10.6 to registrant's Form 10-K filed February 26, 2015.
|
||
|
*10.7
|
Form of Restricted Stock Award Agreement (Executive Officer) under Molina Healthcare, Inc. Equity Incentive Plan
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed August 9, 2005.
|
||
|
*10.8
|
Form of Restricted Stock Award Agreement (Outside Director) under Molina Healthcare, Inc. Equity Incentive Plan
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed August 9, 2005.
|
||
|
*10.9
|
Form of Restricted Stock Award Agreement (Employee) under Molina Healthcare, Inc. Equity Incentive Plan
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed August 9, 2005.
|
||
|
*10.10
|
Form of Stock Option Agreement under Equity Incentive Plan
|
Filed as Exhibit 10.3 to registrant's Form 10-K filed March 14, 2007.
|
||
|
*10.11
|
Amended and Restated Employment Agreement with J. Mario Molina, M.D. dated as of December 31, 2009
|
Filed as Exhibit 10.1 to registrant's Form 8-K filed January 7, 2010.
|
||
|
*10.12
|
Amended and Restated Employment Agreement with John C. Molina dated as of December 31, 2009
|
Filed as Exhibit 10.2 to registrant's Form 8-K filed January 7, 2010.
|
||
|
*10.13
|
Employment Agreement with Terry Bayer dated June 14, 2013
|
Filed as Exhibit 10.1 to registrant’s Form 8-K filed June 14, 2013.
|
||
|
*10.14
|
Employment Agreement with Joseph White dated June 14, 2013
|
Filed as Exhibit 10.2 to registrant’s Form 8-K filed June 14, 2013.
|
||
|
*10.15
|
Employment Agreement with Jeff Barlow, dated June 14, 2013
|
Filed as Exhibit 10.3 to registrant’s Form 8-K filed June 14, 2013.
|
||
|
*10.16
|
Amended and Restated Change in Control Agreement with Terry Bayer, dated as of December 31, 2009
|
Filed as Exhibit 10.4 to registrant's Form 8-K filed January 7, 2010.
|
||
|
*10.17
|
Amended and Restated Change in Control Agreement with Joseph W. White, dated as of December 31, 2009
|
Filed as Exhibit 10.6 to registrant's Form 8-K filed January 7, 2010.
|
||
|
*10.18
|
Change in Control Agreement with Jeff D. Barlow, dated as of September 18, 2012
|
Filed as Exhibit 10.16 to registrant’s Form 10-K filed February 28, 2013.
|
||
|
10.19
|
Form of Indemnification Agreement
|
Filed as Exhibit 10.14 to registrant's Form 10-K filed March 14, 2007.
|
||
|
10.20
|
Base Call Option Transaction Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.1 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.21
|
Base Call Option Transaction Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.2 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.22
|
Base Warrants Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.3 to registrant's Form 8-K filed February 15, 2013.
|
||
120
|
Number
|
Description
|
Method of Filing
|
||
|
10.23
|
Base Warrants Confirmation, dated as of February 11, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.4 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.24
|
Amendment to Base Call Option Transaction Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.5 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.25
|
Amendment to Base Call Option Transaction Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.6 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.26
|
Additional Base Warrants Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.7 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.27
|
Additional Base Warrants Confirmation, dated as of February 13, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.8 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.28
|
Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed May 3, 2013.
|
||
|
10.29
|
Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.2 to registrant's Form 10-Q filed May 3, 2013.
|
||
|
10.30
|
Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and JPMorgan Chase Bank, National Association, London Branch
|
Filed as Exhibit 10.3 to registrant's Form 10-Q filed May 3, 2013.
|
||
|
10.31
|
Additional Amended and Restated Base Warrants Confirmation, dated as of April 22, 2013, between Molina Healthcare, Inc. and Bank of America, N.A.
|
Filed as Exhibit 10.4 to registrant's Form 10-Q filed May 3, 2013.
|
||
|
10.32
|
Lease Agreement, dated as of February 27, 2013, by and between 6th & Pine Development, LLC and Molina Healthcare, Inc.
|
Filed as Exhibit 10.32 to registrant’s Form 10-K filed February 28, 2013.
|
||
|
10.33
|
First Amendment to Office Building Lease, effective as of
October 31, 2014, by and between 6
th
& Pine Development,
LLC and Molina Healthcare, Inc.
|
Filed as Exhibit 10.1 to registrant’s Form 8-K filed November 5, 2014.
|
||
|
10.34
|
Second Amendment to Office Building Lease, effective as of November 2, 2015, by and between 6th & Pine Development, LLC and Molina Healthcare, Inc.
|
Filed as Exhibit 10.1 to registrant's Form 8-K filed November 6, 2015.
|
||
|
10.35
|
Settlement Agreement entered into on October 30, 2013, by and between the Department of Health Care Services and Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc.
