ANNUAL REPORT
2008
About Us
Company Profile
Molina Healthcare, Inc. is a multi-state managed care organization that arranges for the delivery of healthcare services
to persons eligible for Medicaid, Medicare, and other government-sponsored programs for low-income families and
individuals. Molina Healthcare’s ten licensed health plan subsidiaries in California, Florida, Michigan, Missouri, Nevada,
New Mexico, Ohio, Texas, Utah, and Washington currently serve approximately 1.26 million members. More information
about Molina Healthcare can be obtained at www.MolinaHealthcare.com.
California
Washington
Utah
New Mexico
Michigan
Ohio
Each Molina Healthcare
plan has adopted the goal
to achieve or continue
accreditation by the National
Committee for Quality
Assurance (NCQA), an
independent, not-for-profit
organization dedicated to
measuring the quality of
America’s healthcare.
Annual Meeting
The annual meeting of stockholders will be held on
Tuesday April 28, 2009, at 10:00 a.m. local time, at:
Molina Healthcare, Inc.
One Golden Shore Drive
Huntington Conference Room
Long Beach, CA 90802
(562) 435-3666
Financial Highlights
(Dollars in thousands, except per share data)
Revenue:
Premium revenue
Investment income
Total revenue
Expenses:
Medical care costs
General and administrative expenses
Depreciation and amortization
Impairment charge on purchased software(1)
Total expenses
Operating income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted average number of common shares and
potential dilutive common shares outstanding
Operating Statistics:
Ratio of direct medical care costs to premium revenue
Ratio of administrative costs included in medical care costs to premium revenue
Medical care ratio (2)
General and administrative expense ratio (3),
excluding premium taxes (core G&A ratio)
Premium taxes included in general and administrative expenses
Total general and administrative expense ratio
Depreciation and amortization expense ratio (4)
Effective tax rate
Members (5)
Year Ended
December 31,
2008
2007
$ 3,091,240
21,126
3,112,366
$ 2,462,369
30,085
2,492,454
2,621,312
344,761
33,688
-
2,999,761
112,605
(8,714)
2,080,083
285,295
27,967
782
2,394,127
98,327
(4,631)
103,891
41,493
$ 62,398
93,696
35,366
$ 58,330
$ 2.25
$ 2.25
$ 2.06
$ 2.05
27,772,000
28,419,000
82.3%
2.5%
84.8%
81.8%
2.7%
84.5%
8.0%
3.1%
11.1%
1.1%
39.9%
8.2%
3.3%
11.5%
1.1%
37.8%
1,256,000
1,149,000
(1) Amount represents an impairment charge related to commercial software no longer used for operations.
(2) Medical care ratio represents medical care costs as a percentage of premium revenue.
(3) General and administrative expense ratio represents such expenses as a percentage of total revenue.
(4) Depreciation and amortization expense ratio represents such expenses as a percentage of total revenue.
(5) Number of members at end of period.
Historical Highlights
Membership
(thousands)
Aggregate membership up 9% over 2007
Premium Revenues
($ millions)
Annual premium revenues of $3.1
billion, up 26% over 2007
1,256
1,149
$3,091
$2,462
EBITDA
($ millions)
EBITDA of $146.3 million, up 16%
over 2007
$146
$126
Earnings Per Share
Earnings of $2.25 per diluted share, up
10% over 2007
$2.25
$2.05
1,021
$1,985
$97
$1.62
‘06
‘07
‘08
‘06
‘07
‘08
‘06
‘07
‘08
‘06
‘07
‘08
MOLINA HEALTHCARE
ANNUAL REPORT 2008 A1
To Our Stockholders
In a year of turmoil in our economy and challenges to our
industry — from the crisis in the credit markets to state
budget shortfalls — I am pleased to report to you that
Molina Healthcare solidified its leadership position. For
our company, 2008 was marked by continued improvement,
steady growth and solid financial performance.
By a broad range of measures, we enjoyed another very
successful year. Our net income for 2008 was $62.4 million,
or $2.25 per share, representing an increase of 10% over the
previous year. Revenues rose from $2.5 billion to $3.1 billion,
an increase of 26% over 2007. The Parent Company finished the
year with approximately $69 million in cash and investments
and $200 million in an untapped credit line, giving us the
ability to grow through acquisitions in 2009 and beyond.
Our performance also reflects our disciplined emphasis
on managing our business more efficiently and serving
our members and government partners more effectively.
We have focused in on five key areas: quality, growth,
financial strength, compliance and customer service. These
are not separate priorities. Rather, they relate closely to
each other. Our deep commitment to compliance with
regulatory requirements, for example, relates to our customer
service and impacts our financial strength. Quality, service
and compliance contribute to our growth by helping our
company win contracts and attract and retain members.
Growth augments our financial strength, and financial
strength enhances our ability to grow. Because all five of
these areas are closely intertwined, they are all equally
important priorities.
We also enjoyed continued growth in the number of
Americans we serve. Our total enrollment rose by 9%
over the previous year. We ended 2008 with an aggregate
membership in our programs of 1.26 million, and we
established a presence in a new market: Florida.
Our steady successes amid a turbulent environment strongly
affirm the fundamental soundness of our business model.
Our focus has always been on providing healthcare services
to financially vulnerable families and individuals covered
by government programs. Drawing on nearly three decades
of experience, we have an exceptional understanding of the
people we serve and the particular challenges of meeting
their healthcare needs. That experience translates into real
value for plan members, physicians, the federal and state
government and, ultimately, for the taxpayers whose dollars
we have been entrusted to manage.
Building Value through Quality
Similarly, our track record for quality is inseparable from our
other core strategies. It goes hand in hand with our emphasis on
compliance. Quality drives patient and physician satisfaction.
It fuels growth and helps build our financial strength. But
quality has always been more than a strategy. It is ingrained
into every strand of our operation. In part, it is because our
organization began not as a manager of healthcare but rather
as a direct provider of healthcare. Our patients were people
we cared for on a hands on and face to face basis. We continue
this member-centered orientation today – not as a legacy, but
as an operating philosophy.
We take great pride that each of our eligible health plans has
earned a quality accreditation from the nonprofit National
Committee for Quality Assurance (NCQA), which evaluates
Corporate Highlights
In 2008, Molina Healthcare announced that it
would relocate the company’s IT Operations
Center from its corporate headquarters in Long
Beach, California to a new state-of-the-art facility
being constructed in Albuquerque, New Mexico.
The new center is expected to enhance Molina’s
presence in New Mexico, where Molina’s health
plan currently serves more than 85,000 New
Mexicans through the New Mexico Salud! and
other programs.
A2
MOLINA HEALTHCARE
ANNUAL REPORT 2008
The new Molina IT Operations
Center will be located in
Albuquerque’s Mesa del Sol
District and is expected to begin
operations in 2009.
Molina Healthcare leaders and
New Mexico government officials
participate in the groundbreaking
ceremony for the new Molina IT
Operations Center.
plans based on consumer experiences, treatment and
effectiveness of preventive services. For the fourth straight
year, Molina’s plans were ranked by U.S.News and World
Report, which reviewed data on approximately 500 plans
around the country. Our Medicaid plans in New Mexico,
Utah and Washington achieved the highest rankings for
their individual states.
We recognize that quality also contributes value to our
company. In some states that rely on the mandatory assignment
of Medicaid patients to managed care, demonstrable quality
plays a role in patient allocation. More and more, states
are creating financial incentives in the form of bonuses
or “pay-for-performance” formulas for achieving quality
outcomes. In a world of increasing transparency, we believe
that members will gravitate toward plans that demonstrate
high-quality care. But in the end, we place great emphasis
on quality not so much because of financial incentives but
because it is the right thing to do.
Building Quality and Containing Costs
All too often, quality care and cost containment have been
viewed as incompatible goals. Our experience as a provider
taught us long ago that just the opposite is true. To us, real
quality is measured not just in our response to members who
require acute care, but in how we reduce the need for such
care by enhancing their overall health. We have built our
company on a record of helping ensure that patients receive
the right care, at the right time and in the right place, from
the most appropriate type of provider.
The old saying has it wrong: an ounce of prevention is not
worth a pound of cure – it’s worth a lot more. As an example,
for the typical cost of caring for one patient who has suffered
a stroke, we can manage the care for an entire year of 10,000
patients with hypertension. For this reason, we work to
deliver prevention by the ton.
Nothing better illustrates how managing costs proactively
increases value than our approach to prenatal care. Today,
13% of the babies born in this country — nearly one in seven
— are born prematurely. A disproportionate number are
born to low-income mothers with limited access to prenatal
care. On average, a child born at 28 weeks in a pregnancy
consumes $175,000 more in healthcare resources before going
home than does a baby who leaves the hospital after being
carried to a full 40-week term. In addition, babies born too
early are much more likely to suffer from permanent health
problems, ranging from severe learning disabilities to cerebral
palsy. As a result, births that are significantly premature can
create a triple deficit: limiting human potential, imposing
extra burdens on families, and raising healthcare and social
costs enormously over the course of that infant’s lifetime.
In response, Molina Healthcare has become a leader in
programs that focus on maternal health. We actively seek
opportunities with states to encourage early enrollment
of expectant mothers. In addition, we have established
innovative programs under which we combine a review
of both lab tests and imaging studies in order to identify
pregnancies even before they have been confirmed by the
state and at the earliest possible point in the pregnancy when
coordinated prenatal care can make the greatest impact.
For high-risk pregnancies in rural areas where access to
physicians is a problem, we are exploring the use of biometric
devices. Through this technology, we can receive daily
information on the mother’s blood sugar, blood pressure,
weight and other measures — all transmitted over telephone
lines. As a result, we can more quickly detect and address
problems in the pregnancy.
Corporate Highlights
In October 2008, Molina Healthcare
launched the Molina brand in the state of
Missouri, renaming Mercy CarePlus as
Molina Healthcare of Missouri. Molina
firmly established its presence in the
Midwest, expanding in size and geography,
when the Company acquired St. Louis-based
Mercy CarePlus in November 2007.
Relocating company offices
afforded Molina Healthcare of
Missouri opportunities to embrace
community partners and showcase
a new identity.
Molina Healthcare officials welcome
local providers, civic officials and
community organizations during
an open house event at the health
plan’s new St. Louis home.
MOLINA HEALTHCARE
ANNUAL REPORT 2008 A3
We have also implemented a new program to see that women
with histories of premature delivery receive weekly injections
of a medicine – called 17-hydroxyprogesterone caproate –
that helps them carry their babies to term. Among those
who have participated in our “17-P” program, we have seen
a 33% reduction in premature births. In this way, we have
helped create wins for families, providers, the overburdened
healthcare system and for American taxpayers.
Building Our Company by Building Trust
Compliance with federal and state regulations has long been
an area of intensive focus for us — not simply because it is a
requirement, but because it is integral to our long-term success.
We make compliance a priority because we learned long ago
that it pays significant dividends. In a real and direct way,
the trust of government regulators and policymakers is our
pipeline to future revenue. Earning trust provides our company
the opportunity to be awarded new contracts and to expand
programs and revenues under existing contracts. Trust must be
earned each day, through ensuring that we comply consistently
with the requirements of the taxpayer-funded programs we
serve. We also must earn the trust of patients and physicians.
Our careful attention to compliance is directly related to
customer service. It impacts the satisfaction of providers and
their willingness to participate in the Medicaid program.
For us, compliance is a way of life. We do not permit it to be
the concern only of a “compliance officer,” or of merely a small
number of corporate staff. Instead, we have established a culture
in which compliance is the daily responsibility of every one
of the more than 2,500 employees of Molina Healthcare.
Building a Strong Base for the Future
Molina Healthcare continues to be a leader in our industry
in holding down administrative costs. It has become one
of our hallmarks. Operating efficiently means that more
dollars from government-funded health programs can be
used for the delivery of healthcare, serving both patients and
the public. At the same time, reducing administrative costs
has enhanced our company’s financial strength — a strategy
where value became even clearer after the events of last year
left the federal government and many state governments
in a financial crisis. Our efficiencies, combined with our
conservative use of debt, have positioned Molina Healthcare
not only to weather the present economic storm, but they
also enhance our ability to grow and to win new contracts.
Our growth — and, in particular, the way we have grown —
also continues to build financial strength for our company.
Throughout 2008, we executed our strategy in a way that
improved our performance for the year and provided an
even more solid foundation for the future.
In August, we announced that we had entered into a
definitive agreement to acquire Florida NetPASS, a provider
of care management and administrative services to then
approximately 55,000 members in South and Central Florida.
After winning a Medicaid managed care contract with the
state, our Florida health plan began enrolling members
in December. Our entry into Florida provides us with an
important opportunity in a fertile market for growth as we
demonstrate the value and efficacy of our model.
Meanwhile, we continued to enjoy organic growth in existing
markets. This growth was especially strong in Ohio and
Missouri — states that we entered in the previous two years
and where we are steadily expanding our presence and our
membership. We also continued to expand our membership
among “dual eligibles” who qualify for assistance under both
the Medicare and Medicaid programs, as well as among
low-income Medicare beneficiaries who do not qualify for
Medicaid. These individuals are demographically similar to
Corporate Highlights
For nearly three decades, Molina Healthcare’s
commitment to our members has made us a
national leader in providing quality healthcare to
underserved families and individuals.
At the same time, Molina has remained committed
to community service. By meaningful grassroots
partnerships and engaged community outreach,
Molina has pioneered and refined a model for
serving the needs of underserved communities that
focuses on becoming a positive participant and a
fully devoted community member.
A4
MOLINA HEALTHCARE
ANNUAL REPORT 2008
Molina Healthcare’s lovable mascot,
Dr. Cleo the Cat, accompanies a
community outreach team during a
spirit-lifting visit with toddlers at the
children’s ward of Cardinal Glennon
Hospital in St. Louis, Missouri.
Dr. Mario Molina underscores
Molina Healthcare’s committed
community presence during a
presentation to students of the
Latino Business Association at the
University of Southern California.
the traditional Medicaid beneficiaries we serve, and they face
similar challenges when it comes to accessing healthcare
services. Our unsurpassed experience in serving Medicaid
beneficiaries translates well to these additional members and
offers promising avenues for growth and diversification.
We also continue to diversify geographically — a strategy
that will help fuel our company’s growth while increasing our
financial strength. One year ago, we generated 62% of our
revenues in California, Michigan and Washington. As our
membership in our newer states has grown, those three states
of California, Michigan, and Washington now represent only
53% of our revenues, despite the fact that enrollment in all
three of those states has also grown. We are thus well on our
way toward achieving our long-term goal of relying on no
single state for more than 15% of our revenues.
Building on Unmatched Experience
Over the years, we have learned that every challenging
market is accompanied by new opportunities. The current
economic environment is no exception. According to the
Urban Institute, with every 1% increase in the unemployment
rate, the number of Medicaid beneficiaries rises by roughly
one million Americans. In five of the states where we
operate, unemployment levels are higher than the steadily
rising national average. With the recent re-authorization
and expansion of the State Children’s Health Insurance
Program, or SCHIP, we estimate that 4.1 million more
children will be covered. And because we have built a solid
financial foundation for our company, we can selectively
take advantage of acquisition opportunities, like our most
recent opportunity in Florida, as they emerge.
At Molina Healthcare, we have made significant investments
of time and resources to ensure that our growth is sustainable
over the long run. Actually, our short-term view of the world
is evaluated over a three to five year horizon, not just over
six months or a year. Over the last 30 years, we have built
this business from one primary care clinic into a multi-state
healthcare organization. Planning for the long run has been
the key to our success. In fact, this long-term approach to
planning defines our financial view, regardless of challenges
to the economy.
We believe that our past experience serves as the most reliable
navigational aid as we chart our future. We have served
Medicaid recipients longer than virtually any other major
health management organization. We know how to connect
our members with services in ways that improve outcomes
and conserve costs, and we continue to improve on those
abilities each year. Our management team has earned a strong
track record during both booming economies and more
challenging times like today. Our strategies are succeeding,
and our business model continues to prove itself. Drawing
on all of these assets and competitive advantages, we look
forward to another strong year in 2009. As always, we remain
grateful for your support, your investment and your trust.
Sincerely,
J. Mario Molina, M.D.
President and Chief Executive Officer
Corporate Highlights
Molina Healthcare is proud to honor
and partner with everyday community
leaders across the country.
Their spirit of service, commitment
and caring embodies the philosophy of
our founder, and we are privileged to
recognize their contributions.
Everyday heroes whose behind-
the-scenes dedication, selflessness
and civic contributions improve
their communities are recognized
through Molina’s Community
Champions grant program.
Molina Healthcare leaders and
local community advocates
participate in the ceremony for the
San Diego Community Champions.
MOLINA HEALTHCARE
ANNUAL REPORT 2008 A5
Officers & Key Executives
J. Mario Molina, MD
Chairman of the Board, President and
Chief Executive Officer
John C. Molina, JD
Chief Financial Officer
Mark L. Andrews, Esq.
Chief Legal Officer and Corporate Secretary
Board of Directors
Terry P. Bayer, JD, MPH
Chief Operating Officer
Amir P. Desai
Vice President, Chief Information Officer
James W. Howatt, MD, MBA
Chief Medical Officer
Juan José Orellana, MBA
Vice President, Investor Relations
Joseph W. White, CPA, MBA
Vice President, Chief Accounting Officer
J. Mario
Molina, MD
Chairman of
the Board,
President and
Chief Executive
Officer Molina
Healthcare, Inc.
John C.
Molina, JD
Chief Financial
Officer Molina
Healthcare, Inc.
Ronna E.
Romney
Director
Park-Ohio
Holding
Corporation
Charles Z.
Fedak,
CPA, MBA
Founder
Charles Z.
Fedak & Co.,
CPAs
Frank E.
Murray, MD
Retired Private
Practitioner
John P.
Szabo, Jr.
Private
Investor
Steven
Orlando,
CPA
Founder
Orlando
Consulting
Sally K.
Richardson
Executive
Director
Institute for
Health Policy
Research
Associate
Vice President
Health Services
Center of
West Virginia
University
Corporate Data
Corporate Headquarters
Molina Healthcare, Inc.
200 Oceangate, Suite 100
Long Beach, CA 90802
(562) 435-3666 (phone)
(562) 437-1335 (fax)
www.MolinaHealthcare.com
Independent Registered Public
Accounting Firm
Ernst & Young LLP
725 South Figueroa Street, 5th Floor
Los Angeles, CA 90017
(213) 977-3200 (phone)
(213) 977-3568 (fax)
www.ey.com
Transfer Agent
American Stock Transfer
& Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
(800) 937-5449
www.amstock.com
A6
MOLINA HEALTHCARE
ANNUAL REPORT 2008
Common Stock
The common stock of Molina Healthcare, Inc.
is traded on the New York Stock Exchange
(NYSE) under the symbol, MOH.
NYSE Disclosures
The certifications of our Chief Executive
Officer and Chief Financial Officer required
under the Sarbanes-Oxley Act are filed as
exhibits to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
In addition, in accordance with NYSE rules, we
filed in June 2008 the annual certification of our
Chief Executive Officer certifying that he was
unaware of any violation by us of the NYSE’s
corporate governance listing standards.
Forward-Looking Statements
This annual report contains “forward-looking
statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Any
statements in this document that relate to
prospective events or developments are forward-
looking statements. Words such as “believes,”
“expects,” “will,” and similar expressions are
intended to identify forward-looking statements
about the expected future business and financial
performance of Molina Healthcare. Forward-
looking statements are based on management’s
current expectations and assumptions, which
are subject to numerous risks, uncertainties, and
potential changes in circumstances that are difficult
to predict. Any of our forward-looking statements
may turn out to be wrong, and thus you should
not place undue reliance on any forward-looking
statements, which speak only as of the date they
were made. For a list and description of some of
the risks and uncertainties to which our forward-
looking statements are subject, please refer to
the discussion in this Annual Report under the
caption, “Item 1A. Risk Factors,” as well as to the
additional risk factors described from time to
time in our quarterly reports on Form 10-Q and
our current reports on Form 8-K as filed with the
Securities and Exchange Commission. Except to
the extent otherwise required by federal securities
laws, we undertake no obligation to publicly update
or revise any of our forward-looking statements.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
¥
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
n
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31719
or
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-4204626
(I.R.S. Employer
Identification No.)
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:
Title of Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value
New York Stock Exchange
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. n Yes
¥ 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. n Yes
¥ 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. ¥ Yes
n 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. n
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):
Large accelerated filer n
Smaller reporting company n
Non-accelerated filer n
Accelerated filer ¥
Indicate by check mark whether
¥ No
Act). n Yes
(Do not check if a smaller reporting company)
the registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange
The aggregate market value of Common Stock held by non-affiliates of the Registrant as of June 30, 2008, the last business day of
our most recently completed second fiscal quarter, was approximately $300 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, 2008).
As of March 13, 2009, approximately 26,066,000 shares of the Registrant’s Common Stock, $0.001 par value per share, were
outstanding.
Portions of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be held on April 28, 2009 are
incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
MOLINA HEALTHCARE, INC.
Table of Contents
Form 10-K
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
13
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29
29
29
31
34
36
59
60
99
99
99
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
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101
101
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Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART IV
PART I
Item 1: Business
Overview
We are a multi-state managed care organization that arranges for the delivery of health care services to persons
eligible for Medicaid, Medicare, and other government-sponsored programs for low-income families and indi-
viduals. We conduct our business primarily through 10 licensed health plans in the states of California, Florida,
Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. The health plans are locally
operated by our respective wholly owned subsidiaries in those 10 states, each of which is licensed as a health
maintenance organization. Our revenues are derived primarily from premium revenues paid to our health plans by
the relevant state Medicaid authority, which revenues are jointly financed by the federal government and the states.
Increasingly, we also derive revenues from the federal Centers for Medicare and Medicaid Services, or CMS, in
connection with our Medicare services.
The payments made to our health plans generally represent an agreed upon amount per member per month, or a
“capitation” amount, which is paid regardless of whether the member utilizes any medical services in that month or
whether the member utilizes medical services in excess of the capitation amount. Each of our health plans (with the
exception of our Utah plan whose Medicaid business was not capitated in 2008) is thus financially “at risk” for the
medical care of its members. Each health plan arranges for health care services for its members by contracting with
health care providers in the relevant communities or states, including contracting with primary care physicians,
specialist physicians, physician groups, hospitals, and other medical care providers. Our California health plan also
operates 17 of its own primary care community clinics. Various core administrative functions of our health plans —
primarily claims processing, information systems, and finance — are centralized at our corporate parent in Long
Beach, California. As of December 31, 2008, approximately 1,256,000 members were enrolled in our ten health
plans.
Dr. C. David Molina founded our company in 1980 under the name “Molina Medical Centers” as a provider
organization serving the Medicaid population in Southern California through a network of primary care clinics.
Since then, we have increased our membership through the start-up development of new health plan operations, the
acquisition of existing health plans, and internal or organic growth. In 1997, we established our Utah health plan as a
start-up operation. In 1999, we incorporated in California as the parent company of our California and Utah health
plan subsidiaries under the name “American Family Care, Inc.” In late 1999, we acquired our Michigan and
Washington health plans. In March 2000, we changed our name to Molina Healthcare, Inc. In June 2003, we
reincorporated from California to Delaware, and in July 2003 we completed our initial public offering of common
stock and listed our shares for trading on the New York Stock Exchange under the trading symbol, MOH. In July
2004, we acquired our New Mexico health plan. Our start-up health plan in Ohio began operations in December
2005. On January 1, 2006, our health plans in California, Michigan, Utah, and Washington began operating
Medicare Advantage Special Needs Plans in their respective states. In May 2006, we acquired Cape Health Plan in
Michigan, merging it into our Michigan health plan effective December 31, 2006. Our start-up health plan in Texas
began operations in September 2006. On January 1, 2007, our health plans in California, Michigan, Nevada, New
Mexico, Texas, Utah, and Washington began enrolling members in Medicare Advantage plans with prescription
drug coverage, or MA-PD plans. In June 2007, we organized a health plan in Nevada that serves only Medicare
members. In November 2007, we acquired Alliance For Community Health LLC, doing business as Mercy
CarePlus, a licensed health plan in Missouri. In January 2008, our health plans in New Mexico and Texas also began
operating Medicare Advantage Special Needs Plans. In late December 2008, we began enrolling members in our
Florida health plan.
Our members have distinct social and medical needs and come from diverse cultural, ethnic, and linguistic
backgrounds. From our inception, we have focused exclusively on serving financially vulnerable individuals
enrolled in government-sponsored health care programs. Our success has resulted from our extensive experience
with meeting the needs of our members, including over 28 years of experience in operating community-based
primary care clinics, our cultural and linguistic expertise, our education and outreach programs, our expertise in
working with government agencies, and our focus on operational and administrative efficiencies.
1
Our principal executive offices are located at 200 Oceangate, Suite 100, Long Beach, California 90802, and
our telephone number is (562) 435-3666. Our website is www.molinahealthcare.com.
Information contained on our website or linked to our website is not incorporated by reference into, or as part
of, this annual report. Unless the context otherwise requires, references to “Molina Healthcare,” the “Company,”
“we,” “our,” and “us” herein refer to Molina Healthcare, Inc. and its subsidiaries. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports, are available free
of charge on our website, www.molinahealthcare.com, as soon as reasonably practicable after such reports are
electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Information regarding
our officers and directors, and copies of our Code of Business Conduct and Ethics, Corporate Governance
Guidelines, and our Audit, Compensation, and Corporate Governance and Nominating Committee Charters, are
also available on our website. Such information is also available in print upon the request of any stockholder to our
Investor Relations Department at the address of our executive offices set forth above. In accordance with New York
Stock Exchange (“NYSE”) rules, on June 9, 2008, we filed the annual certification by our Chief Executive Officer
certifying that he was unaware of any violation by us of the NYSE’s corporate governance listing standards at the
time of the certification.
Our Industry
The Medicaid and CHIP Programs. Established in 1965, the Medicaid program is an entitlement program
funded jointly by the federal and state governments and administered by the states. The Medicaid program provides
health care benefits to low-income families and individuals. Each state establishes its own eligibility standards,
benefit packages, payment rates, and program administration within broad federal statutory and regulatory
guidelines. The most common state-administered Medicaid program is the Temporary Assistance for Needy
Families program, or TANF (often pronounced “TAN-if”). TANF is the successor to the Aid to Families with
Dependent Children program, or AFDC, and most enrolled members are mothers and their children. Another
common state-administered Medicaid program is for the aged, blind, or disabled, or ABD Medicaid members, who
do not qualify under other Medicaid coverage categories. Although state programs must meet minimum federal
standards, states have significant flexibility in determining eligibility thresholds, the amount of covered services,
and payment rates for providers.
In addition, the Children’s Health Insurance Program, known widely by the acronym, 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, but not enough to afford commercial health insurance. States have the option of admin-
istering CHIP through their Medicaid programs.
The federal government pays a portion of the costs that states incur to provide services to Medicaid enrollees.
The proportion of states’ costs that the federal government pays is based on the “federal medical assistance
percentage,” or FMAP. The percentage for each state is determined through a formula that assigns a higher federal
reimbursement rate to states that have lower income per capita (and vice versa) relative to the national average. The
average matching rate that the federal government pays is 57 percent nationwide; states contribute the remaining
43 percent. The federal matching rates have both a floor (50 percent) and a ceiling (83 percent). The matching rates
for CHIP are approximately one-third higher than those under Medicaid. Generally, states have more programmatic
flexibility in CHIP than in Medicaid.
As part of the American Recovery and Reinvestment Act of 2009 enacted on February 17, 2009, states will
receive approximately $87 billion in assistance for their Medicaid programs through a temporary increase in the
FMAP match rate. The funding is effective retroactively from October 1, 2008 to December 31, 2010. Under the
American Recovery and Reinvestment Act of 2009, every state will receive a minimum FMAP increase of
6.2 percent. The balance of funding is based on unemployment rates in the states. In order to receive this additional
FMAP increase, states may not reduce Medicaid eligibility levels below the eligibility levels that were in place on
July 1, 2008. Medicaid is classified as an entitlement, and therefore there is no limit on the federal funds that may be
expended. Federal payments for Medicaid are limited only by the amount states are willing and able to spend.
Nevertheless, budgetary constraints at both the federal and state levels may limit the benefits paid and the number of
members served by Medicaid. CHIP, however, is a capped allotment. Pursuant to the Children’s Health Insurance
2
Program Reauthorization Act of 2009 enacted on February 4, 2009, CHIP was reauthorized and expanded to cover
up to a total of 11 million children by 2011. The legislation also provides an additional $32.8 billion in funding over
the next four and a half years, and allows states to expand coverage up to 300 percent of the federal poverty level.
CHIP will continue to be funded at an enhanced match, with the minimum federal amount being 65 percent.
Medicaid Managed Care. Under traditional fee-for-service Medicaid programs, health care services are
made available to beneficiaries in an uncoordinated manner. These beneficiaries typically have minimal access to
preventive care such as immunizations, and access to primary care physicians is limited. As a consequence,
treatment is often postponed until medical conditions become more severe, leading to higher utilization of costly
emergency room services. In addition, because providers are paid on a fee-for-service basis where additional
services rendered result in additional revenues, they lack incentives to monitor utilization and control costs.
In an effort to improve quality and provide more uniform and more cost-effective care, many states have
implemented Medicaid managed care programs. Such 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 a predetermined payment per enrollee or member (commonly referred to as “capitation”) for
the covered health care services. The health plan is thus financially “at risk” for its members’ medical services. The
health plan, in turn, arranges for the provision of the covered health care services by contracting with a network of
providers, including both physicians and hospitals, who agree to provide the covered services to the health plan’s
members. The health plan also monitors quality of care and implements preventive programs, thereby striving to
improve access to care while more effectively controlling costs.
Over the past decade, the federal government has expanded the ability of state Medicaid agencies to explore
and, in many cases, to mandate the use of managed care for Medicaid beneficiaries. If Medicaid managed care is not
mandatory, individuals entitled to Medicaid may choose either the fee-for-service Medicaid program or a managed
care plan, if available. All states in which we operate have mandatory Medicaid managed care programs.
Medicare Advantage Plans. During 2008, each of our health plans in California, Michigan, Nevada, New
Mexico, Texas, Utah, and Washington operated Medicare Advantage plans, each of which included a mandatory
Part D prescription drug benefit. Our Medicare Advantage special needs plans, or SNPs, operate under the trade
name, Molina Medicare Options Plus, and serve those beneficiaries who are dually eligible for both Medicare and
Medicaid such as low-income seniors and people with disabilities. Our Medicare Advantage Prescription Drug
plans, or MA-PDs, operate under the trade name, Molina Medicare Options. Although our MA-PD benefit plans do
not exclusively enroll dual eligible beneficiaries, the plans’ benefit structure is designed to appeal to lower income
beneficiaries. We believe offering these Medicaid plans is consistent with our historical mission of serving low-
income and medically underserved families and individuals. None of our health plans operate a Medicare
Advantage private fee-for-service plan. Total enrollment in our Medicare Advantage plans at December 31,
2008 was approximately 8,000 members. Our 2008 premium revenues from Medicare across all health plans
represented approximately 3.1% of our total premium revenues.
Other Government Programs for Low Income Individuals.
In certain instances, states have elected to provide
medical benefits to individuals and families who do not qualify for Medicaid. Such programs are often administered
in a manner similar to Medicaid and CHIP, but without federal matching funds. At December 31, 2008, our
Washington health plan served approximately 26,000 such members under one such program, that state’s “Basic
Health Plan.”
3
Our Approach
We focus on serving financially vulnerable families and individuals who receive health care benefits through
government-sponsored programs within a managed care model. These families and individuals generally represent
diverse cultures and ethnicities. Many have had limited educational opportunities and do not speak English as their
first language. Lack of adequate transportation is common. We believe we are well-positioned to capitalize on the
growth opportunities in serving these members. Our approach to managed care is based on the following key
attributes:
Experience. For over 28 years we have focused on serving Medicaid beneficiaries as both a health plan and
as a provider. We have developed and forged strong relationships with the constituents whom we serve — members,
providers, and government agencies. Our ability to deliver quality care and to establish and maintain provider
networks, as well as our administrative efficiency, has allowed us to compete successfully for government contracts.
We have a strong record of obtaining and renewing contracts and have developed significant expertise as a
government contractor.
Administrative Efficiency. We have centralized and standardized various functions and practices across all of
our health plans to increase administrative efficiency. The steps we have taken include centralizing claims
processing and information services onto a single platform. We have standardized medical management programs,
pharmacy benefits management contracts, and health education programs. In addition, we have designed our
administrative and operational infrastructure to be scalable for cost-effective expansion into new and existing
markets.
Proven Expansion Capability. We have successfully replicated our business model through the acquisition of
health plans, the start-up development of new operations, and the transition of members from other health plans.
The successful integration of our New Mexico and Missouri health plans demonstrated our ability to expand into
states in which we had not previously had any presence. The establishment of our health plans in Utah, Ohio, and
Texas reflects our ability to replicate our business model on a start-up basis in new states, while contract acquisitions
in California, Michigan, and Washington have demonstrated our ability to expand our operations within states in
which we were already operating.
Flexible Care Delivery Systems. Our systems for delivery of health care services are diverse and readily
adaptable to different markets and changing conditions. We arrange health care services through contracts with
providers that include independent physicians and medical groups, hospitals, ancillary providers and, in California,
our own clinics. Our systems support multiple contracting models, such as fee-for-service, capitation, per diem,
case rates, and diagnostic related groups, or DRGs. Our provider network strategy is to contract with providers that
are best-suited, based on expertise, proximity, cultural sensitivity, and experience, to provide services to the
members we serve.
Our California health plan operates 17 company-owned primary care clinics in California. In addition, on
July 1, 2008, our unlicensed subsidiary in Virginia began to manage the Fairfax County Community Health Care
Network. This network consists of three county-owned clinics, providing comprehensive medical services to over
12,000 of Fairfax County’s uninsured residents. We believe that our clinics serve a useful role in providing certain
communities with access to primary care and providing us with insights into physician practice patterns, first-hand
knowledge of the needs of our members, and a platform to pilot new programs.
Cultural and Linguistic Expertise. We have over 28 years of experience developing targeted health care
programs for culturally diverse Medicaid members, and believe we are well-qualified to successfully serve these
populations. We contract with a diverse network of community-oriented providers who have the capabilities to
address the linguistic and cultural needs of our members. We educate employees and providers about the differing
needs among our members. We develop member education materials in a variety of media and languages and ensure
that the literacy level is appropriate for our target audience.
Medical Management. We believe that our experience as a health care provider has helped us to improve
medical outcomes for our members while at the same time enhancing the cost-effectiveness of care. We carefully
monitor day-to-day medical management to provide appropriate care to our members, contain costs, and ensure an
efficient delivery network. We have developed disease management and health education programs that address the
4
particular health care needs of our members. We have established pharmacy management programs and policies
that have allowed us to manage our pharmaceutical costs effectively. For example, our staff pharmacists educate our
providers on the use of generic drugs rather than brand drugs.
Our Strategy
Our objective is to be an innovative health care leader providing quality care and accessible services in an
efficient and caring manner to Medicaid, CHIP, Medicare, and other financially vulnerable members. To achieve
this objective, we intend to:
Focus On Serving Financially Vulnerable Families And Individuals. We believe that the Medicaid and low-
income Medicare population, which is characterized by significant ethnic diversity, requires unique services to meet
its health care needs. Our more than 28 years of experience in serving this population has provided us significant
expertise in meeting the unique needs of our members.
Increase Our Membership. We have grown our membership through a combination of acquisitions, start-up
health plans, serving new populations, and internal or organic growth. Increasing our membership provides the
opportunity to grow and diversify our revenues, increase profits, enhance economies of scale, and strengthen our
relationships with providers and government agencies. We will continue to seek to grow our membership by
expanding within existing markets and entering new strategic markets.
• Expand within existing markets. We expect to grow in existing markets by expanding our service areas and
provider networks, increasing awareness of the Molina brand name, extending our services to new
populations, maintaining positive provider relationships, and integrating members from other health plans.
• Enter new strategic markets. We intend to enter new markets by acquiring existing businesses or building
our own operations. We will focus our expansion in markets with competitive provider communities,
supportive regulatory environments, significant size and, where possible, mandated Medicaid managed care
enrollment.
Provide quality cost-effective care. We will use our information systems, strong provider networks, and first-
hand provider experience to further develop and utilize effective medical management and other programs that
address the distinct needs of our members. While improving the quality of care, these programs also facilitate the
cost-effective delivery of that care. To document our commitment to quality, each Molina Healthcare health plan
has adopted goals: (1) to achieve or continue accreditation by the National Committee for Quality Assurance, or
NCQA, and (2) to achieve scores under the Healthcare Effectiveness Data and Information Set (HEDIS) at the
75th percentile for Medicaid plans. It is our goal to be the health plan of choice, recognized for the quality and
accessibility of our services. Financially vulnerable families and individuals covered by government programs have
traditionally faced long-standing barriers to accessing care that include language, culture, and literacy. We want to
be known for our ability to help others overcome these barriers. Among physicians, hospitals, and other providers,
we want to be known for prompt and accurate payment of claims and sound medical decisions.
Leverage operational efficiencies. Our centralized administrative infrastructure, flexible information sys-
tems, and dedication to controlling administrative costs provide economies of scale. We believe our administrative
infrastructure has significant expansion capacity, allowing us to integrate new members from expansion within
existing markets and entry into new markets.
5
Our Health Plans
As of December 31, 2008, our health plans were located in California, Florida, Michigan, Missouri, Nevada,
New Mexico, Ohio, Texas, Utah, and Washington. Additionally, we operate three county primary care clinics in
Virginia. An overview of our health plans and their principal governmental program contracts with the relevant state
authority as of December 31, 2008 is provided below:
State
Expiration Date
Contract Description or Covered Program
California . . . .
3-31-10
California . . . .
12-31-12
California . . . .
3-31-11
California . . . .
6-30-09
California . . . .
6-30-09
Florida . . . . . .
Michigan . . . .
Missouri. . . . .
Nevada. . . . . .
New Mexico. .
8-31-09
9-30-09
9-30-09
12-31-09
6-30-09
Ohio . . . . . . .
6-30-09
Texas . . . . . . .
8-31-10
Utah . . . . . . .
Washington . .
6-30-09
12-31-09
Washington . .
12-31-09
Subcontract with Health Net for services to Medi-Cal members under
Health Net’s Los Angeles County Two-Plan Model Medi-Cal contract with
the California Department of Health Services (DHS).
Medi-Cal contract for Sacramento Geographic Managed Care Program with
California Department of Health Services (DHS).
Two Plan Model Medi-Cal contract for Riverside and San Bernardino
Counties (Inland Empire) with California Department of Health Services
(DHS).
Medi-Cal contract for San Diego Geographic Managed Care Program with
California Department of Health Services (DHS).
Healthy Families contract (California’s CHIP program) with California
Managed Risk Medical Insurance Board (MRMIB).
Medicaid contract with the Florida Agency for Health Care Administration.
Medicaid contract with State of Michigan.
Medicaid contract with the Missouri Department of Social Services.
Medicare Advantage contract with CMS.
Salud! Medicaid Managed Care Program contract (including CHIP) with
New Mexico Human Services Department (HSD).
Medicaid contract with Ohio Department of Job and Family Services
(ODJFS).
Medicaid contract with Texas Health and Human Services Commission
(HHSC).
Medicaid contract with Utah Department of Health.
Basic Health Plan and Basic Health Plus Programs contract with
Washington State Health Care Authority (HCA).
Healthy Options Program (including Medicaid and CHIP) contract with
State of Washington Department of Social and Health Services.
In addition to the foregoing, our health plans in California, Michigan, Nevada, New Mexico, Texas, Utah, and
Washington have entered into a standardized form of contract with CMS with respect to their operation of a MA
SNP, and our health plans in California, Michigan, Nevada, New Mexico, Texas, Utah, and Washington have also
entered into a standardized form of contract with CMS with respect to their operations of an MA-PD plan. These
contracts are renewed annually and were most recently renewed as of January 1, 2009.
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. For example, our Indiana plan’s contract with the state of Indiana expired
without being renewed effective December 31, 2006.
Our contracts with state and local governments 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. We are usually paid a negotiated amount per
member per month, with the amount varying from contract to contract. Generally, that amount is higher in states
where we are required to offer more extensive health benefits. We are also paid an additional amount for each
newborn delivery in Michigan, Missouri, New Mexico, Ohio, Texas and Washington. Since July 2002, our Utah
health plan has been reimbursed by the state for all medical costs incurred by its Medicaid members plus a 9%
6
administrative fee. Effective as of January 1, 2009, that administrative fee was reduced to 8%. In general, either
party may terminate our state contracts with or without cause upon 30 days to nine months prior written notice. In
addition, most of these contracts contain renewal options that are exercisable by the state.
California. As of December 31, 2008, our California health plan served 322,000 members. We arrange
health care services for our members either as a direct contractor to the state or through subcontracts with other
health plans. Our plan serves the counties of Los Angeles, Riverside, San Bernardino, San Diego, Sacramento, and
Yolo. Our Medi-Cal members in Los Angeles County are served pursuant to a subcontract we have entered into with
Health Net, with Health Net in turn contracting with the state. Our California health plan also operates 17 of its own
primary care community clinics.
Florida.
In August 2008, we announced our intention to acquire Florida NetPASS, LLC (“NetPASS”), a
provider of care management and administrative services at that time to approximately 55,000 Florida MediPass
members in South and Central Florida. In October 2008, we announced that our wholly owned subsidiary, Molina
Healthcare of Florida, Inc., was awarded a Medicaid managed care contract by the state of Florida. The term of the
contract commenced on December 1, 2008, at which time Molina Healthcare of Florida began its initial enrollment
of NetPASS Medicaid members, with the full transition of NetPASS members expected to be completed by the third
quarter of 2009. As of March 1, 2009, our Florida plan served approximately 17,000 members.
Michigan. As of December 31, 2008, our Michigan health plan served 206,000 members, and operated in 42
of the state’s 83 counties, including the Detroit metropolitan area.
Missouri. As of December 31, 2008, our Missouri health plan served 77,000 members, and operated in 57 of
the state’s 114 counties. Our Missouri health plan was acquired effective November 1, 2007.
Nevada. As of December 31, 2008, our Nevada health plan served approximately 700 Medicare members,
and had no Medicaid enrollment. Our Nevada health plan became operational on June 1, 2007.
New Mexico. As of December 31, 2008, our New Mexico health plan served 84,000 members, and operated
in all of New Mexico’s 33 counties.
Ohio. As of December 31, 2008, our Ohio health plan served 176,000 members, and operated in 50 of the
state’s 88 counties.
Texas. As of December 31, 2008, our Texas health plan served 31,000 members, serving STAR and CHIP
members in 6 counties and STAR PLUS members in 13 counties. STAR stands for State of Texas Access Reform,
and is Texas’ Medicaid managed care program. STAR PLUS is the Texas Medicaid managed care program serving
the aged, blind or disabled and includes a long-term care component.
Utah. As of December 31, 2008, our Utah health plan served 61,000 members (including 2,400 Medicare
Advantage SNP members). Our Utah health plan serves Medicaid members in 26 of the state’s 29 counties,
including the Salt Lake City metropolitan area, and CHIP members in all 29 counties.
Virginia. On July 1, 2008, Molina Healthcare of Virginia, Inc. began to operate the Fairfax County
Community Health Care Network. This network consists of three county clinics, providing comprehensive medical
services to over 12,000 of the county’s uninsured residents.
Washington. As of December 31, 2008, our Washington health plan served 299,000 members, and operated
in 32 of the state’s 39 counties.
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 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.
7
The following table shows the total approximate number of primary care physicians, specialists, and hospitals
participating in our network as of December 31, 2008:
Primary Care
Physicians
Specialists
Hospitals
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,833
226
2,103
1,828
706
1,511
1,682
1,329
1,101
2,710
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,029
7,162
85
4,319
4,282
2,091
5,799
10,585
3,939
3,178
5,815
47,255
81
8
66
97
27
60
123
58
35
87
642
Physicians. We contract with both primary care physicians and specialists, many of whom are organized into
medical groups or independent practice associations. Primary care physicians provide office-based primary care
services. Primary care 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, or DRGs, capitation, and case rates.
Primary Care Clinics. Our California health plan operates 17 company-owned primary care clinics in
California staffed by our physicians, physician assistants, and nurse practitioners. These clinics 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 assist us in developing and implementing community education, disease management,
and other programs. The clinics also give us direct clinic management experience that enables us to better
understand the needs of our contracted providers. In addition, we have a non-licensed subsidiary in Virginia which
manages three health care clinics for Fairfax County.
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 proven 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
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data into actionable information. We use a predictive modeling capability 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.
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!sm is a multi-disciplinary disease
management program that provides intensive health education resources and case management services to assist
physicians caring for asthmatic members between the ages of three and fifteen. Healthy Living with Diabetessm is a
diabetes disease management program. “Heart Health Living” is a cardiovascular disease management program for
members who have suffered from congestive heart failure, angina, heart attack, or high blood pressure.
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 parents on the use of primary care physicians, emergency
rooms, and nurse call centers.
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.
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.
Plan Administration and Operations
Management Information Systems. All of our health plan information technology and systems operate on a
single platform. This approach avoids the costs associated with maintaining multiple systems, improves produc-
tivity, 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:
• Provider Self Services. Providers have the ability to access information regarding their members and
include Check Member Eligibility, View Claim, and View/Submit
claims. Key functionalities
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.
• File Exchange Services. Various trading partners — such as service partners, providers, vendors, man-
agement companies, and individual IPAs — are able to exchange data files (HIPAA or any other proprietary
format) with us using the file exchange functionality.
Best Practices. We continuously seek to promote best practices. Our approach to quality is broad, encom-
passing 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 Health Employer Data and Information Set (HEDIS) and accreditation by the
National Committee on Quality Assurance, or 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. At
December 31, 2008, six of our ten health plans were accredited by the NCQA. In January 2009, our Ohio health plan
received its NCQA accreditation. Our Texas health plan expects to apply for NCQA accreditation review in 2009.
Our Missouri plan will undergo NCQA review in 2010, and our Nevada plan expects to apply for NCQA review as
soon as it is eligible.
Claims Processing. All of our health plans operate on a single managed care platform for claims processing
(the QNXT 3.4 system), with the exception of our Missouri plan which we expect will be migrated to the Molina
standard platform in the fourth quarter of 2009.
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
U.S. Department of Health and Human Services. 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.
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.
Competition
We operate in a highly competitive environment. The Medicaid managed care industry is fragmented and
currently subject to significant changes as a result of business consolidations, new strategic alliances entered into by
other managed care organizations, and the entry into the industry of large commercial health plans. We compete
with a large number of national, regional, and local Medicaid service providers, principally on the basis of size,
location, and quality of provider network, quality of service, and reputation. Below is a general description of our
principal competitors for state contracts, members, and providers:
• 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.
• 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.
• 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.
• 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.
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.
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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.
Regulation
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.
To operate a health plan in a given state, we must apply for and obtain a certificate of authority or license from
that state. Our 10 operating health plans are licensed to operate as health maintenance organizations, or HMOs, in each
of California, Florida, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. In those states
we are regulated by the 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. We must demonstrate that our provider network is adequate, that our quality and
utilization management processes comply with state requirements, and that we have adequate procedures in place for
responding to member and provider complaints and grievances. We must also demonstrate that we can meet
requirements for the timely processing of provider claims, and that we can collect and analyze the information needed
to manage our quality improvement activities. In addition, we must prove that we have the financial resources
necessary to pay our anticipated medical care expenses and the infrastructure needed to account for our costs.
Each of our health plans is required to report quarterly on its operating results to the appropriate state
regulatory agencies, and to undergo 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. Any acquisition of another
plan’s members must also be approved by the state, and our ability to invest in certain financial securities may be
prescribed by statute.
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.
Medicaid. Medicaid was established under the U.S. Social Security Act to provide medical assistance to the
poor. Although both the federal and state governments jointly fund it, Medicaid is a state-operated and state-
implemented program. Our contracts with the state Medicaid programs impose various requirements on us in
addition to those imposed by applicable federal and state laws and regulations. Within broad guidelines established
by the federal government, each state:
• establishes its own member eligibility standards;
• determines the type, amount, duration, and scope of services;
• sets the rate of payment for health care services; and
• administers its own program.
We obtain our Medicaid contracts in different ways. Some states, such as Washington, award contracts to any
applicant demonstrating that it meets the state’s requirements. Other states, such as California, engage in a
competitive bidding process. In all cases, we must demonstrate to the satisfaction of the state Medicaid program that
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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:
• We must measure provider access and availability in terms of the time needed to reach the doctor’s office
using public transportation;
• Our quality improvement programs must emphasize member education and outreach and include measures
designed to promote utilization of preventive services;
• 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;
• We must be able to meet the needs of the disabled and others with special needs;
• Our providers and member service representatives must be able to communicate with members who do not
speak English or who are deaf; and
• Our member handbook, newsletters, and other communications must be written at the prescribed reading
level, and must be available in languages other than English.
In addition, we must demonstrate that 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. We must also have the financial
resources needed to protect the state, our providers, and our members against the insolvency of one of our health plans.
Once awarded, our contracts generally have terms of one to four years, with renewal options at the discretion of
the states. Our contracts generally set forth the requirements for operating in the Medicaid sector, and include
provisions relating to: eligibility; enrollment and disenrollment processes; covered services; eligible providers;
subcontractors; record-keeping and record retention; periodic financial and informational reporting; quality
assurance; marketing; financial standards; timeliness of claims payments; health education and 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 the insurance department of the jurisdiction that licenses the health plan, and must submit periodic
utilization reports and other information to state or county Medicaid authorities. Health plans are not permitted to
enroll members directly, and are permitted to market only in accordance with strict guidelines. Most health plans
must also submit quarterly and annual statutory financial statements and utilization reports, as well as many other
reports in accordance with individual state requirements.
Our health plans 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. The Medicaid managed care contracts of our Michigan and Missouri health plans are
each the subject of a new Request for Proposal, or RFP, during 2009.
HIPAA.
In 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996, or
HIPAA. All health plans are subject to HIPAA, including ours. HIPAA generally requires health plans to:
• Establish the capability to receive and transmit electronically certain administrative health care transactions,
like claims payments, in a standardized format,
• Afford privacy to patient health information, and
• Protect the privacy of patient health information through physical and electronic security measures.
The American Recovery and Reinvestment Act of 2009 further expands the coverage of HIPAA by, among
other things, extending the privacy and security provisions, mandating new regulations around electronic medical
records, expanding enforcement mechanisms, allowing the state Attorneys General to bring enforcement actions
and increasing penalties for violations.
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Fraud and Abuse Laws. Federal and state governments have made investigating and prosecuting health care
fraud and abuse a priority. 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. 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. Although we believe that our compliance efforts are adequate,
we will continue to devote significant resources to support our compliance efforts.
Employees
As of December 31, 2008, we had approximately 2,500 employees. Our employee base is multicultural and
reflects the diverse Medicaid and Medicare membership we serve. We believe we have good relations with our
employees. None of our employees is represented by a union.
Item 1A: Risk Factors
RISK FACTORS
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 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. We cannot guarantee 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 that
we are unaware of or that we currently deem immaterial may also become important factors that may materially
affect us. 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.
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, 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
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example, if our overall medical care ratio for 2008 of 84.8% had been one percentage point higher, or 85.8%, our
earnings for 2008 would have been $1.60 per diluted share rather than our actual 2008 earnings of $2.25 per diluted
share, a 29% reduction in our earnings.
Factors that may affect our medical care costs include the level of utilization of health care services, increases
in hospital costs, an increased incidence or acuity of high dollar claims related to catastrophic illnesses or medical
conditions such as hemophilia 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, unexpected
patterns in the annual flu season, 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 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.
For additional information regarding this risk, see “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical Accounting Policies.”
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,” or 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 health plans in Florida and Missouri is impacted by the more limited claims payment
history of those health plans. Likewise, our ability to accurately estimate claims for our newer lines of business or
populations, such as with respect to Medicare Advantage or aged, blind or disabled Medicaid members, is impacted
by the more limited experience we have had with those populations. Finally, with regard to the new Medicaid and
CHIP members we expect to enroll in 2009 through organic growth due primarily to the recession, new members
may be disproportionately costly due to high utilization in their first several months of Medicaid or CHIP
membership as a result of their previously having been uninsured and therefore not seeking or deferring medical
treatment.
The IBNR 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.
If our actual liability for claims payments is higher than estimated, our earnings per share 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. For additional information regarding this risk, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies.”
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The 2008-’09 recession and resulting pressures on state budgets may result in funding for Medicaid or
CHIP that does not keep pace with the growth in member enrollment.
As a result of the current recession and rising unemployment levels, overall Medicaid enrollment and Medicaid
costs are projected to increase in 2009. In addition, the federal government recently approved a significant
expansion of the CHIP program, which should lead to increased CHIP enrollment and costs.
However, most state governments are currently facing significant budget shortfalls for their 2009 and 2010
fiscal years. These budget pressures have already caused many states to cut their spending, to tap into their budget
reserves, and to seek to raise revenues in order to balance their budgets. Because governmental health care programs
account for such a large portion of state budgets, efforts to contain overall government spending and to achieve a
balanced budget often result in significant political pressure being directed at the funding for these health care
programs. With the exception of the relatively small portion of our revenues which come from Medicare, nearly all
of our premium revenues are derived from the joint federal and state funding of the Medicaid and CHIP programs.
Thus, the completeness of the funding under our various state contracts, or the rate increases we expect to receive
during the course of a year, can be jeopardized during times of state budget crises. All of the states in which we
currently operate our health plans — with the sole exception of Texas — are currently facing significant budgetary
pressures.
In recognition of this problem and to help ease the pressure caused by shortfalls in state budgets, the federal
government enacted on February 17, 2009 the American Recovery and Reinvestment Act of 2009. As part of this
legislation, the federal government increased the amount of funding for federal Medicaid matching by approx-
imately $87 billion for the period between October 1, 2008 and December 31, 2010. The actual matching
percentage is computed from a formula that takes into account the average per capita income for each state relative
to the national average, and a state’s unemployment rate. As a result of the passage of this legislation, the share of
Medicaid costs that are paid for by the federal government will go up, and the share of costs that are paid for by the
states will go down.
However, in order for states to receive these increased federal matching funds, they must first budget for and
actually spend their own state dollars to cover their additional Medicaid and CHIP members. Medicaid spending
will therefore be driven by states’ available revenues. State governments may have insufficient funds in order to
fully fund these programs or provide for expanded enrollment. As a result, states may seek to cut or revise health
care programs, optional benefits, eligibility criteria, or provider rates, causing the funding of one or more of our
state contracts to be curtailed or cut off. In addition, the timing of payments we receive may be impacted by state
budget shortfalls. As an example, during 2008 some monthly payments made by the state of California to our
California health plan were several months late, which may occur again during 2009. Any of these events could
have a material adverse effect on our business, financial condition, cash flows, or results of operations.
There are numerous risks associated with the growth and operation of our Ohio health plan.
Membership at our Ohio health plan has grown rapidly, and the medical care ratio of our Ohio health plan has
been substantially higher than that historically experienced by the Company as a whole. At the beginning of 2008,
we had projected that the medical care ratio of our Ohio plan would be 88% for the full year. The actual medical care
ratio of our Ohio health plan for full year 2008 was 91.1%. For full year 2009, as the result of risk adjustment
payments we expect to receive with respect to our Ohio ABD members, the expected benefits from our in-sourcing
of behavioral health, and the expected savings derived from our provider re-contracting efforts, we have projected
that we can lower the medical care ratio of our Ohio health plan to approximately 87%. In the event these efforts are
unsuccessful, the predicted savings are not realized, or we are otherwise unable to lower the medical care ratio of
our Ohio health plan, the higher-than-expected medical care ratio of that plan could negatively impact the financial
performance of the Company as a whole.
In addition, the lower amount of experience of our Ohio Medicaid and ABD members in accessing managed
care and of our local providers in coordinating managed care services for their patients may also contribute to a
higher than average medical care ratio. Further, as our Ohio plan continues to grow, we will be required to increase
the amount of regulatory capital we contribute to it. In 2008, we were required to contribute $18.4 million in
additional regulatory capital to our Ohio plan. If we are required to contribute additional capital in the future, our
15
existing cash balances or cash from operations may not be sufficient to cover such payments, in which case we
would be required to draw down on our credit facility or obtain additional financing from another source and
thereby incur additional indebtedness. In the event we are unable to lower our medical care ratio in Ohio, or if the
Ohio plan requires a disproportionate investment of corporate resources or is otherwise unsuccessful, the poor
performance of that health plan could detrimentally impact the financial performance of the Company as a whole.
If our government contracts are not renewed or are terminated, or if the responsive bids of our health
plans for new Medicaid contracts are not successful, including the 2009 bids of our Michigan and
Missouri health plans, our premium revenues could be materially reduced and our operating results could
be negatively impacted.
Our government contracts generally run for periods of one year to four years, and may be successively
extended by amendment for additional periods if the relevant state agency so elects. Our current contracts expire on
various dates over the next several years. There is no guarantee that any of our government contracts will be
renewed or extended. Moreover, our contracts may be subject to periodic competitive bidding. As an example, the
Medicaid contracts of our Michigan and Missouri health plans both expire on September 30, 2009. These health
plans will be required to submit bids in response to the requests for proposals of the Medicaid authorities in each of
Michigan and Missouri. In the event the responsive bids of our health plans are not successful, we will lose our
Medicaid contract in the applicable state, and our premium revenues could be materially reduced as a result.
Alternatively, even if our responsive bids are successful, they 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 or had previously been the case.
In addition, all of our contracts may be terminated for cause if we breach a material provision of the contract or
violate relevant laws or regulations. Our contracts with the states are also subject to cancellation by the state in the
event of unavailability of state or federal funding. In some jurisdictions, such cancellation may be immediate and in
other jurisdictions a notice period is required. In addition, most contracts are terminable without cause. We may face
increased competition as other plans, many with greater financial resources and greater name recognition, attempt
to enter our markets through the contracting process. 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.
We derive our premium revenues from a relatively small number of state health plans.
We currently derive our premium revenues from ten state health plans. If we were unable to continue to operate in
any of those ten states — and in particular in the plans we operate in the states of Washington, Ohio, Michigan,
California, or New Mexico — or if our current operations in any portion of the states we are in were significantly
curtailed, our revenues could decrease materially. Our reliance on operations in a limited number of states could cause
our revenue and profitability to change suddenly and unexpectedly depending on significant rate reductions, a loss of a
material contract, legislative actions, changes in Medicaid eligibility methodologies, catastrophic claims, an epidemic
or an unexpected increase in utilization, general economic conditions, and similar factors in those states. 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.
Portions of our premium revenue are subject to accounting estimates or retroactive adjustment.
Certain elements of the premium revenue earned by our New Mexico, Ohio, Texas, and Utah health plans, and
by our Medicare Advantage plans, are subject to accounting estimates. Such estimates may subsequently prove to
be inaccurate or may require adjustment based upon factual developments. If our accounting estimates with respect
to our anticipated premiums are inaccurate or previously recognized premiums require retroactive adjustment, the
change in our revenues could have a material adverse effect on our business, financial condition, cash flows, or
results of operations. For additional information regarding this risk, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Revenue.”
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Our business may be negatively affected by major governmental health care reform proposals.
In response to dramatically escalating health care costs and the large and growing number of uninsured
Americans, legislative proposals that would reform the health care system have been advanced by Congress and
state legislatures and are currently pending at the federal and state levels. These changes include policy changes that
would fundamentally change the dynamics of the health care industry, such as having the federal government
assume a larger role in the health care industry, or effecting a fundamental restructuring of the Medicare or
Medicaid programs. These proposals may also affect certain aspects of our business, including contracting with
providers, provider reimbursement methods and payment rates, coverage determinations, mandated benefits,
minimum medical expenditures, claims payment and processing, drug utilization and patient safety efforts,
collection, use, disclosure, maintenance, and disposal of individually identifiable health information or personal
health records.
We cannot predict if any of these initiatives will ultimately become law, or, if enacted, what their terms or the
regulations promulgated pursuant to such laws will be, but their enactment could increase our costs, expose us to
expanded liability and require us to revise the ways in which we conduct business or put us at risk for loss of
business. In addition, our operating results could be adversely affected by such changes even if we correctly predict
their occurrence.
In the event the grandfathering of the Medicaid managed care organization provider tax in the states of
California, Missouri, and Ohio is not extended past September 30, 2009 or replacement state programs
are not enacted, the Medicaid funds available for managed care organization in those states, including
for our health plans, could be materially reduced.
Section 1903(w) of the Social Security Act permits states to receive federal matching Medicaid funds for
revenues collected through health care-related taxes. Some states use these taxes to fund increased payment rates to
providers, thereby effectively increasing the state’s federal matching rates. The statute defines the term “tax” to
include any licensing fee, assessment, or other payment mandated by the state. Prior to the enactment of the Deficit
Reduction Act of 2005 (the “Deficit Reduction Act”), the law had permitted a state to define the class of items
provided by managed care organizations to mean only revenues received for Medicaid services. However, the
Deficit Reduction Act effectively eliminated the future use of such a tax by requiring states to apply the tax broadly
to revenue received by health plans for all services provided, including services provided by commercial health
plans to commercial health plan members. But for eight states that previously had had managed care organization
provider taxes in place targeting only Medicaid health plan services, the Deficit Reduction Act delayed the effective
date of this change to October 1, 2009. Included among those eight grandfathered states were four states in which
we currently operate health plans: California, Michigan, Missouri, and Ohio. Since the adoption of the Deficit
Reduction Act, those four states have continued to collect a provider tax on Medicaid managed care organizations,
which has resulted in additional federal Medicaid matching funds being available in those states for distribution to
Medicaid managed care organizations. These states depend upon revenues raised through their Medicaid managed
care organization provider tax to help them fund their Medicaid programs.
The affected states are now considering how to comply with the expiration of the Deficit Reduction Act
grandfather clause on September 30, 2009. One option would be for them to eliminate the managed care
organization provider tax and replace the lost funds with increases in other Medicaid provider taxes. Another
option would be to modify the existing managed care organization provider tax to meet the requirements for a
“broad-based” tax that is imposed on both Medicaid and non-Medicaid covered services. One of the affected states
— Michigan — has recently enacted a law which, effective as of April 1, 2009, repeals the existing managed care
organization provider tax and introduces a new use tax on entities that have a contract to provide Medicaid services,
thus effectively resolving the issue in that state. In the event Congress does not further grandfather the Medicaid
managed care organization provider tax in the states of California, Missouri, and Ohio to support their Medicaid
programs, or if local state programs are not adopted in its place, the loss of state and federal matching Medicaid
funds in those states starting in October 2009 could materially reduce the revenues of our California, Missouri, and
Ohio health plans, thereby negatively affecting our business, financial condition, cash flows, or results of
operations.
17
A sustained drop in the rate of interest earned on our invested balances could adversely affect our
revenues.
Our revenues from invested balances in 2008 were $21.1 million, whereas our revenues from invested balances
in 2007 were $30.1 million. If the rate of return on our invested balances in 2008 had matched the rate of return
experienced in 2007, our year-over-year earnings would have increased by 23% rather than the 10% increase
actually experienced. Thus, prevailing interest rates during the year can have a significant impact on our revenues
and earnings. We have projected that, on average in fiscal year 2009, our invested balances will earn interest at the
rate of at least 2%. Our invested balances earned an average of 3.0% in 2008. In the event the interest earned on our
invested balances throughout 2009 averages less than 2% per annum, our business, financial condition, cash flows,
or results of operations could be adversely affected.
If we are unable to achieve our projected growth in Medicare members or our projected medical care
ratio with respect to our Medicare program, our results of operations could be adversely affected.
Our business strategy includes increasing enrollment for our members who are dually eligible under both the
Medicaid and Medicare programs, as well as increasing the number of our members eligible under Medicare alone.
Our experience with the Medicare program and with Medicare members is much more limited than our experience
with Medicaid. The administrative processes, programmatic requirements, and regulations pertaining to the
Medicare program differ significantly from those of the Medicaid program. Likewise, the Medicare population
has many characteristics and behavior patterns which differ from the Medicaid population with which we are
familiar. Finally, Medicare providers, provider networks, and provider relations also differ from those of Medicaid.
During 2009, we intend to continue to invest in the infrastructure necessary to grow our Medicare program. We
have projected that we will have enrolled 12,000 Medicare members by the end of 2009. In the event we are unable
to enroll as many Medicare members as we project or if we are unable to quickly develop our Medicare expertise
and adapt to the differing requirements and needs of the Medicare program and Medicare members, our business
strategy may be unsuccessful and our business, financial condition, cash flows, or results of operations could be
adversely affected.
Failure to attain profitability in any new start-up operations 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 require-
ments, performance bonds or escrows, or contingency guaranties. If we were 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 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, 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 will also create 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 expanding a health plan in an existing state could have a significant adverse impact on our business,
financial condition, cash flows, or results of operations.
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 strategy. Many of the other potential purchasers of these assets
18
— 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 obtain the necessary
financing for these acquisitions. 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:
• additional employees who are not familiar with our operations or our corporate culture,
• new provider networks which may operate on terms different from our existing networks,
• additional members who may decide to transfer to other health care providers or health plans,
• disparate information, claims processing, and record keeping systems,
• 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
• new regulatory schemes, relationships, practices, and compliance requirements.
Also, we are generally required to obtain regulatory approval from one or more state agencies when making
acquisitions. 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. We may be
unable to obtain the necessary governmental approvals or comply with these regulatory requirements in a timely
manner, if at all. 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.
Restrictions and covenants in our credit facility may limit our ability to make certain acquisitions or
reduce our liquidity and capital resources.
To provide liquidity, we have a $200 million senior secured credit facility that matures in May 2012. As of
December 31, 2008, we had no outstanding indebtedness under our credit facility. Our credit facility imposes
numerous restrictions and covenants, including prescribed consolidated leverage and fixed charge coverage ratios,
net worth requirements, and acquisition limitations that restrict our financial and operating flexibility, including our
ability to make certain acquisitions above specified values and declare dividends without lender approval. As a
result of the restrictions and covenants imposed under our credit facility, our growth strategy may be negatively
impacted by our inability to act with complete flexibility, or our inability to use our credit facility in the manner
intended.
If we are in default at a time when funds under the credit facility are required to finance an acquisition, or if a
proposed acquisition does not satisfy the pro forma financial requirements under our credit facility, we may be
unable to use the credit facility in the manner intended. In addition, if we were to draw down on our credit facility, or
incur other additional debt in the future, it could have an adverse effect on our business and future operations. For
example, it could:
• require us to dedicate a substantial portion of cash flow from operations to pay principal and interest on our
debt, which would reduce funds available to fund future working capital, capital expenditures, and other
general operating requirements;
• increase our vulnerability to general adverse economic and industry conditions or a downturn in our
business; or
• place us at a competitive disadvantage compared to our competitors that have less debt.
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In addition, the financial institutions which form the lending syndicate under our credit facility have recently
experienced significant losses. As a result, such financial institutions may be unable to fund a loan under our credit
facility. In the event we default under our credit facility or our lenders are unable to fund a loan request under our
credit facility, our operations, liquidity, and capital resources could be materially adversely affected.
Adverse credit market conditions may have a material adverse affect on our liquidity or our ability to
obtain credit on acceptable terms.
The securities and credit markets have been experiencing extreme volatility and disruption over the past year.
The availability of credit, from virtually all types of lenders, has been severely restricted. Such conditions may
persist throughout 2009 and beyond. In the event we need access to additional capital to pay our operating expenses,
make payments on our indebtedness, pay capital expenditures, or fund acquisitions, our ability to obtain such capital
may be limited and the cost of any such capital may be significant, particularly if we are unable to access our
existing credit facility.
Our access to additional financing will depend on a variety of factors such as prevailing economic and credit
market conditions, the general availability of credit, the overall availability of credit to our industry, our credit
ratings and credit capacity, and perceptions of our financial prospects. Similarly, our access to funds may be
impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these
factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be
able to successfully obtain additional financing on favorable terms or at all. While we have not attempted to access
the credit markets recently, we believe that if credit could be obtained, the terms and costs of such credit would be
significantly less favorable to us than what was obtained in our most recent financings.
Ineffective management of our growth may negatively affect our business, financial condition, or results
of operations.
Depending on acquisitions and other opportunities, we expect to continue to grow our membership and to
expand into other markets. In fiscal year 2005, we had total premium revenue of $1.6 billion. In fiscal year 2008, we
had total premium revenue of $3.0 billion, an increase of 88% over a four-year span. Continued rapid growth could
place a significant strain on our management and on other Company 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 financial condition and 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.
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.
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Funding under our contracts is subject to regulatory and programmatic adjustments and reforms for
which we may not be appropriately compensated.
The federal government and the governments of the states in which we operate frequently consider legislative
and regulatory proposals regarding Medicaid reform and programmatic changes. Such proposals involve, among
other things, changes in reimbursement or payment levels based on certain parameters or member characteristics,
changes in eligibility for Medicaid, and changes in benefits covered such as pharmacy, behavioral health, or vision.
Any of these changes could be made effective retroactively. If our cost increases resulting from these changes are
not matched by commensurate increases in our revenue, we would be unable to make offsetting adjustments, such as
supplemental premiums or changes in our benefit plans, as would a commercial health plan. Any such regulatory or
programmatic reforms at either the federal or state level could have a material adverse effect on our business,
financial condition, cash flows, or results of operations.
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,
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
become subject to material fines or if other sanctions or other corrective actions were imposed upon us, we might
suffer a substantial reduction in profitability, and might 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 govern-
ment. For instance, CMS announced in 2008 that it will perform audits of selected Medicare health plans each year
to validate the coding practices of and supporting documentation maintained by care providers. These audits
involve a review of medical records maintained by providers, including those in and out of network, and may result
in retrospective or prospective adjustments to payments made to health plans pursuant to CMS Medicare contracts.
The final amounts we ultimately receive under government contracts may be different from the amounts we initially
recognize in our financial statements.
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, or to successfully
migrate our main data processing facility to the new facility we are constructing in New Mexico, 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 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. Our policy is to upgrade and expand our information systems capabilities. 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.
We are currently constructing a new health information technology center in Albuquerque, New Mexico.
During 2009, we anticipate migrating our main data processing functions from our current facility in Long Beach,
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California to that new facility. In the event that transition to New Mexico is disrupted for any reason, or if the
information technology equipment in our new facility malfunctions, our claims processing, utilization manage-
ment, or other data processing functions could be disrupted which would adversely affect all of our business
operations. In addition, we intend during 2009 to migrate the claims processing functions of our Missouri health
plan to our centralized platform. In the event that migration is unsuccessful, the business operations of our Missouri
health plan could be adversely affected.
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 they 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, until our centralized claims
processing and information technology support functions are migrated to New Mexico, those facilities will remain
in Long Beach, California. Southern California is exposed to a statistically greater risk of a major earthquake than
most other parts of the country. If a major earthquake were to strike the Los Angeles and Long Beach 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 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.
If we are unable to 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 assure 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. 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.
In some markets, certain providers, particularly hospitals, physician/hospital organizations, and some spe-
cialists, 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.
Some providers that render services to our members are not contracted with our plans. In those cases, there is
no pre-established understanding between the provider and our 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
22
plan. The uncertainty of the amount to pay and the possibility of subsequent adjustment of the payment could
adversely affect our business, financial position, 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 the Company does not participate. Because of the limited
number of health care companies competing in our market space, these actions and the resulting negative publicity
could become associated with or imputed to the Company, regardless of the Company’s 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 the
Company does 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-year periods and can be renewed on an ongoing
basis if the state applies. 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.
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, 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. Providers at the 17
primary care clinics we operate in California are employees of our California health plan. As a direct employer of
physicians and ancillary medical personnel and as an operator of primary care clinics, our California plan is subject
to liability for negligent acts, omissions, or injuries occurring at one of its clinics or caused by one of its employees.
We maintain medical malpractice insurance for our clinics in the amount of $1 million per occurrence, and an
annual aggregate limit of $3 million, errors and omissions insurance in the amount of $10 million per occurrence
and in aggregate for each policy year, and such other lines of coverage as we believe are 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 were unsuccessful or without merit, we would 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. Also, Congress and several state legislatures have considered
legislation that would permit managed care organizations to be held liable for negligent treatment decisions or
benefits coverage determinations. If this or similar legislation were enacted, 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 financial condition and profitability.
23
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, cash flows, or results of operations, 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 currently subject to significant
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.
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 and indirect 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 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. The aggregate
amounts our health plan subsidiaries could have paid us at December 31, 2008, 2007, and 2006 without approval of
the regulatory authorities were approximately $7.6 million, $18.7 million, and $6.9 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 our credit facility and/or our
senior convertible notes.
Unforeseen changes in regulations or pharmaceutical 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
24
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
an adverse effect on our business, financial condition, cash flows, or results of operations.
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 identifies 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 NYSE, SEC or other regulatory
authorities, which would require additional financial and management resources.
Volatility of our stock price could adversely affect stockholders.
Since our initial public offering in July 2003, the sales price of our common stock has ranged from a low of
$16.12 to a high of $53.23. A number of factors will continue to influence the market price of our common stock,
including:
• changes in expectations as to our future financial performance or changes in financial estimates, if any, of
public market analysts,
• announcements relating to our business or the business of our competitors,
• state and federal budget decreases,
• adverse publicity regarding health maintenance organizations and other managed care organizations,
• government action regarding member eligibility,
• changes in government payment levels,
• changes in state mandatory programs,
• conditions generally affecting the managed care industry or our provider networks,
• the success of our operating or acquisition strategy,
• the operating and stock price performance of other comparable companies in the health care industry,
• the termination of our Medicaid or CHIP contracts with state or county agencies, or subcontracts with other
Medicaid managed care organizations that contract with such state or county agencies,
• regulatory or legislative change, and
• general economic conditions, including unemployment rates, inflation, and interest rates.
Our stock may not trade at the same levels as the stock of other health care companies or the market in general.
Also, if the trading market for our stock does not continue to develop, securities analysts may not initiate or maintain
research coverage of our company and our shares, and this could depress the market for our shares.
25
Members of the Molina family own a majority 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 own or are entitled to receive upon certain events approximately 56% of our capital stock. 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 and removal 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.
It may be difficult for a third party to acquire our company, 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.
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.
We do not anticipate paying any cash dividends in the foreseeable future.
We have not declared or paid any dividends since our initial public offering in July 2003. While we have in the
past and may again use our available cash to repurchase our securities, we do not anticipate declaring or paying any
cash dividends in the foreseeable future.
Changes in accounting may affect our results of operations.
U.S. generally accepted accounting principles (“GAAP”) and related implementation guidelines and inter-
pretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation,
the adoption of new pronouncements or the application of existing pronouncements to our business could
significantly affect our results of operations.
In October 2007, we completed our offering of $200 million aggregate principal amount of 3.75% Convertible
Senior Notes due 2014. In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (the “FSP”). The FSP requires the proceeds from the issuance of such
convertible debt instruments to be allocated between a liability component and an equity component. The resulting
debt discount is amortized over the period the convertible debt is expected to be outstanding, as additional non-cash
26
interest expense. The change in accounting treatment is effective for fiscal years beginning after December 15,
2008, and shall be applied retrospectively to prior periods. The FSP changes the accounting treatment for our
3.75% Convertible Senior Notes. The impact of this new accounting treatment will result in an increase to non-cash
interest expense beginning in fiscal year 2009 for financial statements covering past and future periods. The
incremental impact of the FSP to our results of operations in 2009 will be approximately $3.1 million, or
$0.12 per diluted share, net of tax. This estimate does not include the impact of our repurchase of $13 million face
amount of the 3.75% Convertible Senior Notes in February 2009. We estimate the retroactive adjustment for prior
periods will be approximately $627,000, or $0.02 per diluted share, net of tax, for 2007, and $2.9 million, or
$0.11 per diluted share, net of tax, for 2008.
Our investments in auction rate securities are subject to risks that may cause losses and have a material
adverse effect on our liquidity.
As of December 31, 2008, $70.5 million par value (fair value of $58.2 million) of our investments consisted of
auction rate securities, all of which were securities collateralized by student loan portfolios, guaranteed by the
U.S. government. We continued to earn interest on substantially all of these auction rate securities as of December 31,
2008. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning
in the first quarter of 2008. As such, quoted prices in active markets were not readily available during the majority of
2008. We used pricing models to estimate the fair value of these securities. These pricing models included factors such
as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash
flows, and the expectation of the next time the security would be expected to have a successful auction. The estimated
values of these securities were also compared, when possible, to valuation data with respect to similar securities held
by other parties. We concluded that these estimates, given the lack of market available pricing, provided a reasonable
basis for determining fair value of the auction rate securities as of December 31, 2008.
As of December 31, 2008, we held $42.5 million par value (fair value of $34.9 million) auction rate securities
with a certain investment securities firm. In November 2008, we entered into a rights agreement with this firm that
(1) allows us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm
between June 30, 2010 and July 2, 2012, and (2) gives the investment securities firm the right to purchase the
auction rate securities from us any time after the agreement date as long as we receive the par value.
We have accounted for the Rights as a freestanding financial instrument and have elected to record the value of
the Rights under the fair value option of SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities. In the fourth quarter of 2008, this resulted in the recognition of a $6.9 million non-current asset, with a
corresponding increase to pretax income for the value of the Rights. To determine the fair value estimate of the
Rights, we used a discounted cash-flow model that was based on the expectation that the auction rate securities will
be put back to the investment securities firm at par on June 30, 2010, as permitted by the Rights agreement.
Simultaneous to the recognition of the $6.9 million rights agreement, we recorded an other-than-temporary
impairment of the underlying auction rate securities, and prior unrealized losses on the auction rate securities that
had been recorded to other comprehensive loss through November 2008 were charged to income, totaling
$7.2 million. Also, at the time of the execution of the Rights agreement and pursuant to SFAS 115, we elected
to transfer the underlying auction rate securities from available-for-sale to trading securities. For the month of
December 2008, we recorded additional losses of $399,000 on these auction rate securities. We expect that the
future changes in the fair value of the Rights will be substantially offset by the fair value movements in the
underlying auction rate securities.
As of December 31, 2008, the remainder of our auction rate securities, which are still designated as available-
for-sale, amounted to $28.0 million par value (fair value of $23.3 million). As a result of the decline in fair value of
these auction rate securities, we recorded unrealized losses of $4.7 million to accumulated other comprehensive
(loss) income for the year ended December 31, 2008. We have deemed these unrealized losses to be temporary and
attribute the decline in value to liquidity issues, as a result of the failed auction market, rather than to credit issues.
Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any
recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss) income. If we
27
determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as
appropriate.
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 solely of investment-grade debt securities. The unrestricted portion of this portfolio is
designated primarily 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 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. Trading securities are carried at fair value and any realized gains or losses are
included as a component of earnings. For our available-for-sale investments 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. During the year ended December 31, 2008, we recorded an other-than-temporary impairment of certain
auction rate securities as described above, totaling $7.2 million. Over time, the economic and market environment
may further deteriorate or 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 or losses related to our trading securities to be recorded as an expense. Given the current market conditions
and the significant judgments involved, there is continuing risk that further declines in fair value may occur and
material other-than-temporary impairments or trading security losses may result in realized losses in future periods
which could have an adverse effect on our business, financial condition, cash flows, or results of operations.
An unauthorized disclosure of sensitive or confidential member information could have an adverse effect
on our business.
As part of our normal operations, we collect, process and retain confidential member information. We are
subject to various federal and state laws and rules regarding the use and disclosure of confidential member
information, including HIPAA and the Gramm-Leach-Bliley Act. The American Recovery and Reinvestment Act
of 2009 further expands the coverage of HIPAA by, among other things, extending the privacy and security
provisions, mandating new regulations around electronic medical records, expanding enforcement mechanisms,
allowing the state Attorneys General to bring enforcement actions and increasing penalties for violations. Despite
the security measures we have in place to ensure compliance with applicable laws and rules, our facilities and
systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism,
computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security
breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential member
information, whether by us or a third party, could have a material adverse effect on our business, financial condition,
cash flows, or results of operations.
28
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. We may be unsuccessful in recruiting and retaining such personnel which could negatively impact our
operations.
A pandemic, such as a worldwide outbreak of a new influenza virus, could materially and adversely affect
our ability to control health care costs.
An outbreak of a pandemic disease, such as the H5N1 avian flu, could materially and adversely affect our
business and operating results. The impact of a flu pandemic on the United States would likely be substantial.
Estimates of the contagion and mortality rate of any mutated avian flu virus that can be transmitted from human to
human are highly speculative. A significant global outbreak of avian flu among humans could have a material
adverse effect on our results of operations and financial condition as a result of increased inpatient and outpatient
hospital costs and the cost of anti-viral medication to treat the virus.
Conversion of our senior convertible notes may dilute the ownership interest of existing stockholders.
Our convertible notes are convertible into cash and, under certain circumstances, shares of our common stock.
The conversion of some or all of our convertible notes may dilute the ownership interests of existing stockholders.
Any sales in the public market of our common stock issuable upon such conversion could adversely affect
prevailing market prices of our common stock. In addition, the anticipated conversion of the convertible notes into
cash and shares of our common stock could depress the price of our common stock.
Item 1B: Unresolved Staff Comments
We have not received any comments from the staff of the Securities and Exchange Commission which remain
unresolved.
Item 2: Properties
We lease a total of 51 facilities, including our corporate headquarters at 200 Oceangate in Long Beach,
California, and 16 of our 17 California medical clinics. We also own a 32,000 square-foot office building in Long
Beach, California, the 26,000 square-foot data center nearing completion of construction in Albuquerque, New
Mexico, and one of our medical clinics in Pomona, California. We believe our current facilities are adequate to meet
our operational needs for the foreseeable future.
Item 3: Legal Proceedings
The health care industry is 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. The outcome of such legal actions is
inherently uncertain. Nevertheless, we believe that these actions, when finally concluded and determined, are not
likely to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
None.
29
Executive Officers of the Registrant
J. Mario Molina, M.D., 50, 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 since 1996. Prior
to that, he served as Medical Director from 1991 through 1994 and was Vice President responsible for provider
contracting and relations, member services, marketing and quality assurance from 1994 to 1996. He earned an M.D.
from the University of Southern California and performed his medical internship and residency at the Johns
Hopkins Hospital. Dr. Molina is the brother of John C. Molina.
John C. Molina, J.D., 44, has served in the role of Chief Financial Officer since 1995. He also has served as a
director since 1994. Mr. Molina has been employed by us for over 28 years in a variety of positions. Mr. Molina is a
past president of the California Association of Primary Care Case Management Plans. He earned a Juris Doctorate
from the University of Southern California School of Law. Mr. Molina is the brother of J. Mario Molina, M.D.
Mark L. Andrews, Esq., 51, has served as Chief Legal Officer and General Counsel since 1998. He also has
served as a member of the Executive Committee of our company since 1998. Before joining our company,
Mr. Andrews was a partner at Wilke, Fleury, Hoffelt, Gould & Birney of Sacramento, California, where he chaired
that firm’s health care and employment law departments and represented Molina as outside counsel from 1994
through 1997. Mr. Andrews holds a Juris Doctorate degree from Hastings College of the Law.
Terry P. Bayer, 58, has served as our Chief Operating Officer since November 2005. She had formerly served as
our Executive Vice President, Health Plan Operations since January 2005. Ms. Bayer has 25 years of health care
management experience, including staff model clinic administration, provider contracting, managed care oper-
ations, disease management, and home care. Prior to joining us, her professional experience included regional
responsibility at FHP, Inc. and multi-state responsibility as Regional Vice-President at Maxicare; Partners National
Health Plan, a joint venture of Aetna Life Insurance Company and Voluntary Hospital Association (VHA); and
Lincoln National. She has also served as Executive Vice President of Managed Care at Matria Healthcare, President
and Chief Operating Officer of Praxis Clinical Services, and as Western Division President of AccentCare. She
holds a Juris Doctorate from Stanford University, a Master’s degree in Public Health from the University of
California, Berkeley, and a Bachelor’s degree in Communications from Northwestern University.
James W. Howatt, 62, has served as our Chief Medical Officer since May 2008. Dr. Howatt formerly served as
the chief medical officer of Molina Healthcare of Washington. Prior to joining Molina Healthcare in February 2006,
Dr. Howatt was Western Regional Medical Director for Humana, where he was responsible for the coordination and
oversight of quality, utilization management, credentialing, and accreditation for Humana’s activities west of
Kansas City. Previously, he was Vice President and CMO of Humana Arizona, where he was responsible for leading
a variety of medical management functions and worked closely with the company’s sales division to develop
customer-focused benefit structures. Dr. Howatt also served as CMO for Humana TRICARE, where he oversaw a
$2.5 billion health care operation that served three million beneficiaries and comprised a professional network of
40,000 providers, 800 institutions, and 13 medical directors. Dr. Howatt received B.S. and M.D. degrees from the
University of California, San Francisco, and also holds a Master of Business Administration degree with an
emphasis in Health Management from the University of Phoenix. He interned and completed his residency program
in family practice at Ventura County Hospital in Ventura, California. Dr. Howatt is a board-certified family
physician and a member of the American College of Managed Care Medicine.
30
PART II
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.” The high and
low sales prices of our common stock for specified periods are set forth below:
Date Range
2008
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44.94
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42.61
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32.45
2007
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34.76
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34.92
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38.41
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41.21
As of March 10, 2009, there were approximately 112 holders of record of our common stock.
$23.46
$22.68
$24.08
$16.12
$28.88
$28.72
$28.15
$34.01
We did not declare or pay any dividends in 2008, 2007, or 2006. While we have in the past and may again in the
future use our cash to repurchase our securities, we do not anticipate declaring or paying any cash dividends in the
foreseeable future.
Moreover, our ability to pay dividends to stockholders is dependent on cash dividends being paid to us by our
subsidiaries. Laws of the states in which we operate or may operate our health plans, as well as requirements of the
government sponsored health programs in which we participate, limit the ability of our health plan subsidiaries to
pay dividends to us. In addition, the terms of our credit facility limit our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2008)
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)
665,339(1)
$30.29
3,887,414(2)
Plan Category
Equity compensation
plans approved by
security holders . . . . . .
(1) Options to purchase shares of our common stock issued under the 2000 Omnibus Stock and Incentive Plan and
the 2002 Equity Incentive Plan. Further grants under the 2000 Omnibus Stock and Incentive Plan have been
suspended.
(2) Includes only shares remaining available to issue under the 2002 Equity Incentive Plan (the “2002 Incentive
Plan”) and the 2002 Employee Stock Purchase Plan (the “ESPP”). The 2002 Incentive Plan initially allowed for
the issuance of 1.6 million shares of common stock. Beginning January 1, 2004, shares available for issuance
under the 2002 Incentive Plan automatically increase by the lesser of 400,000 shares or 2% of total outstanding
capital stock on a fully diluted basis, unless the board of directors affirmatively acts to nullify the automatic
increase. The 400,000 share increase on January 1, 2008 increased the total number of shares reserved for
issuance under the 2002 Incentive Plan to 3,600,000 shares. The ESPP initially allowed for the issuance of
600,000 shares of common stock. Beginning December 31, 2003, and each year until the 2.2 million maximum
aggregate number of shares reserved for issuance is reached, shares reserved for issuance under the ESPP
automatically increase by 1% of total outstanding capital stock. Through the automatic increase effective
31
December 31, 2008, the total number of shares reserved for issuance under the ESPP has increased to
2.2 million shares.
Purchases of Equity Securities by the Issuer
As publicly announced on July 23, 2008, our board of directors authorized the repurchase of up to one million
shares of our common stock. The repurchase plan terminated on December 31, 2008. Purchases of common stock
made by or on behalf of the Company during the quarter ended December 31, 2008 are set forth below:
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value
of Shares That May Yet Be
Purchased Under the Plans
or Programs
Oct. 1 - Oct. 31,
2008 . . . . . . . . . . . .
721,561
$23.9222
721,561
Nov. 1 - Nov. 30,
2008 . . . . . . . . . . . .
Dec. 1 - Dec. 31,
2008 . . . . . . . . . . . .
—
—
—
—
—
—
Total . . . . . . . . . . . . .
721,561
$23.9222
721,561
$—
—
—
$—
32
STOCK PERFORMANCE GRAPH
The following discussion shall not be deemed to be “soliciting material” or to be “filed” with the SEC nor
shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange
Act, 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 (the “S&P 500”) and
a peer group index for the five-year period from December 31, 2003 to December 31, 2008. The graph assumes an
initial investment of $100 in Molina Healthcare, Inc. common stock and in each of the indices.
The peer group index consists of Amerigroup Corporation (AGP), Centene Corporation (CNC), Coventry
Health Care, Inc. (CVH), Health Net, Inc. (HNT), Humana, Inc. (HUM), UnitedHealth Group Incorporated (UNH),
and WellPoint, Inc. (WLP).
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Among Molina Healthcare, Inc, The S&P 500 Index
And A Peer Group
$250
$200
$150
$100
$50
$0
12/03
12/04
12/05
12/06
12/07
12/08
Molina Healthcare, Inc.
S&P 500
Peer Group
* $100 invested on 12/31/03 in stock & index-including reinvestment of dividends. Fiscal year ending
December 31.
33
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”) for the five years ended December 31, 2008 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 dollars are in thousands, except per share data. The data under the caption
“Operating Statistics” has not been audited.
2008
2007(1)
Year Ended December 31,
2006(2)
2005
2004(3)
Statements of Income Data:
Revenue:
Premium revenue . . . . . . . . . . . . . . . $ 3,091,240
21,126
Investment income . . . . . . . . . . . . . .
$ 2,462,369
30,085
$ 1,985,109
19,886
$ 1,639,884
10,174
$ 1,171,038
4,230
Total revenue . . . . . . . . . . . . . . . . . .
Expenses:
Medical care costs . . . . . . . . . . . . . .
General and administrative
expenses . . . . . . . . . . . . . . . . . . . .
Loss contract charge . . . . . . . . . . . . .
Impairment charge on purchased
software(4) . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . .
Total expenses . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . .
Total other income (expense), net . . .
Income before income taxes . . . . . . .
Provision for income taxes . . . . . . . .
3,112,366
2,492,454
2,004,995
1,650,058
1,175,268
2,621,312
2,080,083
1,678,652
1,424,872
984,686
344,761
—
—
33,688
2,999,761
112,605
(8,714)
103,891
41,493
285,295
—
782
27,967
2,394,127
98,327
(4,631)
93,696
35,366
229,057
—
—
21,475
1,929,184
75,811
(2,353)
73,458
27,731
163,342
939
—
15,125
1,604,278
45,780
(1,929)
43,851
16,255
94,150
—
—
8,869
1,087,705
87,563
122
87,685
31,912
55,773
Net income . . . . . . . . . . . . . . . . . . . . $
62,398 $
58,330
$
45,727 $
27,596
$
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . $
2.25 $
2.25 $
2.06 $
2.05 $
1.64 $
1.62 $
1.00 $
0.98 $
2.07
2.04
Weighted average number of
common shares outstanding . . . . . .
27,676,000
28,275,000
27,966,000
27,711,000
26,965,000
Weighted average number of
common shares and potential
dilutive common shares
outstanding . . . . . . . . . . . . . . . . . .
Operating Statistics:
Medical care ratio(5) . . . . . . . . . . . . .
General and administrative expense
ratio(6) . . . . . . . . . . . . . . . . . . . . .
General and administrative expense
ratio, excluding premium taxes . . .
Members(7) . . . . . . . . . . . . . . . . . . .
27,772,000
28,419,000
28,164,000
28,023,000
27,342,000
84.8%
11.1%
8.0%
84.5%
11.5%
8.2%
84.6%
11.4%
8.4%
86.9%
84.1%
9.9%
7.1%
8.0%
5.9%
1,256,000
1,149,000
1,077,000
893,000
788,000
34
2008
2007(1)
2006(2)
2005
2004(3)
As of December 31,
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . $ 387,162
1,149,186
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (including current
maturities) . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . .
200,000
638,522
510,664
$ 459,064
1,171,305
$403,650
864,475
$249,203
659,927
$228,071
533,859
200,000
680,827
490,478
45,000
444,309
420,166
—
297,077
362,850
1,894
203,237
330,622
(1) The balance sheet and operating results of the MCP (Mercy CarePlus) acquisition have been included since
November 1, 2007, the effective date of the acquisition.
(2) The balance sheet and operating results of the HCLB (Cape Health Plan) acquisition have been included since
May 15, 2006, the effective date of the acquisition.
(3) The balance sheet and operating results of the New Mexico HMO have been included since July 1, 2004, the
effective date of the acquisition.
(4) Amount represents an impairment charge related to commercial software no longer used for operations.
(5) 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, our ability to effectively manage costs, and changes in accounting estimates related to incurred but
not reported claims. See Management’s Discussion and Analysis of Financial Condition and Results of
Operations for further discussion.
(6) General and administrative expense ratio represents such expenses as a percentage of total revenue.
(7) Number of members at end of period.
35
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 the “Selected Financial Data” and the accompanying consolidated financial statements and the notes to those
statements appearing elsewhere in this report. This discussion contains forward-looking statements that involve
known and unknown risks and uncertainties, including those set forth under Item 1A — Risk Factors, above.
Overview
Molina Healthcare, Inc. is a multi-state managed care organization participating exclusively in government-
sponsored health care programs for low-income persons, such as the Medicaid program and the Children’s Health
Insurance Program, or CHIP. We also serve a small number of low-income Medicare members. We conduct our
business primarily through 10 licensed health plans in the states of California, Florida, Michigan, Missouri, Nevada,
New Mexico, Ohio, Texas, Utah, and Washington. The health plans are locally operated by our respective wholly
owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO.
Our financial performance for 2008, 2007 and 2006 is briefly summarized below (dollars in thousands, except
per- share data):
Year Ended December 31,
2007
2006
2008
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . $
2.25
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,091,240
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,605
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62,398
Medical care ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G&A expenses as a percentage of total revenue . . . . . . . .
Total ending membership . . . . . . . . . . . . . . . . . . . . . . . . .
1,256,000
84.8%
11.1%
$
2.05
$2,462,369
98,327
$
58,330
$
$
1.62
$1,985,109
75,811
$
45,727
$
84.5%
11.5%
84.6%
11.4%
1,149,000
1,077,000
Revenue
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally
subject to significant accounting estimates. For the year ended December 31, 2008, we received approximately 92%
of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts
with state agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services (CMS), and our
contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues
are recognized in the month that members are entitled to receive health care services. The state Medicaid programs
and the federal Medicare program periodically adjust premium rates.
The amount of the premiums paid to us may vary substantially between states and among various government
programs. PMPM premiums for members of the Children’s Health Insurance Program (CHIP) are generally among
our lowest, with rates as low as approximately $80 PMPM in California and Utah. Premium revenues for Medicaid
members are generally higher. Among the Temporary Aid for Needy Families (TANF) Medicaid population — the
Medicaid group that includes most mothers and children — PMPM premiums range between approximately $100
in California to $300 in New Mexico. Among our Medicaid Aged, Blind or Disabled (ABD) membership, PMPM
premiums range from approximately $450 in California and Texas to over $1,000 in New Mexico and Ohio.
Medicare premiums are approximately $1,100 PMPM, with Medicare revenue totaling $95.1 million, $49.3 million
and $27.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Approximately 3% of our premium revenue for the year ended December 31, 2008 was realized under a
Medicaid cost-plus reimbursement agreement that our Utah plan has with that state. For the year ended Decem-
ber 31, 2008, we also received approximately 5% of our premium revenue in the form of “birth income” — a one-
time payment for the delivery of a child — from the Medicaid programs in Michigan, Missouri, Ohio, Texas, and
Washington. Such payments are recognized as revenue in the month the birth occurs.
36
Certain components of premium revenue are subject to accounting estimates. Chief among these are (1) that
portion of premium revenue paid to our New Mexico health plan by the state of New Mexico that may be refunded to
the state if certain minimum amounts are not expended on defined medical care costs, or if administrative costs or
profit (as defined) exceed certain amounts, (2) that portion of the revenue of our Ohio health plan that is at risk if
certain performance measures are not met, (3) the additional premium revenue our Utah health plan is entitled to
receive from the state of Utah as an incentive payment for saving the state of Utah money in relation to
fee-for-service Medicaid, (4) the profit-sharing agreement between our Texas health plan and the state of Texas,
where we pay a rebate to the state of Texas if our Texas health plan generates pretax income above a certain
specified percentage, according to a tiered rebate schedule, and (5) that portion of our Medicare revenue that is
subject to retroactive adjustment for member risk adjustment and recoupment of pharmacy related revenue.
Our contract with the state of New Mexico requires that we spend a minimum percentage of premium revenue
on certain explicitly defined medical care costs (the medical cost floor). Our contract is for a three-year period, and
the medical cost floor is based on premiums and medical care costs over the entire contract period. During the six
months ended June 30, 2008, we recorded adjustments totaling $12.9 million to increase premium revenue
associated with this requirement. The revenue resulted from a reversal of previously recorded amounts due the state
of New Mexico when we were below the minimum percentage, because we exceeded the minimum percentage for
the six months ended June 30, 2008.
Effective July 1, 2008, our New Mexico health plan entered into a new three year contract that, in addition to
retaining the medical cost floor, added certain limits on the amount our New Mexico health plan can: (1) expend on
administrative costs; and (2) retain as profit. At December 31, 2008, there was no liability recorded under the terms
of these contract provisions. Any changes to the terms of these provisions, including revisions to the definitions of
premium revenue, medical care costs, administrative costs or profit, the period of time over which performance is
measured or the manner of its measurement, or the percentages used in the calculations, may trigger a change in the
amounts owed. If the state of New Mexico disagrees with our interpretation of the existing contract terms, an
adjustment to the amounts owed may be required.
Under our contract with the state of Ohio, up to 1% of our Ohio health plan’s revenue may be refundable to the
state if certain performance measures are not met. At December 31, 2008, we had recorded a liability of
approximately $1.6 million under the terms of this contract provision.
In prior years, we estimated amounts we believed were recoverable under our savings sharing agreement with
the state of Utah based on available information and our interpretation of our contract with the state. The state may
not agree with our interpretation or our application of the contract language, and it may also not agree with the
manner in which we have processed and analyzed our member claims and encounter records. Thus, the ultimate
amount of savings sharing revenue that we realize from prior years may be subject to negotiation with the state.
During 2007, as a result of an ongoing disagreement with the state of Utah, we wrote off the entire receivable,
totaling $4.7 million. Our Utah health plan continues to work with the state to assure an appropriate determination
of amounts due to us under the savings share agreement. When additional information is known, or agreement is
reached with the state regarding the appropriate savings sharing payment amount for prior years, we will adjust the
amount of savings sharing revenue recorded in our financial statements as appropriate in light of such new
information or agreement.
As of December 31, 2008, we had a liability of approximately $619,000 accrued pursuant to our profit-sharing
agreement with the state of Texas for the 2008 contract year (ending August 31, 2008) and the 2009 contract year
(ending August 31, 2009). During 2008, we paid the state of Texas $10.1 million relating to the 2007 and 2008
contract years, and the 2007 contract year is now closed. Because the final settlement calculations include a claims
run-out period of nearly one year, the amounts recorded, based on our estimates, may be adjusted. We believe that
the ultimate settlement will not differ materially from our estimates.
Medicare revenue paid to us is subject to retroactive adjustment for both member risk scores and member
pharmacy cost experience. Based on member encounter data that we submit to the Centers for Medicare and
Medicaid Services (CMS), our Medicare revenue is subject to adjustment for up to two years after the original year
of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was
anticipated when premiums were originally set for that member. In the event that our membership (measured on an
37
individual by individual basis) requires less acute medical care than was anticipated by the original premium
amount, CMS may recover premium from us. In the event that our membership requires more acute medical care
than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A similar
retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. That analysis is
similar to the process for the adjustment of member risk scores, but is further complicated by member pharmacy
cost sharing provisions attached to the Medicare pharmacy benefit that do not apply to the services measured by the
member risk adjustment process. We estimate the amount of Medicare revenue that will ultimately be realized for
the periods presented based on our knowledge of our members’ heath care utilization patterns and CMS practices.
To the extent that the premium revenue ultimately received from CMS differs from recorded amounts, we will
adjust reported Medicare revenue.
Historically, membership growth has been the primary reason for our increasing revenues, although more
recently our revenues have also grown due to the more care intensive benefits associated with our ABD and
Medicare members. We have increased our membership through both internal growth and acquisitions. The
following table sets forth the approximate total number of members by state health plan as of the dates indicated:
Total Ending Membership by Health Plan:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2007
2006
2008
322,000
206,000
77,000
—
84,000
176,000
31,000
61,000
299,000
296,000
209,000
68,000
—
73,000
136,000
29,000
55,000
283,000
300,000
228,000
—
—
65,000
76,000
19,000
52,000
281,000
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,256,000
—
Indiana(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,149,000
—
1,021,000
56,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,256,000
1,149,000
1,077,000
Total Ending Membership by State for our Medicare
Advantage Special Needs Plans:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Ending Membership by State for our Aged, Blind
and Disabled (“ABD”) Population:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
1,500
1,700
700
300
400
2,400
1,000
8,000
12,700
30,300
6,300
19,000
16,200
7,300
3,000
94,800
1,100
1,100
500
—
—
1,900
500
5,100
11,800
31,400
6,800
14,900
16,000
6,800
2,800
90,500
500
200
—
—
—
1,500
200
2,400
10,700
33,200
6,700
—
—
6,900
2,700
60,200
(1) Our Missouri health plan was acquired effective November 1, 2007.
(2) Less than one thousand members. Our Nevada plan serves only Medicare members and commenced operations
in June 2007.
(3) Our Texas health plan commenced operations in September 2006.
(4) Our Indiana health plan ceased serving members effective January 1, 2007.
The following table provides details of member months (defined as the aggregation of each month’s
membership for the period) by state for the years ended December 31, 2008, 2007, and 2006:
Total Member Months by Health Plan:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
2006
3,721,000
2,526,000
910,000
7,000
970,000
1,998,000
348,000
659,000
3,514,000
3,500,000
2,597,000
136,000
1,000
803,000
1,567,000
335,000
593,000
3,419,000
3,694,000
2,365,000
—
—
726,000
442,000
34,000
689,000
3,410,000
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,653,000
—
Indiana(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,951,000
—
11,360,000
499,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,653,000
12,951,000
11,859,000
(1) Our Missouri health plan was acquired effective November 1, 2007.
(2) Our Nevada plan serves only Medicare members and commenced operations in June 2007.
(3) Our Texas health plan commenced operations in September 2006.
(4) Our Indiana health plan ceased serving members effective January 1, 2007.
Expenses
Our operating expenses include expenses related to the provision of medical care services and general and
administrative, or G&A, expenses. Our results of operations are impacted by our ability to effectively manage
expenses related to health care services and to accurately estimate costs incurred. Expenses related to medical care
services are captured in the following four categories:
• Fee-for-service: Physician providers paid on a fee-for-service basis are paid according to a fee schedule set
by the state or by our contracts with these providers. We pay hospitals on a fee-for-service basis in a variety
of ways, including per diem amounts, diagnostic-related groups, or DRGs, percent of billed charges, and
case rates. We also pay a small portion of hospitals on a capitated basis. We also have stop-loss agreements
with the hospitals with which we contract; under certain circumstances, we pay escalated charges in
connection with these stop-loss agreements. Under all fee-for-service arrangements, we retain the financial
responsibility for medical care provided. Expenses related to fee-for-service contracts 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 managers are included in fee-for-service costs.
• Capitation: Many of our primary care physicians and a small portion of our specialists and hospitals are
paid on a capitated basis. Under capitation contracts, we typically pay a fixed PMPM payment to the
provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under
capitated contracts, we remain liable for the provision of certain health care services. Certain of our capitated
39
contracts also contain incentive programs based on service delivery, quality of care, utilization management,
and other criteria. 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.
• Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our
pharmacy benefit managers. As noted above, drugs and injectibles not paid through our pharmacy benefit
managers are included in fee-for-service costs, except in those limited instances where we capitate drug and
injectible costs.
• Other: Other medical care costs include medically related administrative costs, certain provider incentive
costs, reinsurance cost, and other health care expense. Medically related administrative costs include, for
example, expenses relating to health education, quality assurance, case management, disease management,
24-hour on-call nurses, and a portion of our information technology costs. Salary and benefit costs are a
substantial portion of these expenses. For the years ended December 31, 2008, 2007 and 2006, medically
related administrative costs were approximately $75.9 million, $65.4 million and $52.6 million,
respectively.
The following table provides the details of our consolidated medical care costs for the periods indicated
(dollars in thousands except PMPM amounts):
2008
Year Ended December 31,
2007
2006
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
Amount
PMPM
Fee-for-service . . $1,709,806 $116.69
30.74
Capitation . . . . . .
24.31
Pharmacy . . . . . .
7.16
Other . . . . . . . . .
450,440
356,184
104,882
65.2% $1,343,911 $103.77
28.97
375,206
17.2
20.88
270,363
13.6
7.00
90,603
4.0
64.6% $1,125,031 $ 94.86
22.05
261,476
18.0
17.65
209,366
13.0
6.98
82,779
4.4
% of
Total
67.0%
15.6
12.5
4.9
Total . . . . . . . . $2,621,312 $178.90 100.0% $2,080,083 $160.62 100.0% $1,678,652 $141.54 100.0%
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. See “Critical
Accounting Policies” below for a comprehensive discussion of how we estimate such liabilities. The following table
provides the details of our medical claims and benefits payable as of the dates indicated (in thousands):
Fee-for-service claims incurred but not paid (IBNP) . . . . . . . . . . . . . . . . . . . $236,492
28,111
Capitation payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,837
Pharmacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,002
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$264,385
27,840
14,676
4,705
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $292,442
$311,606
December 31,
2008
2007
G&A expenses largely consist of wage and benefit costs for our employees, premium taxes, and other
administrative expenses. Some G&A services are provided locally, while others are delivered to our health plans
from a centralized location. The primary centralized functions are claims processing, information systems, finance
and accounting services, and legal and regulatory services. Locally provided functions include member services,
plan administration, and provider relations. G&A expenses include premium taxes for each of our health plans in
California, Michigan, New Mexico, Ohio, Texas, and Washington.
40
Results of Operations
The following table sets forth selected consolidated operating ratios. All ratios, with the exception of the
medical care ratio, are shown as a percentage of total revenue. The medical care ratio is shown as a percentage of
premium revenue because there is a direct relationship between the premium revenue earned and the cost of health
care.
Year Ended December 31,
2008
2006
2007
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99.3% 98.8% 99.0%
1.2
1.0
0.7
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Medical care ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84.8% 84.5% 84.6%
General and administrative expense ratio, excluding premium taxes . . . . . .
Premium taxes included in general and administrative expenses . . . . . . . . .
8.0%
3.1
8.2% 8.4%
3.3
3.0
Total general and administrative expense ratio . . . . . . . . . . . . . . . . . . . . . .
11.1% 11.5% 11.4%
Depreciation and amortization expense ratio . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1%
1.1% 1.1%
39.9% 37.8% 37.8%
3.9% 3.8%
3.6%
2.3% 2.3%
2.0%
Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007
The following table summarizes premium revenue, medical care costs, medical care ratio, and premium taxes
by health plan for the periods indicated (PMPM amounts are in whole dollars; other dollar amounts are in
thousands):
Premium Revenue
Total
PMPM
Year Ended December 31, 2008
Medical Care Costs
Total
PMPM
Medical
Care Ratio
Premium Tax
Expense
California . . . . . .
Michigan . . . . . . .
Missouri . . . . . . .
Nevada . . . . . . . .
New Mexico . . . .
Ohio . . . . . . . . . .
Texas . . . . . . . . .
Utah . . . . . . . . . .
Washington . . . . .
Other. . . . . . . . . .
$ 417,027
509,782
225,280
8,037
348,576
602,826
110,178
155,991
709,943
3,600
$ 112.06
201.86
247.62
1,106.45
359.45
301.76
316.32
236.75
202.02
—
$ 363,776
405,683
184,298
9,099
286,004
549,182
84,324
139,011
575,085
24,850
$
97.75
160.64
202.58
1,252.61
294.92
274.91
242.09
210.98
163.64
—
87.2%
79.6
81.8
113.2
82.1
91.1
76.5
89.1
81.0
—
$12,503
26,710
—
—
11,713
30,505
1,995
—
11,668
21
$3,091,240
$ 210.97
$2,621,312
$ 178.90
84.8%
$95,115
41
Premium Revenue
Total
PMPM
Year Ended December 31, 2007
Medical Care Costs
Total
PMPM
Medical
Care Ratio
Premium Tax
Expense
California . . . . . .
Michigan . . . . . . .
Missouri . . . . . . .
Nevada . . . . . . . .
New Mexico . . . .
Ohio . . . . . . . . . .
Texas . . . . . . . . .
Utah . . . . . . . . . .
Washington . . . . .
Other. . . . . . . . . .
$ 378,934
487,032
30,730
2,438
268,115
436,238
88,453
116,907
652,970
552
$ 108.29
187.55
226.65
1,440.73
333.94
278.39
263.90
197.19
190.96
—
$ 310,226
409,230
26,396
2,069
221,567
394,451
68,173
109,895
519,763
18,313
$
88.66
157.59
194.69
1,222.76
275.97
251.72
203.40
185.36
152.00
—
$2,462,369
$ 190.13
$2,080,083
$ 160.62
81.9%
84.0
85.9
84.9
82.6
90.4
77.1
94.0
79.6
—
84.5%
$11,338
28,493
—
—
9,088
19,631
1,598
—
10,844
28
$81,020
Net Income
For the year ended December 31, 2008, net income increased to $62.4 million, or $2.25 per diluted share, from
$58.3 million, or $2.05 per diluted share, for the year ended December 31, 2007.
Premium Revenue
Premium revenue for the year ended December 31, 2008 was $3,091.2 million, an increase of $628.8 million,
or 26%, over the $2,462.4 million of premium revenue for the year ended December 31, 2007. Medicare premium
revenue for 2008 was $95.1 million, compared with $49.3 million for 2007.
Significant contributors to the $628.8 million increase in annual premium revenue included the following:
• A $194.6 million increase in Medicaid premium revenue at the Missouri health plan, primarily a result of our
acquisition of this plan on November 1, 2007.
• A $166.6 million increase in Medicaid premium revenue at the Ohio health plan due to higher enrollment,
particularly in the Covered Families and Children (CFC) population.
• A $78.7 million increase in Medicaid premium revenue at the New Mexico health plan, primarily due to
higher enrollment.
• A $51.4 million increase in Medicaid premium revenue at the Washington health plan, primarily due to
higher rates.
• A $45.8 million increase in Medicare premium revenue across all health plans that serve Medicare enrollees,
primarily due to increased enrollment.
• A $34.3 million increase in Medicaid premium revenue at the California health plan, primarily due to
increased enrollment.
Investment income
Investment income for 2008 decreased $9.0 million to $21.1 million, from $30.1 million earned in 2007. This
30% decline was due to declining interest rates in 2008.
Medical care costs
Medical care costs as a percentage of premium revenue (the medical care ratio) increased to 84.8% in 2008
from 84.5% in 2007. Excluding Medicare, our medical care ratio was 84.8% in 2008, compared with 84.7% in 2007.
42
• The medical care ratio of the California health plan was 87.2% for 2008, up from 81.9% in 2007. The
increase in the plan’s medical care ratio was caused primarily by increased fee-for-service and pharmacy
costs that proportionally exceeded the increased revenue from premium rate increases.
• The medical care ratio of the Michigan health plan was 79.6% for 2008, down from 84.0% in 2007. This
decrease was caused primarily by premium rate increases that proportionally exceeded the plan’s increased
medical costs.
• The medical care ratio of the Missouri health plan was 81.8% for 2008, down from 85.9% in 2007. Premium
increases were proportionally greater than PMPM medical costs due to revised provider contracts and a fee
schedule increase effective July 1, 2008.
• The medical care ratio of the New Mexico health plan was 82.1% in 2008, down from 82.6% in 2007.
Between July 1, 2008 and December 31, 2008, the New Mexico health plan received a blended rate decrease
of approximately 3% under the plan’s Medicaid Salud! contract and two separate contracts serving
membership under the state’s coverage initiative for the uninsured. The impact of this blended rate decrease
was exceeded by the reversal of a $12.9 million accrual established as of December 31, 2007, pursuant to a
minimum medical care ratio contract provision. In 2007, the New Mexico health plan had recorded a charge
of $6.0 million related to this contract provision. Absent the impact of the minimum medical care ratio
contract provision, the New Mexico health plan’s MCR would have been 85.2% in 2008, compared with
80.8% in 2007, due to higher fee-for-service and capitation costs and lower PMPM premium revenue.
• The medical care ratio of the Ohio health plan increased to 91.1% in the 2008 from 90.4% in the 2007,
primarily due to higher pharmacy cost as a parentage of premium revenue. The medical care ratio of the Ohio
health plan, by line of business, was as follows:
Dec. 31,
2008
Dec. 31,
2007
Covered Families and Children (CFC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aged, Blind or Disabled (ABD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89.7% 88.6%
93.7
94.7
Aggregate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91.1% 90.4%
• The medical care ratio of the Texas health plan was 76.5% in 2008, down from 77.1% in 2007. Increased
premiums more than offset higher medical costs.
• The medical care ratio of the Utah health plan was 89.1% in 2008, down from 94.0% in 2007. In 2007, the
Utah health plan had recorded a $4.2 million reduction of revenue as a result of a reconciliation of amounts
due the state of Utah under a savings sharing arrangement. Absent the savings sharing adjustment, the
medical care ratio in 2007 would have been 90.7%.
• The medical care ratio of the Washington health plan was 81.0% in 2008, up from 79.6% in 2007, primarily
due to higher fee-for-service specialist and hospital costs.
General and administrative expenses
General and administrative expenses were $344.8 million, or 11.1% of total revenue, for 2008, compared with
$285.3 million, or 11.5% of total revenue, for 2007. Included in G&A expenses were premium taxes totaling
$95.1 million in 2008 and $81.0 million in 2007. Premium taxes increased in 2008 due to increased revenues in the
states where premium taxes are assessed.
43
Core G&A expenses (defined as G&A expenses less premium taxes) were 8.0% of revenue in 2008, compared
with 8.2% in 2007. The decrease in core G&A compared with 2007 was primarily due to lower administrative
payroll as a percentage of revenue, as indicated in the table below.
Medicare-related administrative costs . . . . . . . . . . .
Non Medicare-related administrative costs:
Administrative payroll, including employee
incentive compensation . . . . . . . . . . . . . . . . .
Florida health plan start up expenses . . . . . . . . .
All other administrative expense . . . . . . . . . . . .
Year Ended December 31,
2008
2007
Amount
% of Total
Revenue
Amount
% of Total
Revenue
(In thousands)
$ 18,451
0.6%
$ 9,778
0.4%
190,932
2,495
37,768
6.1
0.1
1.2
163,420
—
31,077
6.6
—
1.2
Core G&A expenses . . . . . . . . . . . . . . . . . . . . . . . $249,646
8.0%
$204,275
8.2%
Depreciation and Amortization
Depreciation and amortization expense increased $5.7 million for the year ended December 31, 2008
compared to 2007, primarily due to depreciation expense associated with investments in infrastructure. Of the
total increase, amortization expense contributed $2.1 million, primarily due to the Mercy CarePlus acquisition in
Missouri in 2007. The following table presents the components of depreciation and amortization expense (in
thousands):
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,718
12,970
Amortization expense on intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,118
10,849
Total depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,688
$27,967
Year Ended
December 31,
2008
2007
Impairment Charge on Purchased Software
During the second quarter of 2007, we recorded an impairment charge of $782,000, related to purchased
software no longer used for operations. No such charge was recorded in 2008.
Interest Expense
Interest expense increased to $8.7 million in 2008 from $4.6 million in 2007 primarily due to the issuance of
our $200.0 million convertible senior notes in the fourth quarter of 2007.
Income Taxes
Income taxes were recorded at an effective rate of 39.9% for the year ended December 31, 2008, compared
with 37.8% in the prior year. The increase in our effective tax rate was primarily the result of an increase in
Michigan state taxes attributable to tax law changes that took effect on January 1, 2008. The increase in Michigan
taxes was partially offset by prior years’ tax benefits recorded during 2008 relating to California enterprise zone
credits. Absent the enterprise zone credit tax benefits, our effective tax rate for the year ended December 31, 2008
would have been approximately 41%.
44
Year Ended December 31, 2007 Compared with the Year Ended December 31, 2006
The following table summarizes premium revenue, medical care costs, medical care ratio, and premium taxes
by health plan for the periods indicated (PMPM amounts are in whole dollars; other dollar amounts are in
thousands):
Premium Revenue
Total
PMPM
Year Ended December 31, 2007
Medical Care Costs
Total
PMPM
Medical
Care Ratio
Premium Tax
Expense
California . . . . . .
Michigan . . . . . . .
Missouri . . . . . . .
Nevada . . . . . . . .
New Mexico . . . .
Ohio . . . . . . . . . .
Texas . . . . . . . . .
Utah . . . . . . . . . .
Washington . . . . .
Other. . . . . . . . . .
$ 378,934
487,032
30,730
2,438
268,115
436,238
88,453
116,907
652,970
552
$ 108.29
187.55
226.65
1,440.73
333.94
278.39
263.90
197.19
190.96
—
$ 310,226
409,230
26,396
2,069
221,567
394,451
68,173
109,895
519,763
18,313
$
88.66
157.59
194.69
1,222.76
275.97
251.72
203.40
185.36
152.00
—
$2,462,369
$ 190.13
$2,080,083
$ 160.62
81.9%
84.0
85.9
84.9
82.6
90.4
77.1
94.0
79.6
—
84.5%
$11,338
28,493
—
—
9,088
19,631
1,598
—
10,844
28
$81,020
Premium Revenue
Total
PMPM
Year Ended December 31, 2006
Medical Care Costs
Total
PMPM
Medical
Care Ratio
Premium Tax
Expense
California . . . . . . . . . $ 372,071
82,946
Indiana . . . . . . . . . . .
429,835
Michigan . . . . . . . . .
221,597
New Mexico . . . . . . .
94,751
Ohio . . . . . . . . . . . . .
4,508
Texas . . . . . . . . . . . .
165,507
Utah . . . . . . . . . . . . .
613,750
Washington . . . . . . . .
144
Other . . . . . . . . . . . .
$100.74
166.29
181.73
305.07
214.25
133.37
240.10
179.98
—
$ 328,532
79,411
335,696
187,460
86,249
4,688
151,417
484,435
20,764
$ 88.95
159.20
141.93
258.08
195.03
138.70
219.66
142.06
—
88.3%
95.7%
78.1%
84.6%
91.0%
104.0%
91.5%
78.9%
—
$11,738
—
25,982
8,203
4,265
79
—
10,506
4
$1,985,109
$167.39
$1,678,652
$141.55
84.6%
$60,777
Net Income
For the year ended December 31, 2007, net income increased to $58.3 million, or $2.05 per diluted share, from
$45.7 million, or $1.62 per diluted share, for the year ended December 31, 2006.
Premium Revenue
For the year ended December 31, 2007, premium revenue was $2,462.4 million, an increase of $477.3 million,
or 24.0%, over $1,985.1 million for the year ended December 31, 2006. Medicare premium revenue for 2007 was
$49.3 million compared with $27.2 million in 2006. Contributing to the $477.3 million increase in annual premium
revenues were the following:
• A $341.5 million increase at the Ohio health plan principally due to higher enrollment;
• An $83.9 million increase at the Texas health plan due to higher enrollment. During 2007, the Texas health
plan reduced revenue by $3.1 million to record amounts due back to the state under a profit sharing
agreement;
45
• A $57.2 million increase at our Michigan health plan principally due to a full year of operations which had
included the revenue of the Cape Health Plan, compared to only eight months of operations including Cape
Health Plan revenues in 2006 (the acquisition of Cape Health Plan was effective May 1, 2006);
• A $46.5 million increase at our New Mexico health plan due to higher enrollment and higher premium rates.
The New Mexico health plan reduced revenue by $6.0 million and $6.9 million in 2007 and 2006,
respectively, to meet a contractually required minimum medical care ratio;
• A $39.2 million increase at our Washington health plan due to higher premium rates and slightly higher
membership;
• A $30.7 million increase as a result of our acquisition of Mercy CarePlus in Missouri effective November 1,
2007; and
• A $6.9 million increase at our California health plan as increased premium rates offset lower enrollment.
These increases in premium revenues during 2007 were partially offset by:
• An $82.9 million decrease due to the termination of operations of our Indiana health plan effective January 1,
2007; and
• A $48.6 million decrease at our Utah health plan due to reduced membership (on a member-month basis),
and the write-off of $4.7 million in savings share receivables.
Investment Income
Investment income for 2007 increased $10.2 million to $30.1 million, from $19.9 million for 2006, as a result
of higher invested balances, due in part to the investment of proceeds from our offering of convertible senior notes in
the fourth quarter of 2007, and higher investment yields.
Medical Care Costs
Medical care costs as a percentage of premium revenue (the medical care ratio), decreased to 84.5% in the year
ended December 31, 2007, from 84.6% in 2006. Contributing to this change were the following:
• The medical care ratio of the California health plan decreased to 81.9% in 2007 from 88.3% in 2006 as a
result of the premium increases received during 2007 in San Bernardino/Riverside, San Diego, and
Sacramento counties, while PMPM medical costs were essentially flat;
• The medical care ratio of the Michigan health plan increased to 84.0% in 2007 from 78.1% in 2006 due to
higher capitation and pharmacy and specialty fee-for-service costs partially offset by lower hospital
fee-for-service costs;
• The medical care ratio of the New Mexico health plan decreased to 82.6% in 2007 from 84.6% in 2006. The
decrease was the result of higher premium rates and a reduction in the minimum medical care ratio premium
adjustment, partially offset by the impact of Medicaid fee schedule increases. Absent the adjustments made
to premium revenue in 2007 and 2006, the medical care ratio in New Mexico would have been 80.8% in 2007
and 82.0% in 2006;
• The medical care ratio of the Ohio health plan decreased to 90.4% for 2007 from 91.0% in 2006. During
2007, the Ohio health plan began serving the ABD population for the first time. The medical care ratio of the
Ohio health plan, by line of business, was as follows:
Covered Families and Children (CFC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aged, Blind or Disabled (ABD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88.6% 91.0%
94.7
—
Aggregate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90.4% 91.0%
Dec. 31,
2007
Dec. 31,
2006
46
• The medical care ratio of the Texas health plan decreased in 2007 primarily due to very low medical costs for
the Star Plus membership. As noted above, we recorded a $3.1 million reduction to revenue in Texas during
2007 to reflect estimated amounts due back to the state under a profit sharing arrangement;
• The medical care ratio of the Utah health plan increased due to the write-off of $4.2 million in savings share
receivables in the second half of 2007. Medical care costs in Utah decreased on a PMPM basis in 2007 when
compared to 2006. Absent the write-off of $4.2 million in savings share receivable in the second half of 2007
($4.0 million of which was accrued as of December 31, 2006), the Utah health plan’s medical care ratio
would have been 90.7%, a decrease compared with the 91.5% reported for 2006. During 2007 our Utah
health plan served the majority of its membership under a cost-plus contract with the state of Utah;
• The medical care ratio reported at the Washington health plan increased to 79.6% in 2007 from 78.9% in
2006, principally due to higher fee-for-service costs; and
• The termination of our operations in Indiana resulted in a 10 basis-point decrease in our medical care ratio, to
84.5%, in 2007. Absent the impact of the Indiana plan in both years, the medical care ratio in 2007 would
have increased 50 basis points to 84.6% from 84.1% in 2006.
General and Administrative Expenses
G&A expenses were $285.3 million, or 11.5% of total revenue, for the year ended December 31, 2007,
compared to $229.1 million, or 11.4% of total revenue, for 2006. Included in G&A expenses were premium taxes
totaling $81.0 million in 2007 and $60.8 million in 2006. Premium taxes increased in 2007 due to increased
revenues in the states where premium taxes are assessed.
Core G&A expenses decreased to 8.2% of total revenue for the year ended December 31, 2007, compared with
8.4% for 2006. Although Core G&A expenses declined slightly in 2007 as a percentage of total revenue, certain
categories of expenses increased. These increases included employee incentive compensation, recruitment costs,
and our continued investment in the administrative infrastructure necessary to support the Medicare product line.
The following table provides details regarding the impact of these increases (dollars in thousands):
Medicare-related administrative costs . . . . . . . . . . .
Non Medicare-related administrative costs:
Employee recruitment expense. . . . . . . . . . . . . . . .
Employee incentive compensation . . . . . . . . . . . . .
All other administrative expense . . . . . . . . . . . . . .
Year Ended December 31,
2007
2006
Amount
% of Total
Revenue
Amount
% of Total
Revenue
$ 9,778
0.4%
$ 3,237
0.2%
2,568
9,976
182,735
0.1
0.4
7.3
1,769
5,102
158,172
0.1
0.2
7.9
Core G&A expenses . . . . . . . . . . . . . . . . . . . . .
$205,057
8.2%
$168,280
8.4%
Depreciation and Amortization
Depreciation and amortization expense increased $6.5 million for the year ended December 31, 2007
compared to 2006, primarily due to depreciation expense associated with investments in infrastructure. Of the
total increase, amortization expense contributed $1.3 million, primarily due to the Cape Health Plan acquisition in
Michigan in 2006. The following table presents the components of depreciation and amortization expense (in
thousands):
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,118
10,849
Amortization expense on intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,936
9,539
Total depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,967
$21,475
47
Year Ended
December 31,
2007
2006
Impairment Charge on Purchased Software
During the second quarter of 2007, we recorded an impairment charge of $782,000 related to purchased
software no longer used for operations. No such charge occurred during the year ended December 31, 2006.
Interest Expense
Interest expense increased to $4.6 million in 2007 from $2.4 million in 2006 primarily due to increased
borrowings, including the issuance of our convertible senior notes in the fourth quarter of 2007.
Income Taxes
We recognized income tax expense for the year ended December 31, 2007 using an effective tax rate of 37.8%,
consistent with the rate used for the year ended December 31, 2006.
Acquisitions
In August 2008, we announced our intention to acquire Florida NetPASS, LLC (“NetPASS”), a provider of
care management and administrative services to approximately 55,000 Florida MediPass members in South and
Central Florida. We expect the closing of the transaction to occur by the third quarter of 2009, at a purchase price of
approximately $42 million, subject to adjustments. On October 1, 2008, we completed the initial closing of the
transaction, under which we acquired one percent of the ownership interests of NetPASS for $9.0 million.
Additionally, we deposited $9.0 million to an escrow account that will be used for the purpose of reimbursing the
state of Florida for any sums due under a final settlement agreement with the state.
On October 7, 2008, we announced that our wholly owned subsidiary, Molina Healthcare of Florida, Inc., was
awarded a Medicaid managed care contract by the state of Florida. The term of the contract commenced on
December 1, 2008, at which time Molina Healthcare of Florida began its initial enrollment of NetPASS Medicaid
members, with the full transition of NetPASS members expected to be completed by the third quarter of 2009.
On June 30, 2008, we paid $1 million and issued a total of 48,186 shares of our common stock in connection
with our acquisition of the assets of The Game of Work, LLC. The purchase price consideration totaled $2.3 million.
The Game of Work, LLC is a company specializing in productivity measurement and improvement and will be used
internally to increase operational efficiency.
Effective November 1, 2007, we acquired Mercy CarePlus, a licensed Medicaid managed care plan based in
St. Louis, Missouri, to expand our market share within our core Medicaid managed care business. The results of
operations for Mercy CarePlus are included in the consolidated financial statements from periods following
November 1, 2007. The purchase price for the acquisition was $80.0 million, and was funded with available cash
and proceeds from our issuance of convertible senior notes in October 2007. The purchase price was subject to the
following post-closing adjustments: (1) a reconciliation with respect to incurred but not reported medical costs;
(2) a settlement of income taxes; and (3) the payment of an additional $5.0 million to the sellers if the earnings of the
health plan (as defined in the purchase agreement) exceeded $22.0 million for the twelve months ended June 30,
2008. Upon evaluation, we have preliminarily determined that: (1) the sellers owe us approximately $650,000 in
connection with the reconciliation of incurred but not reported medical costs; (2) we owe the sellers approximately
$400,000 in connection with the settlement of income taxes; and (3) the earnings condition was not met, so we
believe that we do not owe the sellers the additional $5.0 million payment. However, the sellers have objected to our
first and third determinations as listed above, and the dispute resolution process provided for under the parties’ stock
purchase agreement has commenced. During the post-acquisition period in 2008, we reduced goodwill relating to
the Mercy CarePlus acquisition by approximately $6.2 million, primarily due to the establishment of a deferred tax
asset relating to the carryover tax basis in certain identifiable intangibles.
In May 2006, we acquired HCLB, Inc. (“HCLB”). HCLB is the parent company of Cape Health Plan, Inc.
(“Cape”), a Michigan corporation based in Southfield, Michigan. The Cape acquisition expanded our geographic
presence within Michigan. The purchase price was $44.0 million in cash and the acquisition was deemed effective
May 15, 2006 for accounting purposes. Accordingly, the results of operations for Cape have been included in the
48
consolidated financial statements for the periods following May 15, 2006. Effective December 31, 2006, we merged
Cape into Molina Healthcare of Michigan, Inc., our Michigan health plan.
Liquidity and Capital Resources
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 and investment income.
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 in advance of the payment of claims 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,
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 ten years or less (excluding auction
rate securities and variable rate securities, for which interest rates are periodically reset) and that the average
maturity be four years or less. Professional portfolio managers operating under documented guidelines manage our
investments. As of December 31, 2008, a substantial portion of our cash was invested in a portfolio of highly liquid
money market securities, and our investments consisted solely of investment-grade debt securities. For a com-
prehensive discussion of our auction rate securities, see “Fair Value Measurements,” below. Our restricted
investments are invested principally in certificates of deposit and U.S. treasury securities.
All of our investments are classified as current assets, except for our investments in auction rate securities,
which are classified as non-current assets. The average annualized portfolio yields for the years ended December 31,
2008, 2007, and 2006 were approximately 3.0%, 5.2%, and 4.8%, respectively.
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 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. 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 non-regulated parent
company in the form of dividends, when and as permitted by applicable regulations, for general corporate use.
Cash provided by operating activities for the year ended December 31, 2008 was $40.4 million, compared with
$158.6 million for 2007, a decrease of $118.2 million. The significant components of the 2008 decrease in cash
provided by operating activities included the following:
• Receivables:
year-over-year increase in 2008 due primarily to higher birth income receivables as a result
of increased enrollment in Ohio and Missouri, combined with the addition of receivables from the
acquisition of our Missouri health plan in the fourth quarter of 2007;
• Medical claims and benefits payable:
year-over-year decrease due primarily to the ramp up of member-
ship and medical claims at the Texas and Ohio health plans in 2007 compared with less significant changes
for those plans in 2008;
• Deferred revenue:
year-over-year decrease due primarily to the timing of the Ohio health plan’s receipts of
premium payments from the state of Ohio;
• Income taxes:
the 2008 increase in income taxes receivable, combined with the 2007 decrease in income
taxes payable, due to timing of receipts and payments.
49
Cash used in investing activities was $64.5 million for the year ended December 31, 2008, compared with
$256.3 million for 2007. The much greater amount invested in 2007 relates to the $193.4 million in proceeds from
our issuance of $200 million senior convertible notes and our $70.2 million purchase of our Missouri health plan,
Mercy CarePlus, both of which occurred in the fourth quarter of 2007, with no comparable activity in 2008.
Cash used in financing activities totaled $47.8 million for the year ended December 31, 2008, compared with
$153.1 million provided by financing activities for 2007. The primary use of cash in 2008 was $49.9 million in
repurchases of our common stock, compared with cash provided by, in 2007, the $193.4 million net proceeds from
the issuance of convertible senior notes, offset by the reduction in borrowings and the repayment of amounts owed
under our credit facility.
The securities and credit markets have been experiencing extreme volatility and disruption over the past year,
and as a result the availability of credit has been severely restricted. Such conditions may persist throughout 2009. In
the event we need access to additional capital to pay our operating expenses, make payments on our indebtedness,
pay capital expenditures, or fund acquisitions, our ability to obtain such capital may be limited and the cost of any
such capital may be significant, particularly if we are unable to access our existing credit facility. While we have not
attempted to access the credit markets recently, we believe that if credit could be obtained, the terms and costs of
such credit would be significantly less favorable to us than what was obtained in our most recent financings.
Repurchase Programs. Under our board of directors’ authorization, we undertook two common stock share
repurchase programs in 2008. During 2008, we repurchased approximately 1.9 million shares at an aggregate cost
of approximately $50 million. In January 2009, our board of directors authorized the repurchase of up to $25 million
in aggregate of either our common stock or our convertible senior notes. In February 2009, we paid approximately
$10 million to repurchase $13 million face amount of our convertible senior notes. In February and March 2009, we
repurchased approximately 724,000 shares of our common stock for an aggregate purchase price of approximately
$13.3 million.
Shelf Registration Statement.
In December 2008, we filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission covering the issuance of up to $300 million of our securities, including
common stock, warrants, or debt securities, and up to 250,000 shares of outstanding common stock that may be sold
from time to time by the Molina Siblings Trust. We may publicly offer securities from time to time at prices and
terms to be determined at the time of the offering.
Capital Resources
At December 31, 2008, we had working capital of $340.8 million compared with $407.7 million at
December 31, 2007. At December 31, 2008 and December 31, 2007, cash and cash equivalents were $387.2 million
and $459.1 million, respectively. At December 31, 2008 and December 31, 2007, investments were $248.0 million
and $242.9 million, respectively. In 2008, this total included $58.2 million in auction rate securities classified as
non-current assets. In 2007, all investments were classified as current assets. At December 31, 2008, the parent
company (Molina Healthcare, Inc.) had cash and investments of approximately $68.9 million. 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.
EBITDA(1)
Three Months Ended
December 31,
Year Ended
December 31,
2008
2007
2008
2007
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,467
Add back:
(In thousands)
$30,633
$112,605
$ 98,327
Depreciation and amortization expense . . . . . . . . .
8,691
7,693
33,688
27,967
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,158
$38,326
$146,293
$126,294
(1) We calculate EBITDA by adding back depreciation and amortization expense to operating income. Operating
income included interest income of $21.1 million and $29.2 million for the years ended December 31, 2008,
50
and 2007, respectively. EBITDA is not prepared in conformity with GAAP since it excludes depreciation and
amortization expense, as well as interest expense, and the provision for income taxes. This non-GAAP financial
measure should not be considered as an alternative to net income, operating income, operating margin, or cash
provided by operating activities. Management uses EBITDA as a supplemental metric in evaluating our
financial performance, in evaluating financing and business development decisions, and in forecasting and
analyzing future periods. For these reasons, management believes that EBITDA is a useful supplemental
measure to investors in evaluating our performance and the performance of other companies in our industry.
Fair Value Measurements
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for financial assets and liabilities.
The statement defines fair value, provides guidance for measuring fair value and requires certain disclosures.
SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income
approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of
an asset or replacement cost). The statement establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is a brief description of those three
levels:
• Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
• Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active.
• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
As of December 31, 2008, we held certain assets that are required to be measured at fair value on a recurring
basis. These included cash and cash equivalents, investments and restricted investments as follows:
Balance Sheet Classification
Description
Current assets:
Cash and cash
equivalents
Investments
Non-current assets:
Investments
Other assets
Restricted investments
Cash and highly liquid securities with original or purchase date remaining maturities
of up to three months that are readily convertible into known amounts of cash;
reported at fair value based on market prices that are readily available (Level 1).
Investment grade debt securities; designated as available-for-sale; reported at fair
value based on market prices that are readily available (Level 1).
Auction rate securities; designated as available-for-sale; reported at fair value based
on discounted cash flow analysis or other type of valuation model (Level 3).
Auction rate securities; designated as trading; reported at fair value based on
discounted cash flow analysis or other type of valuation model (Level 3).
Auction rate securities rights (the “Rights”); reported at fair value based on
discounted cash flow analysis or other type of valuation model (Level 3).
Interest-bearing deposits and U.S. treasury securities required by the respective
states in which we operate, or required by contractual arrangement with a third party
such as a provider group; designated as held-to-maturity; reported at amortized cost
which approximates market value and based on market prices that are readily
available (Level 1).
As of December 31, 2008, $70.5 million par value (fair value of $58.2 million) of our investments consisted of
auction rate securities, of which all were securities collateralized by student loan portfolios, guaranteed by the
U.S. government. We continued to earn interest on substantially all of these auction rate securities as of
December 31, 2008. Due to events in the credit markets, the auction rate securities held by us experienced failed
auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available
during the majority of 2008. We used pricing models to estimate the fair value of these securities. These pricing
51
models included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the
timing of expected future cash flows, and the expectation of the next time the security would be expected to have a
successful auction. The estimated values of these securities were also compared, when possible, to valuation data
with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market
available pricing, provided a reasonable basis for determining fair value of the auction rate securities as of
December 31, 2008.
As of December 31, 2008, we held $42.5 million par value (fair value of $34.9 million) auction rate securities
with a certain investment securities firm. In November 2008, we entered into a rights agreement with this firm that
(1) allows us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm
between June 30, 2010 and July 2, 2012, and (2) gives the investment securities firm the right to purchase the
auction rate securities from us any time after the agreement date as long as we receive the par value.
We have accounted for the Rights as a freestanding financial instrument and have elected to record the value of
the Rights under the fair value option of SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities. In the fourth quarter of 2008, this resulted in the recognition of a $6.9 million non-current asset, with a
corresponding increase to pretax income for the value of the Rights. To determine the fair value estimate of the
Rights, we used a discounted cash-flow model that was based on the expectation that the auction rate securities will
be put back to the investment securities firm at par on June 30, 2010, as permitted by the Rights Agreement.
Simultaneous to the recognition of the $6.9 million rights agreement, we recorded an other-than-temporary
impairment of the underlying auction rate securities, and prior unrealized losses on the auction rate securities that
had been recorded to other comprehensive loss through November 2008 were charged to income, totaling
$7.2 million. Also, at the time of the execution of the Rights agreement and pursuant to SFAS 115, we elected
to transfer the underlying auction rate securities from available-for-sale to trading securities. For the month of
December 2008, we recorded additional losses of $399,000 on these auction rate securities. We expect that the
future changes in the fair value of the Rights will be substantially offset by the fair value movements in the
underlying auction rate securities.
As of December 31, 2008, the remainder of our auction rate securities, which are still designated as
available-for-sale, amounted to $28.0 million par value (fair value of $23.3 million). As a result of the decline
in fair value of these auction rate securities, we recorded unrealized losses of $4.7 million to accumulated other
comprehensive (loss) income for the year ended December 31, 2008. We have deemed these unrealized losses to be
temporary and attribute the decline in value to liquidity issues, as a result of the failed auction market, rather than to
credit issues. Any future fluctuation in fair value related to these instruments that we deem to be temporary,
including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss)
income. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge
to earnings as appropriate.
Long-Term Debt
Convertible Senior Notes
In October 2008, we completed our offering of $200.0 million aggregate principal amount of 3.75% Con-
vertible Senior Notes due 2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million.
The Notes rank equally in right of payment with our existing and future senior indebtedness.
The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial
conversion rate is 21.3067 shares of our common stock per $1,000 principal amount of the Notes. This represents an
initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain corporate
transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain
circumstances. Prior to July 2014, holders may convert their Notes only under the following circumstances:
• During any fiscal quarter after our fiscal quarter ending December 31, 2008, if the closing sale price per
share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading
days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the
conversion price per share of our common stock;
52
• During the five business day period immediately following any five consecutive trading day period in which
the trading price per $1,000 principal amount of the Notes for each trading day of such period was less than
98% of the product of the closing price per share of our common stock on such day and the conversion rate in
effect on such day; or
• Upon the occurrence of specified corporate transactions or other specified events.
On or after July 1, 2014, holders may convert their Notes at any time prior to the close of business on the
scheduled trading day immediately preceding the stated maturity date regardless of whether any of the foregoing
conditions is satisfied.
We will deliver cash and shares of our common stock, if any, upon conversion of each $1,000 principal amount
of Notes, as follows:
• An amount in cash (the “principal return”) equal to the sum of, for each of the 20 Volume-Weighted Average
Price (VWAP) trading days during the conversion period, the lesser of the daily conversion value for such
VWAP trading day and $50 (representing 1/20th of $1,000); and
• A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any
excess of the daily conversion value above $50.
On February 18, 2009, we settled the repurchase of $13.0 million face amount of our convertible senior notes
(see Note 11 of the notes to consolidated financial statements). We repurchased the notes at an average price of
$74.25 per $100 principal amount, for a total of $9.6 million. Including accrued interest of approximately $186,000,
our total payment was $9.8 million.
Credit Facility
In 2005, we entered into an Amended and Restated Credit Agreement, dated as of March 9, 2005, among
Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”).
Effective May 2008, we entered into a third amendment of the Credit Facility that increased the size of the revolving
line of credit from $180.0 million to $200.0 million, maturing in May 2012. The Credit Facility is intended to be
used for working capital and general corporate purposes, and subject to obtaining commitments from existing or
new lenders and satisfaction of other specified conditions, we may increase the amount available under the Credit
Facility to up to $250.0 million.
Interest rates on borrowings under the Credit Facility are based, at our election, on the London Interbank
Offered Rate, or LIBOR, or the base rate plus an applicable margin. The base rate equals the higher of Bank of
America’s prime rate or 0.500% above the federal funds rate. We also pay a commitment fee on the total unused
commitments of the lenders under the Credit Facility. The applicable margins and commitment fee are based on our
ratio of consolidated funded debt to consolidated earnings before interest expense, taxes, depreciation and
amortization, or EBITDA. The applicable margins range between 0.750% and 1.750% for LIBOR loans and
between 0.000% and 0.750% for base rate loans. The commitment fee ranges between 0.150% and 0.275%. In
addition, we are required to pay a fee for each letter of credit issued under the Credit Facility equal to the applicable
margin for LIBOR loans and a customary fronting fee. As of December 31, 2008, there were no borrowings
outstanding under the Credit Facility.
Our obligations under the Credit Facility are secured by a lien on substantially all of our assets and by a pledge
of the capital stock of our health plan subsidiaries (with the exception of the California health plan). The Credit
Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens,
mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital
expenditures, investments, and a fixed charge coverage ratio. The Credit Facility also requires us to maintain a ratio
of total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 at any time. At December 31,
2008, we were in compliance with all financial covenants in the Credit Facility.
53
Regulatory Capital and Dividend Restrictions
Our principal operations are conducted through our ten health plan subsidiaries operating in California,
Florida, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. The health plans are
subject to state laws that, among other things, require the maintenance of minimum levels of statutory capital, as
defined by each state, and may restrict the timing, payment, and amount of dividends and other distributions that
may be paid to Molina Healthcare, Inc. as the sole stockholder of each of our health plans. To the extent the
subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us.
The net assets in these subsidiaries, after intercompany eliminations, which may not be transferable to us in the form
of loans, advances, or cash dividends totaled $355.0 million at December 31, 2008, and $332.2 million at
December 31, 2007.
The National Association of Insurance Commissioners, or NAIC, has established model rules which, if
adopted by a particular state, set minimum capitalization requirements for health plans and other insurance entities
bearing risk for health care coverage. The requirements take the form of risk-based capital, or RBC, rules. These
rules, which vary slightly from state to state, have been adopted in Florida, Michigan, Nevada, New Mexico, Ohio,
Texas, Utah, and Washington. California has not adopted RBC rules and has not given notice of any intention to do
so. The RBC rules, if adopted by California, may increase the minimum capital required by that state.
At December 31, 2008, our health plans had aggregate statutory capital and surplus of approximately
$362.5 million, compared to the required minimum aggregate statutory capital and surplus of approximately
$211.1 million. All of our health plans were in compliance with the minimum capital requirements at December 31,
2008. We have the ability and commitment to provide additional working capital to each of our health plans when
necessary to ensure that capital and surplus continue to meet regulatory requirements. Barring any change in
regulatory requirements, we believe that we will continue to be in compliance with these requirements through
2009.
Critical Accounting Policies
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect
reported amounts and disclosures. The determination of our liability for claims and medical 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 claims and medical benefits 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,” or 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. Our estimated IBNP liability represented
$236.5 million of our total medical claims and benefits payable of $292.4 million as of December 31, 2008.
Excluding amounts related to our cost-plus Medicaid contract in Utah and amounts that we anticipate paying on
behalf of a capitated provider in Ohio (which we will subsequently withhold from that provider’s monthly capitation
payment), our IBNP liability at December 31, 2008 was $216.7 million.
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
54
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 reserve for adverse claims development, 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 per member per month (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 change in our estimate of claims liability as of December 31, 2008 that would
have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2008, by the percentages indicated. A reduction in the completion factor results in an increase
in medical claims liabilities. Our Utah health plan is excluded from these calculations, because the majority of the
Utah business is conducted under a cost-plus reimbursement contract. Dollar amounts are in thousands.
(Decrease) Increase in
Estimated
Completion Factors
Increase (Decrease) in
Medical Claims and
Benefits Payable
(6)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 53,199
35,466
17,733
(17,733)
(35,466)
(53,199)
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 change in our estimate of
claims liability as of December 31, 2008, 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. Our Utah
health plan is excluded from these calculations, because the majority of the Utah business is conducted under a cost-
plus reimbursement contract. Dollar amounts are in thousands.
(Decrease) Increase in
Trended Per member Per Month
Cost Estimates
(Decrease) Increase in
Medical Claims and
Benefits Payable
(6)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(27,129)
(18,086)
(9,043)
9,043
18,086
27,129
The following per-share amounts are based on a combined federal and state statutory tax rate of 38%, and
27.8 million diluted shares outstanding for the year ended December 31, 2008. Assuming a hypothetical 1% change
in completion factors from those used in our calculation of IBNP at December 31, 2008, net income for the year
ended December 31, 2008 would increase or decrease by approximately $5.5 million, or $0.20 per diluted share, net
of tax. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at
December 31, 2008, net income for the year ended December 31, 2008 would increase or decrease by approx-
imately $2.8 million, or $0.10 per diluted share, net of tax. The corresponding figures for a 5% change in completion
55
factors and PMPM cost estimates would be $27.5 million, or $0.99 per diluted share, net of tax, and $14.0 million,
or $0.50 per diluted share, net of tax, 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 an change in the estimate of the other component, and that an 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. For example, if completion factors were overestimated by 1%, resulting in an
overstatement of net income by approximately $5.5 million, it is likely that trended PMPM costs would be
underestimated, resulting in an additional overstatement of net income.
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, which also uses actuarial techniques, to account for
adverse developments 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 development. The provision for
adverse claims development 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 (ABD), changes to state-controlled fee schedules upon which
much 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
development. 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 to establish IBNP.
On a monthly basis, we review and update our estimated IBNP liability 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.
Assuming that base reserves have been adequately set, we believe that amounts ultimately paid out should
generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion
in that liability of the allowance for adverse claims development and the accrued cost of settling those claims.
However, there can be no assurance that amounts ultimately paid out will not be higher or lower than this 8% to 10%
56
range, as shown by our results in 2008 and 2007 when the amounts ultimately paid out were less than the amount of
the reserves we had established as of the beginning of those years by approximately 20% and 19%, respectively.
As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities recorded at both
December 31, 2007 and 2006 were less than what we had expected when we established our reserves. While the
specific reasons for the overestimation of our liabilities were different at each of the two reporting dates, in general
the overestimations were tied to our assessment of specific circumstances at our various individual health plans
which were unique to those reporting periods.
In 2008, overestimation of our claims liability, particularly at our Michigan and Washington health plans, at
December 31, 2007 led to the recognition of a benefit from prior period claims development.
• In Michigan, we overestimated the extent to which both catastrophic claims and state-mandated changes to
the methodology used to pay outpatient claims had increased our liability at December 31, 2007.
• In Washington, we overestimated the extent to which state-mandated changes to hospital fee schedules
implemented in August 2007 had increased our liability at December 31, 2007.
In 2007, overestimation of the claims liability at our California, New Mexico, and Washington health plans at
December 31, 2006, led to the recognition of a benefit from prior period claims development, which benefit was
partially offset by the underestimation of our claims liability at December 31, 2006 at our Michigan health plan.
• In California, we underestimated the impact of changes to certain provider contracts implemented during the
second half of 2006 which lowered medical costs further than we had anticipated, leading us to overestimate
our claims liability at December 31, 2006.
• In Washington, we overestimated the impact of the upward trend in medical costs during the latter half of
2006. Additionally, we lowered claims inventory in December 2006 in anticipation of a claims system
upgrade in early 2007. While we attempted to adjust our claims liability estimation procedures for the
increased speed of claims payment, we were only partially successful in doing so. Both of these circum-
stances led us to overestimate our claims liability at December 31, 2006.
• In Michigan, we underestimated the upward trend in medical costs during the latter half of 2006.
Additionally, we underestimated the costs associated with the membership we had added as a result of
our acquisition of Cape Health Plan in May 2006.
We do not believe that the recognition of a benefit (or detriment) from prior period claims development had a
material impact on our consolidated results of operations in either 2008 or 2007.
In estimating our claims liability at December 31, 2008, we adjusted our base calculation to take account of the
impact of the following factors which we believe are reasonably likely to change our final claims liability amount:
• Uncertainties regarding utilization trends in December at our California health plan.
• Delays in the receipt and processing of paper-formatted claims at our California health plan during the
second half of 2008. Our California health plan receives a far higher percentage of its fee-for-service claims
in paper format than do our other health plans.
• The impact of accruals for potential high dollar provider settlements at our New Mexico health plan that we
expect to be resolved in 2009.
• The impact of major revisions to financially significant provider contracts at the Ohio health plan in the latter
half of 2008.
• The impact of a significant increase to the Ohio health plan’s aged, blind or disabled (ABD) membership in
the latter half of 2008.
• The impact of the Ohio health plan’s decision to transition responsibility for the management of behavioral
health services from an independent provider to Company employees in the latter half of 2008.
• Decreases in claims inventory across all of our health plans throughout 2008.
57
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. However, that benefit will
affect current period earnings only to the extent that the replenishment of the reserve for adverse claims
development (and the re-accrual of administrative costs for the settlement of those claims) is less than the benefit
recognized from the prior period liability.
We seek to maintain a consistent claims reserving methodology across all periods. Accordingly, any prior period
benefit from an un-utilized reserve for adverse claims development may be offset by the establishment of a new
reserve in an approximately equal amount (relative to premium revenue, medical care costs, and medical claims and
benefits payable) in the current period, and thus the impact on earnings for the current period may be minimal.
The following table presents the components of the change in our medical claims and benefits payable for the
years ended December 31, 2008 and 2007. The negative amounts displayed for “components of medical care costs
related to prior years” represent the amount by which our original estimate of claims and benefits payable at the
beginning of the period exceeded the actual amount of the liability based on information (principally the payment of
claims) developed since that liability was first reported. The benefit of this prior period development may be offset
by the addition of a reserve for adverse claims development when estimating the liability at the end of the period
(captured as a “component of medical care costs related to current year”).
Year Ended December 31,
2008
2007
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Medical claims and benefits payable from business acquired . . . . . . . . .
Components of medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for medical care costs related to:
(Dollars in thousands, except
per-member amounts)
311,606
—
$ 290,048
14,876
2,683,399
(62,087)
2,621,312
2,136,381
(56,298)
2,080,083
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,413,128
227,348
2,640,476
292,442
1,851,035
222,366
2,073,401
$ 311,606
Benefit from prior period as a percentage of:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days in claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of members at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-for-service claims processing and inventory information:
19.9%
2.0%
2.4%
41
1,256,000
19.4%
2.3%
2.7%
52
1,149,000
87,300
Number of claims in inventory at end of period. . . . . . . . . . . . . . . . .
115,400
Billed charges of claims in inventory at end of period . . . . . . . . . . . . $
0.07
Claims in inventory per member at end of period . . . . . . . . . . . . . . .
91.88
Billed charges of claims in inventory per member at end of period . . $
Number of claims received during the period . . . . . . . . . . . . . . . . . .
11,095,100
Billed charges of claims received during the period . . . . . . . . . . . . . . $ 7,794,900
161,400
$ 212,000
0.14
$
184.51
9,578,900
$6,190,900
Commitments and Contingencies
We lease office space and equipment under various operating leases. As of December 31, 2008, our lease
obligations for the next five years and thereafter were as follows: $15.5 million in 2009, $15.3 million in 2010,
$14.9 million in 2011, $13.8 million in 2012, $12.0 million in 2013, and an aggregate of $40.9 million thereafter.
We are not an obligor to or guarantor of any indebtedness of any other party. We are not a party to off-balance
sheet financing arrangements except for operating leases which are disclosed in Note 15 to the accompanying
58
audited consolidated financial statements for the year ended December 31, 2008. We have certain advances to
related parties, which are discussed in Note 14 to the accompanying audited consolidated financial statements for
the year ended December 31, 2008.
Contractual Obligations
In the table below, we present our contractual obligations as of December 31, 2008. Some of the amounts we
have 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. Amounts are in thousands.
Total
2009
2010-2011
2012-2013
2014 and Beyond
Medical claims and benefits
payable . . . . . . . . . . . . . . . . . . $292,442
200,000
112,310
43,125
28,086
Long-term debt(1) . . . . . . . . . . . .
Operating leases. . . . . . . . . . . . . .
Interest on long-term debt(1) . . . .
Purchase commitments . . . . . . . . .
$292,442
—
15,514
7,500
15,528
$ — $ —
—
25,725
15,000
3,515
—
30,204
15,000
9,028
Total contractual obligations . . . . . $675,963
$330,984
$54,232
$44,240
—
$
200,000
40,867
5,625
15
$246,507
(1) Amounts relate to our October 2007 offering of $200.0 million aggregate principal amount of 3.75% Con-
vertible Senior Notes due 2014.
In accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, we have recorded approximately $11.7 million of unrecognized tax benefits as liabilities. The
above table does not contain this amount because we cannot reasonably estimate when or if such amount may be
settled. See Note 12 to the accompanying audited consolidated financial statements for the year ended December 31,
2008 for further information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market 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 Fund Prime Series — Cash Management Class, PFM Fund Prime Series — Institutional Class, and the
PFM Fund 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. Our investments and a portion of our cash equivalents are managed by professional portfolio
managers operating under documented investment guidelines. No investment that is in a loss position can be sold by
our managers without our prior approval. Our investments consist solely of investment grade debt securities with a
maximum maturity of ten years and an average duration of four years. 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 due to payors consisting principally of the governments of each state in which our
HMO subsidiaries operate.
Inflation
Although the general rate of inflation has remained relatively stable and health care cost inflation has stabilized
in recent years, the national health care cost inflation rate still exceeds the general inflation rate. 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. While we currently believe our strategies will mitigate health care cost inflation, 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.
59
MOLINA HEALTHCARE, INC.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
MOLINA HEALTHCARE INC.
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
61
62
63
64
65
67
60
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, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2008. 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 consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Molina Healthcare, Inc. at December 31, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 4, the Company adopted the provisions of Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Liabilities,” effective January 1, 2008, and elected to
apply this Standard to a transaction completed in the fourth quarter of 2008.
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, 2008, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 16, 2009 expressed an unqualified opinion
thereon.
Los Angeles, California
March 16, 2009
/s/ ERNST & YOUNG LLP
61
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2008
2007
(In thousands,
except per share data)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,162
189,870
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,562
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,019
Income tax refundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,603
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,766
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 459,064
242,855
111,537
—
8,616
12,521
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
Goodwill and indefinite-lived intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
728,982
65,058
79,133
113,466
58,169
4,488
38,202
27,367
34,321
834,593
49,555
89,776
117,447
—
—
29,019
29,240
21,675
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,149,186
$1,171,305
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 292,442
66,247
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,538
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Income tax payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 311,606
69,266
40,104
5,946
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
388,227
200,000
27,367
—
22,928
638,522
426,922
200,000
29,240
10,136
14,529
680,827
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 26,725 shares
at December 31, 2008 and 28,444 shares at December 31, 2007. . . . . . . . . . . . . . . . .
27
28
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (1,201 shares, at cost). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
146,179
(2,310)
387,158
(20,390)
510,664
—
185,808
272
324,760
(20,390)
490,478
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,149,186
$1,171,305
See accompanying notes.
62
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2006
2007
2008
(In thousands, except per share data)
Revenue:
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,091,240
21,126
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,462,369
30,085
$1,985,109
19,886
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,112,366
2,492,454
2,004,995
Expenses:
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge on purchased software . . . . . . . . . . . . . . . . . .
2,621,312
344,761
33,688
—
2,080,083
285,295
27,967
782
1,678,652
229,057
21,475
—
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,999,761
2,394,127
1,929,184
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,605
(8,714)
103,891
41,493
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62,398
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.25
2.25
27,676
27,772
98,327
(4,631)
93,696
35,366
58,330
2.06
2.05
28,275
28,419
$
$
$
75,811
(2,353)
73,458
27,731
45,727
1.64
1.62
27,966
28,164
$
$
$
(1) Potentially dilutive shares issuable pursuant to the Company’s 2007 offering of convertible senior notes were
not included in the computation of diluted net income per share because to do so would have been anti-dilutive
for the years ended December 31, 2008 and 2007.
See accompanying notes.
63
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Outstanding Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
(In thousands)
Retained
Earnings
Treasury
Stock
Total
Balance at January 1, 2006 . . . . . . . . . . . .
27,792
$28
$162,693
$ (629)
$221,148 $(20,390) $362,850
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax:
Unrealized gain on Investments . . . . . . . . .
Total comprehensive income . . . . . . . . . . .
Stock options exercised, employee stock
grants and employee stock purchases . . . .
Tax benefit from employee stock
compensation . . . . . . . . . . . . . . . . . . . .
—
—
—
327
—
—
—
—
—
—
—
—
—
10,070
1,227
—
292
292
—
—
45,727
— 45,727
—
—
292
45,727
— 46,019
—
—
— 10,070
—
1,227
Balance at December 31, 2006 . . . . . . . . . .
28,119
$28
$173,990
$ (337)
$266,875 $(20,390) $420,166
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Unrealized gain on investments . . . . . . . . .
Total comprehensive income . . . . . . . . . . .
Adjustment to initially apply FIN 48 . . . . . .
Stock options exercised, employee stock
grants and employee stock purchases . . . .
Tax benefit from employee stock
compensation . . . . . . . . . . . . . . . . . . . .
—
—
—
—
325
—
—
—
—
—
—
—
—
—
—
—
10,965
853
—
609
609
—
—
—
58,330
— 58,330
—
—
609
58,330
(445)
— 58,939
(445)
—
—
—
— 10,965
—
853
Balance at December 31, 2007 . . . . . . . . . .
28,444
$28
$185,808
$
272
$324,760 $(20,390) $490,478
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax:
Unrealized loss on investments. . . . . . . . . .
Other-than-temporary impairment of
available-for-sale securities . . . . . . . . . .
Total comprehensive income . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . .
Stock issued in business purchase
transaction . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, employee stock
grants and employee stock purchases . . . .
Tax deficiency from employee stock
compensation . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
(1,943)
48
176
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
—
(49,939)
1,262
9,340
(292)
—
62,398
— 62,398
(7,025)
4,443
(2,582)
—
—
—
—
—
—
—
62,398
— (7,025)
—
4,443
— 59,816
(49,940)
—
— (49,940)
— 49,940
—
—
—
—
—
—
1,262
9,340
(292)
Balance at December 31, 2008 . . . . . . . . . .
26,725
$27
$146,179
$(2,310)
$387,158 $(20,390) $510,664
See accompanying notes.
64
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2008
Year Ended December 31,
2007
(In thousands)
2006
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment on available-for-sale securities . . .
Unrealized loss on trading securities . . . . . . . . . . . . . . . . . . . . . . . .
Gain on rights agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . .
Tax deficiency from employee stock compensation recorded as
additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of
acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . .
Medical claims and benefits payable. . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (paid) acquired in business purchase transactions . . . . . . . . . .
Increase in restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . .
Financing activities:
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under credit facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of convertible senior notes . . . . . . . . . . . . . . . .
Repayment of amounts borrowed under credit facility . . . . . . . . . . . . .
Payment of credit facility fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of convertible senior notes fees . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from employee stock compensation recorded as additional
paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock plan
$ 62,398
$ 58,330
$ 45,727
33,688
7,166
399
(6,907)
(1,688)
7,811
1,626
(335)
142
(17,025)
(2,245)
(19,164)
(4,904)
(10,566)
(9,965)
40,431
(34,690)
(263,229)
246,524
(1,000)
(9,183)
(8,973)
6,031
(64,520)
(49,940)
—
—
—
—
—
27,967
—
—
—
(9,057)
7,188
1,042
—
—
15,007
(2,911)
6,683
18,700
21,984
13,693
158,626
(22,299)
(264,115)
103,718
(70,172)
(8,365)
(4,330)
9,290
(256,273)
—
—
200,000
(45,000)
(551)
(6,498)
21,475
—
—
—
(399)
5,505
885
—
—
(38,847)
1,369
51,550
5,188
10,443
(579)
102,317
(20,297)
(148,795)
171,225
5,820
(912)
(3,334)
239
3,946
—
50,000
—
(5,000)
(459)
—
43
853
1,227
purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,084
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
(47,813)
(71,902)
459,064
4,257
153,061
55,414
403,650
2,416
48,184
154,447
249,203
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
$ 387,162
$ 459,064
$ 403,650
65
2,260
474
(182)
292
—
945
—
—
—
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
Supplemental cash flow information
Cash paid during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50,130
$ 27,734
$ 27,354
2008
Year Ended December 31,
2007
(In thousands)
2006
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,797
Schedule of non-cash investing and financing activities:
Unrealized (loss) gain on investments . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3,956)
1,374
Net unrealized (loss) gain on investments . . . . . . . . . . . . . . . . . . . . .
$ (2,582)
Retirement of common stock used for stock-based compensation . . . . .
Accrued purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(555)
65
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 49,940
$
$
$
$
$
$
9,419
977
(368)
609
(480)
672
$
$
$
$
$
— $
Impairment of purchased software . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of adoption of Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. . . . . . . . . . . . . . . . . . .
Accrual of software license fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value of stock issued for employee compensation earned in the
previous year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Details of business purchase transactions:
— $
782
— $
445
$
$
— $
— $
2,375
— $
— $
2,149
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,262)
1,262
—
—
$(106,233)
—
10,843
25,218
$ (86,024)
—
49,820
42,024
Net cash (paid) acquired in business purchase transactions . . . . . . . .
$ (1,000)
$ (70,172)
$
5,820
Business purchase transactions adjustments:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets, net
$
1,265
2,368
(7,549)
$ (3,916)
$
$
— $
2,747
2,747
$
—
—
—
See accompanying notes.
66
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. is a multi-state managed care organization participating exclusively in government-
sponsored health care programs for low-income persons, such as the Medicaid program and the Children’s Health
Insurance Program, or CHIP. We also serve a small number of low-income Medicare members. We conduct our
business primarily through 10 licensed health plans in the states of California, Florida, Michigan, Missouri, Nevada,
New Mexico, Ohio, Texas, Utah, and Washington. The health plans are locally operated by our respective wholly
owned subsidiaries in those ten states, each of which is licensed as a health maintenance organization, or HMO.
Our results of operations include the results of recent acquisitions, including the acquisition of Mercy
CarePlus, a Medicaid managed care organization based in St. Louis, Missouri, effective as of November 1, 2007,
and the acquisition of Cape Health Plan, Inc. based in Southfield, Michigan, effective as of May 15, 2006. We
acquired the Cape Health Plan, Inc. by acquiring its parent, HCLB, Inc. (“HCLB”). The Cape Health Plan, Inc. was
merged into our Michigan health plan effective December 31, 2006.
Consolidation
The consolidated financial statements include the accounts of Molina Healthcare, Inc. and all majority owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Financial information related to subsidiaries acquired during any year is included only for the period subsequent
to their acquisition.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements. 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 medical claims
payable and accruals, determination of allowances for uncollectible accounts, the valuation of certain investments,
settlements under risks/savings sharing programs, impairment of long-lived and intangible assets, professional and
general liability claims, reserves for potential absorption of claims unpaid by insolvent providers, reserves for the
outcome of litigation, valuation allowances for deferred tax assets, and the determination of unrecognized tax
benefits.
Reclassification
In the accompanying consolidated balance sheets, we have reclassified certain amounts to conform to the 2008
presentation.
2. Significant Accounting Policies
Premium Revenue
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally
subject to significant accounting estimates. For the year ended December 31, 2008, we received approximately 92%
of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our contracts with state
Medicaid agencies, Medicare and other managed care organizations for which we operate as a subcontractor. These
premium revenues are recognized in the month that members are entitled to receive health care services. The state
Medicaid programs and the federal Medicare program periodically adjust premium rates.
67
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Approximately 3% of our premium revenue for the year ended December 31, 2008 was realized under a
Medicaid cost-plus reimbursement agreement that our Utah plan has with that state. For the year ended Decem-
ber 31, 2008, we also received approximately 5% of our premium revenue in the form of “birth income” — a one-
time payment for the delivery of a child — from the Medicaid programs in Michigan, Missouri, Ohio, Texas, and
Washington. Such payments are recognized as revenue in the month the birth occurs.
Certain components of premium revenue are subject to accounting estimates. Chief among these are (1) that
portion of premium revenue paid to our New Mexico health plan by the state of New Mexico that may be refunded to
the state if certain minimum amounts are not expended on defined medical care costs, or if administrative costs or
profit (as defined) exceed certain amounts, (2) that portion of the revenue of our Ohio health plan that is at risk if
certain performance measures are not met, (3) the additional premium revenue our Utah health plan is entitled to
receive from the state of Utah as an incentive payment for saving the state of Utah money in relation to fee-for-
service Medicaid, (4) the profit-sharing agreement between our Texas health plan and the state of Texas, where we
pay a rebate to the state of Texas if our Texas health plan generates pretax income above a certain specified
percentage, according to a tiered rebate schedule, and (5) that portion of our Medicare revenue that is subject to
retroactive adjustment for member risk adjustment and recoupment of pharmacy related revenue.
Our contract with the state of New Mexico requires that we spend a minimum percentage of premium revenue
on certain explicitly defined medical care costs (the medical cost floor). Our contract is for a three-year period, and
the medical cost floor is based on premiums and medical care costs over the entire contract period. During the six
months ended June 30, 2008, we recorded adjustments totaling $12.9 million to increase premium revenue
associated with this requirement. The revenue resulted from a reversal of previously recorded amounts due the state
of New Mexico when we were below the minimum percentage, because we exceeded the minimum percentage for
the six months ended June 30, 2008.
Effective July 1, 2008, our New Mexico health plan entered into a new three year contract that, in addition to
retaining the medical cost floor, added certain limits on the amount our New Mexico health plan can: (1) expend on
administrative costs; and (2) retain as profit. At December 31, 2008, there was no liability recorded under the terms
of these contract provisions. Any changes to the terms of these provisions, including revisions to the definitions of
premium revenue, medical care costs, administrative costs or profit, the period of time over which performance is
measured or the manner of its measurement, or the percentages used in the calculations, may trigger a change in the
amounts owed. If the state of New Mexico disagrees with our interpretation of the existing contract terms, an
adjustment to the amounts owed may be required.
Under our contract with the state of Ohio, up to 1% of our Ohio health plan’s revenue may be refundable to the
state if certain performance measures are not met. At December 31, 2008, we had recorded a liability of
approximately $1.6 million under the terms of this contract provision.
In prior years, we estimated amounts we believed were recoverable under our savings sharing agreement with
the state of Utah based on available information and our interpretation of our contract with the state. The state may
not agree with our interpretation or our application of the contract language, and it may also not agree with the
manner in which we have processed and analyzed our member claims and encounter records. Thus, the ultimate
amount of savings sharing revenue that we realize from prior years may be subject to negotiation with the state.
During 2007, as a result of an ongoing disagreement with the state of Utah, we wrote off the entire receivable,
totaling $4.7 million. Our Utah health plan continues to work with the state to assure an appropriate determination
of amounts due to us under the savings share agreement. When additional information is known, or agreement is
reached with the state regarding the appropriate savings sharing payment amount for prior years, we will adjust the
amount of savings sharing revenue recorded in our financial statements as appropriate in light of such new
information or agreement.
As of December 31, 2008, we had a liability of approximately $619,000 accrued pursuant to our profit-sharing
agreement with the state of Texas for the 2008 contract year (ending August 31, 2008) and the 2009 contract year
68
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(ending August 31, 2009). During 2008, we paid the state of Texas $10.1 million relating to the 2007 and 2008
contract years, and the 2007 contract year is now closed. Because the final settlement calculations include a claims
run-out period of nearly one year, the amounts recorded, based on our estimates, may be adjusted. We believe that
the ultimate settlement will not differ materially from our estimates.
Medicare revenue paid to us is subject to retroactive adjustment for both member risk scores and member
pharmacy cost experience. Based on member encounter data that we submit to the Centers for Medicare and
Medicaid Services (CMS), our Medicare revenue is subject to adjustment for up to two years after the original year
of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was
anticipated when premiums were originally set for that member. In the event that our membership (measured on an
individual by individual basis) requires less acute medical care than was anticipated by the original premium
amount, CMS may recover premium from us. In the event that our membership requires more acute medical care
than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A similar
retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. That analysis is
similar to the process for the adjustment of member risk scores, but is further complicated by member pharmacy
cost sharing provisions attached to the Medicare pharmacy benefit that do not apply to the services measured by the
member risk adjustment process. We estimate the amount of Medicare revenue that will ultimately be realized for
the periods presented based on our knowledge of our members’ heath care utilization patterns and CMS practices.
To the extent that the premium revenue ultimately received from CMS differs from recorded amounts, we will
adjust reported Medicare revenue.
Medical Care Costs
Expenses related to medical care services are captured in the following four categories:
• Fee-for-service: Physician providers paid on a fee-for-service basis are paid according to a fee schedule set
by the state or by our contracts with these providers. We pay hospitals on a fee-for-service basis in a variety
of ways, including per diem amounts, diagnostic-related groups or DRGs, percent of billed charges, and case
rates. We also pay a small portion of hospitals on a capitated basis. We also have stop-loss agreements with
the hospitals with which we contract. Under all fee-for-service arrangements, we retain the financial
responsibility for medical care provided. Expenses related to fee-for-service contracts 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 managers are included in fee-for-service costs.
• Capitation: Many of our primary care physicians and a small portion of our specialists and hospitals are
paid on a capitated basis. Under capitation contracts, we typically pay a fixed PMPM payment to the
provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under
capitated contracts, we remain liable for the provision of certain health care services. Certain of our capitated
contracts also contain incentive programs based on service delivery, quality of care, utilization management,
and other criteria. 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.
• Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our
pharmacy benefit managers. As noted above, drugs and injectibles not paid through our pharmacy benefit
managers are included in fee-for-service costs, except in those limited instances where we capitate drug and
injectible costs.
• Other: Other medical care costs include medically related administrative costs, certain provider incentive
costs, reinsurance cost, and other health care expense. Medically related administrative costs include, for
example, expenses relating to health education, quality assurance, case management, disease management,
69
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
24-hour on-call nurses, and a portion of our information technology costs. Salary and benefit costs are a
substantial portion of these expenses. For the years ended December 31, 2008, 2007, and 2006, medically
related administrative costs were approximately $75.9 million, $65.4 million, and $52.6 million,
respectively.
The following table provides the details of our consolidated medical care costs for the periods indicated
(dollars in thousands, except PMPM amounts):
2008
Year Ended December 31,
2007
2006
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
Amount
PMPM
Fee-for- service . . $1,709,806 $116.69
30.74
Capitation . . . . . .
24.31
Pharmacy . . . . . .
7.16
Other . . . . . . . . .
450,440
356,184
104,882
65.2% $1,343,911 $103.77
28.97
375,206
17.2
20.88
270,363
13.6
7.00
90,603
4.0
64.6% $1,125,031 $ 94.86
22.05
261,476
18.0
17.65
209,366
13.0
6.98
82,779
4.4
% of
Total
67.0%
15.6
12.5
4.9
Total . . . . . . . . $2,621,312 $178.90 100.0% $2,080,083 $160.62 100.0% $1,678,652 $141.54 100.0%
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, 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. See Note 10, “Medical Claims and Benefits
Payable.”
We report reinsurance premiums as medical care costs, while related reinsurance recoveries are reported as
deductions from medical care costs. We limit our risk of catastrophic losses by maintaining high deductible
reinsurance coverage. We do not consider this coverage to be material as the cost is not significant and the likelihood
that coverage will be applicable is low.
Taxes Based on Premiums
Our California, Michigan, New Mexico, Ohio, Texas and Washington health plans are assessed a tax based on
premium revenue collected. We report these taxes on a gross basis, included in general and administrative expenses.
Premium tax expense totaled $95.1 million, $81.0 million, and $60.8 million in 2008, 2007, and 2006, respectively.
Delegated Provider Insolvency
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. Addi-
tionally, 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
70
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2008 or 2007.
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, 2008, or 2007.
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
We account for our investments in marketable securities in accordance with Statement of Financial Accounting
Standards No. (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities. Except for restricted
investments and certain student loan portfolios (the “auction rate securities”), marketable securities are designated
as available-for-sale and are carried at fair value. Unrealized gains or losses on available-for-sale securities, if any,
are recorded in stockholders’ equity as other comprehensive income (loss) net of applicable income taxes. 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, on an amortized cost basis. Fair values of securities are generally based on
quoted prices in active markets.
Our investment policy requires that all of our investments have final maturities of ten years or less (excluding
auction rate and variable rate securities where interest rates may be periodically reset), and that the average maturity
be four 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. During 2008, our auction rate securities were
classified as non-current assets. During the fourth quarter of 2008, certain auction rate securities were designated as
trading securities. For comprehensive discussions of the fair value and classification of our current and non-current
investments, including auction rate securities, see Note 4, “Fair Value Measurements,” and Note 5, “Investments.”
Receivables
Receivables consist primarily of amounts due from the various states in which we operate. All receivables are
subject to potential retroactive adjustment. Because the amounts of all receivables are readily determinable and our
creditors are 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 6, “Receivables.”
Property and Equipment
Property and equipment are stated at historical cost. Replacements and major improvements are capitalized,
and repairs and maintenance are charged to expense as incurred. Software developed for internal use is capitalized
in accordance with the provision of AICPA Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Furniture and equipment are depreciated using the straight-line
method over estimated useful lives ranging from three to seven years. Software is amortized over its estimated
71
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
useful life of three years. Leasehold improvements are amortized over the term of the lease or five to 10 years,
whichever is shorter. Buildings are depreciated over their estimated useful lives of 31.5 years. See Note 7, “Property
and Equipment.”
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Identifiable
intangible assets (consisting principally of purchased contract rights and provider contracts) are amortized on a
straight-line basis over the expected period to be benefited (between one and 15 years). See Note 8, “Goodwill and
Intangible Assets.”
Under SFAS 142, Goodwill and Other Intangible Assets, goodwill and indefinite lived assets are not
amortized, but are subject to impairment tests on an annual basis or more frequently if indicators of impairment
exist. Under the guidance of SFAS 142, we used a discounted cash flow methodology to assess the fair values of our
reporting units at December 31, 2008 and 2007. If book equity values of our reporting units exceed the fair values,
we perform a hypothetical purchase price allocation. Impairment is measured by comparing the goodwill derived
from the hypothetical purchase price allocation to the carrying value of the goodwill and indefinite lived asset
balance. Based on the results of our impairment testing, no adjustments were required for the years ended
December 31, 2008, 2007, and 2006.
Long-Lived Asset Impairment
Situations may arise where the carrying value of a long-lived asset may exceed the undiscounted expected cash
flows associated with that asset. In such circumstances, the asset is deemed to be impaired. We review material long-
lived assets for impairment on an annual basis, as well as when events or changes in business conditions suggest
potential impairment. Impaired assets are written down to fair value. In the second quarter of 2007, we recorded an
impairment charge totaling $782,000 related to commercial software no longer used in operations. Other than this
2007 charge, we have determined that no long-lived assets were impaired in the years ended December 31, 2008,
2007, and 2006.
Restricted Investments
Restricted investments, which consist of certificates of deposit and treasury securities, are designated as held-
to-maturity and are carried at amortized cost, which approximates market value. The use of these funds is limited to
specific purposes as required by each state, 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 9, “Restricted
Investments.”
Receivable/Liability for Ceded Life and Annuity Contracts
We report an acquired 100% ceded reinsurance arrangement related to the December 2005 purchase of Molina
Healthcare Insurance Company by recording a non-current receivable from the reinsurer with a corresponding non-
current liability for ceded life and annuity contracts.
Other Assets
During 2008, other assets increased due to the $9.0 million payment on the initial closing of the Florida
NetPASS acquisition (see Note 3, “Business Purchase Transactions”), and the addition of a $6.9 million non-current
asset in connection with a rights agreement (see Note 4, “Fair Value Measurements”). Other significant items
included in other assets include deferred financing costs associated with long-term debt, certain investments held in
connection with our employee deferred compensation program, and an investment in a vision services provider (see
72
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 14, “Related Party Transactions”). The deferred financing costs are being amortized on a straight-line basis
over the seven-year term of the convertible senior notes.
Income Taxes
We account for income taxes under SFAS 109, Accounting for Income Taxes. Deferred tax assets and liabilities
are recorded based on temporary differences between the financial statement basis and the tax basis of assets and
liabilities using presently enacted tax rates. On January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies
the accounting for uncertainty in income taxes recognized in companies’ financial statements in accordance with
SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax
position in accordance with FIN 48 is a two-step process. The first step is recognition to determine whether it is
more likely than not that a tax position will be sustained upon examination. In the second step, a tax position that
meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in
the financial statements. FIN 48 also provides guidance on de-recognition of recognized tax benefits, classification,
interest and penalties, accounting in interim periods, disclosure and transition. See Note 12, “Income Taxes.”
Earnings Per Share
The denominators for the computation of basic and diluted earnings per share were calculated as follows:
Shares outstanding at the beginning of the year . . . . . . . . . . . . . . . . . . 28,444
(871)
Weighted-average number of shares repurchased . . . . . . . . . . . . . . . . .
103
Weighted-average number of shares issued. . . . . . . . . . . . . . . . . . . . . .
2008
2006
Year Ended December 31,
2007
(In thousands)
28,119
—
156
27,792
—
174
Denominator for basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . 27,676
96
Dilutive effect of employee stock options and stock grants(1) . . . . . . . .
28,275
144
27,966
198
Denominator for diluted earnings per share(2) . . . . . . . . . . . . . . . . . . . 27,772
28,419
28,164
(1) Options to purchase common shares are included in the calculation of diluted earnings per share when their
exercise prices are below the average fair value of the common shares for each of the periods presented.
(2) Potentially dilutive shares issuable pursuant to our 2007 offering of convertible senior notes were not included
in the computation of diluted net income per share because to do so would have been anti-dilutive for the years
ended December 31, 2008 and 2007.
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 Fund Prime Series — Cash Management Class, PFM Fund Prime Series — Institutional Class, and the
PFM Fund 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. Our investments and a portion of our cash equivalents are managed by professional portfolio
managers operating under documented investment guidelines. No investment that is in a loss position can be sold by
our managers without our prior approval. Our investments consist solely of investment grade debt securities with a
maximum maturity of ten years and an average duration of four years. Restricted investments are invested
principally in certificates of deposit and treasury securities. Concentration of credit risk with respect to accounts
73
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
receivable is limited due to payors consisting principally of the governments of each state in which our HMO
subsidiaries operate.
Fair Value of Financial Instruments
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents,
investments, receivables, trade accounts payable, medical claims and benefits payable, long-term debt and other
liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and
current liabilities to approximate their fair value because of the relatively short period of time between the
origination of these instruments and their expected realization or payment. For a comprehensive discussion of fair
value measurements with regard to our current and non-current
investments, see Note 4, “Fair Value
Measurements.”
Based on quoted market prices, the fair value of our convertible senior notes issued in October 2007 was
$115.5 million as of December 31, 2008, and $225.6 million as of December 31, 2007. The carrying amount of the
convertible senior notes was $200.0 million as of December 31, 2008.
Risks and Uncertainties
Our profitability depends in large part on accurately predicting and effectively managing 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.
At December 31, 2008, we operated in 10 states, in some instances as a direct contractor with the state, and in
others 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.
Segment Information
We present segment information externally in the same manner used by management to make operating
decisions and assess performance. Each of our subsidiaries arranges for the provision of health care services to
Medicaid and CHIP members in return for compensation from state agencies. They share similar characteristics in
the membership they serve, the nature of services provided and the method by which medical care is rendered. The
subsidiaries are also subject to similar regulatory environments and long-term economic prospects. As such, we
have one reportable segment.
Recent Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (the “FSP”). The FSP requires the proceeds from the issuance of such convertible debt instruments
to be allocated between a liability component and an equity component. The resulting debt discount is amortized
over the period the convertible debt is expected to be outstanding, as additional non-cash interest expense. The
change in accounting treatment is effective for fiscal years beginning after December 15, 2008, and shall be applied
74
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retrospectively to prior periods. The FSP changes the accounting treatment for our $200.0 million 3.75% Con-
vertible Senior Notes due 2014, which were issued in October 2007 (see Note 11, “Long-Term Debt”). The impact
of this new accounting treatment will result in an increase to non-cash interest expense beginning in fiscal year 2009
for financial statements covering past and future periods. We have determined that the applicable interest rate will
be 7.5%. This rate is principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance
date, plus a credit spread. Using this interest rate, the incremental impact of the FSP to our results of operations in
2009 will be approximately $3.1 million, or $0.12 per diluted share, net of tax, but does not include the impact of our
repurchase of $13 million face amount of the Notes in February 2009. See Note 20, “Subsequent Events.” This
estimate assumes a 38% combined federal and state statutory tax rate and 27 million diluted shares outstanding. We
estimate the retroactive adjustment for prior periods will be approximately $627,000, or $0.02 per diluted share, net
of tax, for 2007, and $2.9 million, or $0.11 per diluted share, net of tax, for 2008. For prior periods, the estimates
assume a 38% combined federal and state statutory tax rate and actual diluted shares outstanding for those periods.
In December 2007, the FASB issued SFAS 141(R), Business Combinations and SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements. The standards are intended to improve, simplify, and converge
internationally the accounting for business combinations and the reporting of noncontrolling (minority) interests in
consolidated financial statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need to evaluate and understand the nature and
financial effect of the business combination. SFAS 141(R) is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008, and is applied prospectively to business combinations
for which the acquisition date is on or after the effective date. Earlier adoption is prohibited. We will apply
SFAS 141(R) to the acquisition of Florida NetPASS, LLC, which we expect to complete by the third quarter of 2009.
For more information on this acquisition, see Note 3, “Business Purchase Transactions.”
SFAS 160 is designed to improve the relevance, comparability, and transparency of financial information
provided to investors by requiring all entities to report minority interests in subsidiaries in the same way — as
equity in the consolidated financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and minority interests by requiring they be treated as equity
transactions. In addition, SFAS 160 requires that a parent company recognize a gain or loss in net income when a
subsidiary is deconsolidated upon a change in control. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. In addition,
SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except
for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. As of December 31, 2008, we did not have material outstanding minority
interests.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the
AICPA, and the SEC did not, or are not believed by management to, have a material impact on our present or future
consolidated financial statements.
3. Business Purchase Transactions
Missouri subsidiary. Effective November 1, 2007, we acquired Mercy CarePlus, a licensed Medicaid
managed care plan based in St. Louis, Missouri, to expand our market share within our core Medicaid managed
care business. The results of operations for Mercy CarePlus are included in the consolidated financial statements
from periods following November 1, 2007. The purchase price for the acquisition was $80.0 million, and was
funded with available cash and proceeds from our issuance of convertible senior notes in October 2007. The
purchase price was subject to the following post-closing adjustments: (1) a reconciliation with respect to incurred
but not reported medical costs; (2) a settlement of income taxes; and (3) the payment of an additional $5.0 million to
75
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the sellers if the earnings of the health plan (as defined in the purchase agreement ) exceeded $22.0 million for the
twelve months ended June 30, 2008. Upon evaluation, we have preliminarily determined that: (1) the sellers owe us
approximately $650,000 in connection with the reconciliation of incurred but not reported medical costs; (2) we
owe the sellers approximately $400,000 in connection with the settlement of income taxes; and (3) the earnings
condition was not met, so we believe that we do not owe the sellers the additional $5.0 million payment. However,
the sellers have objected to our first and third determinations as listed above, and the dispute resolution process
provided for under the parties’ stock purchase agreement has commenced. During the post-acquisition period in
2008, we reduced goodwill relating to the Mercy CarePlus acquisition by approximately $6.2 million, primarily due
to the establishment of a deferred tax asset relating to the carryover tax basis in certain identifiable intangibles.
Florida subsidiary.
In August 2008, we announced our intention to acquire Florida NetPASS, LLC
(“NetPASS”), a provider of care management and administrative services at that time to approximately 55,000
Florida MediPass members in South and Central Florida. We expect the closing of the transaction to occur by the
third quarter of 2009, at a purchase price of approximately $42 million, subject to adjustments. On October 1, 2008,
we completed the initial closing of the transaction, under which we acquired one percent of the ownership interests
of NetPASS for $9.0 million. Additionally, we deposited $9.0 million to an escrow account that will be used for the
purpose of reimbursing the state of Florida for any sums due under a final settlement agreement with the state. On
October 7, 2008, we announced that our wholly owned subsidiary, Molina Healthcare of Florida, Inc., was awarded
a Medicaid managed care contract by the state of Florida. The term of the contract commenced on December 1,
2008, at which time Molina Healthcare of Florida began its initial enrollment of NetPASS Medicaid members, with
the full transition of NetPASS members expected to be completed by the third quarter of 2009.
Other. On June 30, 2008, we paid $1 million and issued a total of 48,186 shares of our common stock in
connection with our acquisition of the assets of The Game of Work, LLC. The purchase price consideration totaled
$2.3 million. The Game of Work, LLC is a company specializing in productivity measurement and improvement
and will be used internally to increase operational efficiency.
4. Fair Value Measurements
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for financial assets and liabilities.
The statement defines fair value, provides guidance for measuring fair value and requires certain disclosures.
SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income
approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of
an asset or replacement cost). The statement establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is a brief description of those three
levels:
• Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
• Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active.
• Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
76
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2008, we held certain assets that are required to be measured at fair value on a recurring
basis. These included cash and cash equivalents, investments and restricted investments as follows:
Balance Sheet Classification
Current assets:
Cash and cash equivalents
Investments
Non-current assets:
Investments
Other assets
Restricted investments
Description
Cash and highly liquid securities with original or purchase date remaining maturities
of up to three months that are readily convertible into known amounts of cash;
reported at fair value based on market prices that are readily available (Level 1).
Investment grade debt securities; designated as available-for-sale; reported at fair
value based on market prices that are readily available (Level 1).
Auction rate securities; designated as available-for-sale; reported at fair value based
on discounted cash flow analysis or other type of valuation model (Level 3).
Auction rate securities; designated as trading; reported at fair value based on
discounted cash flow analysis or other type of valuation model (Level 3).
Other assets include auction rate securities rights (the “Rights”); reported at fair
value based on discounted cash flow analysis or other type of valuation model
(Level 3).
Interest-bearing deposits and U.S. treasury securities required by the respective
states in which we operate, or required by contractual arrangement with a third party
such as a provider group; designated as held-to-maturity; reported at amortized cost
which approximates market value and based on market prices that are readily
available (Level 1).
As of December 31, 2008, $70.5 million par value (fair value of $58.2 million) of our investments consisted of
auction rate securities, of which all were securities collateralized by student loan portfolios, guaranteed by the
U.S. government. We continued to earn interest on substantially all of these auction rate securities as of
December 31, 2008. Due to events in the credit markets, the auction rate securities held by us experienced failed
auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available
during the majority of 2008. We used pricing models to estimate the fair value of these securities. These pricing
models included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the
timing of expected future cash flows, and the expectation of the next time the security would be expected to have a
successful auction. The estimated values of these securities were also compared, when possible, to valuation data
with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market
available pricing, provided a reasonable basis for determining fair value of the auction rate securities as of
December 31, 2008.
As of December 31, 2008, we held $42.5 million par value (fair value of $34.9 million) auction rate securities
with a certain investment securities firm. In November 2008, we entered into a rights agreement with this firm that
(1) allows us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm
between June 30, 2010 and July 2, 2012, and (2) gives the investment securities firm the right to purchase the
auction rate securities from us any time after the agreement date as long as we receive the par value.
We have accounted for the Rights as a freestanding financial instrument and have elected to record the value of
the Rights under the fair value option of SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities. In the fourth quarter of 2008, this resulted in the recognition of a $6.9 million non-current asset, with a
corresponding increase to pretax income for the value of the Rights. To determine the fair value estimate of the
Rights, we used a discounted cash-flow model that was based on the expectation that the auction rate securities will
be put back to the investment securities firm at par on June 30, 2010, as permitted by the Rights Agreement.
Simultaneous to the recognition of the $6.9 million rights agreement, we recorded an other-than-temporary
impairment of the underlying auction rate securities, and prior unrealized losses on the auction rate securities that
77
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
had been recorded to other comprehensive loss through November 2008 were charged to income, totaling
$7.2 million. Also, at the time of the execution of the Rights agreement and pursuant to SFAS 115, we elected
to transfer the underlying auction rate securities from available-for-sale to trading securities. For the month of
December 2008, we recorded additional losses of $399,000 on these auction rate securities. We expect that the
future changes in the fair value of the Rights will be substantially offset by the fair value movements in the
underlying auction rate securities.
As of December 31, 2008, the remainder of our auction rate securities, which are still designated as available-
for-sale, amounted to $28.0 million par value (fair value of $23.3 million). As a result of the decline in fair value of
these auction rate securities, we recorded unrealized losses of $4.7 million ($2.9 million net of tax) to accumulated
other comprehensive (loss) income for the year ended December 31, 2008. We have deemed these unrealized losses
to be temporary and attribute the decline in value to liquidity issues, as a result of the failed auction market, rather
than to credit issues. Any future fluctuation in fair value related to these instruments that we deem to be temporary,
including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss)
income. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge
to earnings as appropriate.
Our assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at
December 31, 2008, were as follows:
Fair Value Measurements at Reporting Date Using
Level 3
Level 1
Level 2
Total
(In thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction rate securities (available-for-sale) . . . . . . . . . .
Auction rate securities (trading) . . . . . . . . . . . . . . . . . .
Auction rate securities rights . . . . . . . . . . . . . . . . . . . .
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . .
$387,162
189,870
23,284
34,885
6,907
38,202
$387,162
189,870
—
—
—
38,202
Total assets measured at fair value . . . . . . . . . . . . . . . .
$680,310
$615,234
$—
—
—
—
—
—
$—
$ —
—
23,284
34,885
6,907
—
$65,076
Based on market conditions that resulted in the absence of quoted prices in active markets for our auction rate
securities, we changed our valuation methodology for auction rate securities to a discounted cash flow analysis
during the first quarter of 2008. Accordingly, since our initial adoption of SFAS 157 on January 1, 2008, these
securities changed from Level 1 to Level 3 within SFAS 157’s hierarchy. The following table presents our assets
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS 157:
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auction rate securities rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses (realized or unrealized):
(Level 3)
(In thousands)
$
—
82,150
6,907
Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,565)
(4,716)
(11,700)
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,076
The amount of total losses for the period included in other comprehensive income
attributable to the change in unrealized losses relating to assets still held at
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (4,716)
78
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5.
Investments
The following tables summarize our investments as of the dates indicated:
Municipal securities (including auction rate securities). .
U.S. government agency securities . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost or
Amortized
Cost
$ 85,973
93,994
8,604
13,494
50,315
December 31, 2008
Gross
Unrealized
Gains
Losses
(In thousands)
$
23
1,309
295
—
155
$5,313
79
—
—
731
Estimated
Fair
Value
$ 80,683
95,224
8,899
13,494
49,739
$252,380
$1,782
$6,123
$248,039
Cost or
Amortized
Cost
Municipal securities (including auction rate securities) . . . . $114,123
42,727
U.S. government agency securities . . . . . . . . . . . . . . . . . . .
31,563
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,136
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,556
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007
Gross
Unrealized
Losses
Gains
(In thousands)
$36
$ 10
18
162
—
510
—
—
33
155
Estimated
Fair
Value
$114,097
42,871
32,073
29,136
24,678
The contractual maturities of our investments as of December 31, 2008 are summarized below.
$242,105
$837
$87
$242,855
Amortized
Cost
Estimated
Fair
Value
(In thousands)
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $102,327
87,071
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,230
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,752
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$102,293
87,672
1,146
56,928
$252,380
$248,039
Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under
the specific identification method and are included in investment income. Total proceeds from sales of available-
for-sale securities were $55.3 million, $13.1 million, and $12.6 million for the years ended December 31, 2008,
2007 and 2006, respectively. Net realized investment gains (losses) for the years ended December 31, 2008, 2007
and 2006 were $342,000, $(78,000) and $(151,000) respectively.
We monitor our investments for other-than-temporary impairment. For investments other than our municipal
securities, we have determined that unrealized gains and losses at December 31, 2008 and 2007 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.
79
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our investment in municipal securities consists primarily of auction rate securities. As described in Note 4,
“Fair Value Measurements,” the unrealized losses on these investments were caused primarily by the illiquidity in
the auction markets. Because the decline in market value is not due to the credit quality of the issuers, and because
we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do
not consider the auction rate securities that are designated as available-for-sale to be other-than-temporarily
impaired at December 31, 2008.
For investments presented in the table above, the disclosures required by FASB Staff Position Nos. FAS 115-1
and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,
have not been included because our unrealized losses were immaterial at December 31, 2007. 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, 2008.
In a Continuous Loss
Position
for Less than 12 Months
Estimated
Fair
Value
Unrealized
Losses
$41,901
$4,914
7,237
30,276
79
731
$79,414
$5,724
In a Continuous Loss
Position
for 12 Months or More
Estimated
Fair
Value
Unrealized
Losses
(In thousands)
Total
Estimated
Fair
Value
Unrealized
Losses
$—
—
$—
$—
—
—
$—
$41,901
$4,914
7,237
30,276
79
731
$79,414
$5,724
Municipal securities . . . . . .
U.S. government agency
securities . . . . . . . . . . . .
Corporate bonds . . . . . . . . .
6. Receivables
Accounts receivable by health plan operating subsidiary were as follows:
December 31,
2008
2007
(In thousands)
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,740
6,637
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,024
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,712
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,562
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,614
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,184
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,089
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,046
6,419
15,986
3,887
28,522
23,987
8,308
1,382
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $128,562
$111,537
Substantially all receivables due our California and Missouri health plans at December 31, 2008 were collected
in January 2009.
Ohio. As of December 31, 2008, the receivable due our Ohio health plan included two significant
components. The first is approximately $11.8 million of accrued birth income, net, due from the state of Ohio.
Birth income is a one-time payment for the delivery of a child from the Medicaid program in Ohio.
The second significant component of the Ohio receivable is approximately $20.6 million due from a capitated
provider group. Although we have a capitation arrangement with this provider group, our agreement with them calls
for us to pay for certain medical services incurred by the provider group’s members, and then to deduct the amount
80
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of such payments from future monthly capitation amounts owed to the provider group. Of the $20.6 million
receivable, approximately $14.0 million represents medical services we have paid on behalf of the provider group,
which we will deduct from capitation payments in the months of January and February 2009. The other component
of the Ohio receivable includes an estimate of our liability for claims incurred by members of this provider group,
not covered by capitation, for which we have not yet made payment. This amount totaled $6.6 million as of
December 31, 2008. The offsetting liability for the amount of this receivable established for claims incurred but not
paid is included in “Medical claims and benefits payable” in our consolidated balance sheets. As part of the
agreement with this provider group, our Ohio health plan has withheld approximately $7.7 million from capitation
payments due the group, and placed the funds in an escrow account. The Ohio health plan is entitled to the escrow
amount if the provider group is unable to repay amounts owed to us for these incurred but not reported claims. The
escrow account is included in “Restricted investments” in our consolidated balance sheets. During the quarter ended
December 31, 2008, our average monthly capitation payment to this provider group was approximately $12 million.
Utah. Our Utah health plan’s agreement with the state of Utah calls for the reimbursement of medical costs
incurred in serving our members plus an administrative fee of 9% of that medical cost amount, plus a portion of any
cost savings realized as defined in the agreement. Our Utah health plan bills the state of Utah monthly for actual paid
health care claims plus administrative fees. Our receivable balance from the state of Utah includes: (1) amounts
billed to the state for actual paid health care claims plus administrative fees; and (2) amounts estimated for incurred
but not reported claims, which, along with the related administrative fees, are not billable to the state of Utah until
such claims are actually paid. For amounts reimbursed by the state subsequent to December 31, 2008, the
administrative fee will be reduced to 8% of the medical cost amount.
7. Property and Equipment
A summary of property and equipment is as follows:
December 31,
2008
2007
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, equipment and automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized computer software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,461
25,047
47,074
56,211
$ 3,000
21,928
38,439
34,895
131,793
98,262
Less: accumulated depreciation and amortization on building and
improvements, furniture, equipment and automobiles . . . . . . . . . . . . . . . . .
Less: accumulated amortization on capitalized computer software costs . . . . .
(42,056)
(24,679)
(34,071)
(14,636)
(66,735)
(48,707)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,058
$ 49,555
Depreciation expense recognized for building and improvements, furniture, equipment and automobiles was
$9.0 million, $8.5 million, and $7.7 million for the years ended December 31, 2008, 2007, and 2006, respectively.
Amortization expense recognized for capitalized computer software costs was $11.7 million, $8.6 million, and
$4.3 million for the years ended December 31, 2008, 2007, and 2006, respectively.
8. Goodwill and Intangible Assets
Other intangible assets are amortized over their useful lives ranging from one to 15 years. The weighted
average amortization period for contract rights and licenses is approximately 11.5 years, and for provider network is
approximately 9.9 years. Amortization expense on intangible assets recognized for the years ended December 31,
81
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2008, 2007, and 2006 was $13.0 million, $10.8 million, and $9.5 million, respectively. We estimate that our
intangible asset amortization expense will be $11.6 million in 2009, $11.6 million in 2010, $10.4 million in 2011,
$8.3 million in 2012, and $5.9 million in 2013. The following table provides the details of identified intangible
assets, by major class, for the periods indicated:
Cost
Accumulated
Amortization
(In thousands)
Net
Balance
Intangible assets:
Contract rights and licenses . . . . . . . . . . . . . . . . . . . . . . . . . $114,219
14,548
Provider network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . $128,767
Intangible assets:
Contract rights and licenses . . . . . . . . . . . . . . . . . . . . . . . . . $111,892
14,548
Provider network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . $126,440
$46,160
3,474
$49,634
$34,775
1,889
$36,664
$68,059
11,074
$79,133
$77,117
12,659
$89,776
The changes in the carrying amount of goodwill and indefinite - lived intangible assets were as follows (in
thousands):
Balance as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,447
(6,150)
Goodwill adjustment related to acquisition of Mercy CarePlus . . . . . . . . . . . . . . . . . . . . .
2,169
Goodwill adjustment related to acquisition of Cape Health Plans . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,466
9. Restricted Investments
Pursuant to the regulations governing our subsidiaries, we maintain statutory deposits and deposits required by
state Medicaid authorities. Additionally, we maintain restricted investments as protection against the insolvency of
capitated providers. The following table presents the balances of restricted investments by health plan, and by our
insurance company:
December 31,
2008
2007
$
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(In thousands)
367
9,828
4,718
1,000
506
787
9,670
8,459
1,521
577
151
618
524
307
4,722
1,000
500
885
8,991
9,370
1,491
575
154
500
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,202
$29,019
82
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The increase in restricted investments at our Florida health plan relates primarily to an escrow deposit that will
be used for the purpose of reimbursing the state of Florida for any sums due under a final settlement agreement with
the state, under our purchase agreement with NetPASS, as discussed in Note 3, “Business Purchase Transactions.”
The contractual maturities of our held-to-maturity restricted investments as of December 31, 2008 are
summarized below.
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,485
4,572
145
—
$33,485
4,572
145
—
$38,202
$38,202
Amortized
Cost
Estimated
Fair Value
(In thousands)
10. Medical Claims and Benefits Payable
The following table presents the components of the change in our medical claims and benefits payable for the
years ended December 31, 2008 and 2007. The negative amounts displayed for “components of medical care costs
related to prior years” represent the amount by which our original estimate of claims and benefits payable at the
beginning of the period exceeded the actual amount of the liability based on information (principally the payment of
claims) developed since that liability was first reported. The benefit of this prior period development may be offset
by the addition of a reserve for adverse claims development when estimating the liability at the end of the period
(captured as “components of medical care costs related to current year”).
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical claims and benefits payable from business acquired . . . . . . . . . .
Components of medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2008
2007
(Dollars in thousands)
$ 311,606
—
$ 290,048
14,876
2,683,399
(62,087)
2,136,381
(56,298)
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,621,312
2,080,083
Payments for medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,413,128
227,348
1,851,035
222,366
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,640,476
2,073,401
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 292,442
$ 311,606
Benefit from prior period as a percentage of:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days in claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of members at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.9%
2.0%
2.4%
41
1,256,000
19.4%
2.3%
2.7%
52
1,149,000
83
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Long-Term Debt
Convertible Senior Notes
In October 2007, we completed our offering of $200.0 million aggregate principal amount of 3.75% Con-
vertible Senior Notes due 2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million.
The Notes rank equally in right of payment with our existing and future senior indebtedness.
The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial
conversion rate is 21.3067 shares of our common stock per one thousand dollar principal amount of the Notes. This
represents an initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain
corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion
rate in certain circumstances. Prior to July 2014, holders may convert their Notes only under the following
circumstances:
• During any fiscal quarter after our fiscal quarter ending December 31, 2008, if