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed October 30, 2013.
|
||
|
10.36
|
Agreement of Purchase and Sale, dated as of June 12, 2013, by and between Molina Healthcare, Inc. and Molina Center, LLC, and AG Net Lease Acquisition Corp.
|
Filed as Exhibit 10.1 to registrant's Form 10-Q filed July 25, 2013.
|
||
|
10.37
|
Lease Agreement, dated as of June 13, 2013, by and between AGNL Clinic, L.P., and Molina Healthcare, Inc.
|
Filed as Exhibit 10.2 to registrant's Form 10-Q filed July 25, 2013.
|
||
|
10.38
|
Form of Exchange Agreement, dated August 11, 2014, by and between Molina Healthcare, Inc. and certain beneficial owners of Molina Healthcare, Inc.’s 3.75% Convertible Senior Notes due 2014
|
Filed as Exhibit 10.1 to registrant’s Form 8-K filed August 12, 2014.
|
||
|
10.39
|
Credit Agreement, dated as of June 12, 2015, by and among Molina Healthcare, Inc., Molina Information Systems, LLC, Molina Medical Management, Inc., certain lenders named on the signature pages thereto and SunTrust Bank, as Administrative Agent, Swingline Lender and Issuing Bank
|
Filed as Exhibit 10.1 to registrant's Form 8-K filed June 16, 2015.
|
||
|
10.40
|
Guarantor Joinder Agreement, dated February 18, 2016, by and among the guarantor parties thereto and SunTrust Bank, as Administrative Agent.
|
Filed as Exhibit 10.1 to registrant’s Form 8-K filed February 18, 2016.
|
||
121
|
Number
|
Description
|
Method of Filing
|
||
|
10.41
|
Purchase Agreement, dated as of February 11, 2013, among Molina Healthcare, Inc. and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Representatives of the Initial Purchasers
|
Filed as Exhibit 1.1 to registrant's Form 8-K filed February 15, 2013.
|
||
|
10.42
|
Capitated Medical Group/IPA Provider Services Agreement, effective May 1, 2013, by and between Molina Healthcare of California and Pacific Healthcare IPA.
|
Filed herewith.
|
||
|
10.43
|
Regulatory Amendment for the Capitated Financial Alignment Demonstration Product to Molina Healthcare of California Group/IPA Provider Services Agreement(s), effective September 26, 2014, by and between Molina Healthcare of California and Pacific Healthcare IPA Associates, Inc.
|
Filed herewith.
|
||
|
10.44
|
Capitated Financial Alignment Demonstration Amendment to Molina Healthcare of California Group/IPA Provider Services Agreement, effective as of July 1, 2014, by and between Molina Healthcare of California and Pacific Healthcare IPA Associates, Inc.
|
Filed herewith.
|
||
|
12.1
|
Computation of Ratio of Earnings to Fixed Charges
|
Filed herewith.
|
||
|
21.1
|
List of subsidiaries
|
Filed herewith.
|
||
|
23.1
|
Consent of Independent Registered Public Accounting Firm
|
Filed herewith.
|
||
|
31.1
|
Section 302 Certification of Chief Executive Officer
|
Filed herewith.
|
||
|
31.2
|
Section 302 Certification of Chief Financial Officer
|
Filed herewith.
|
||
|
32.1
|
Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Filed herewith.
|
||
|
32.2
|
Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Filed herewith.
|
||
|
101.INS
|
XBRL Taxonomy Instance Document
|
Filed herewith.
|
||
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
Filed herewith.
|
||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
Filed herewith.
|
||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
Filed herewith.
|
||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
Filed herewith.
|
||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
Filed herewith.
|
||
|
*
|
Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.
|
122
TABLE OF CONTENTS
Part IItem 1: BusinessItem 1A: Risk FactorsItem 1B: Unresolved Staff CommentsItem 2: PropertiesItem 3: Legal ProceedingsItem 4: Mine Safety DisclosuresPart IIItem 5: Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules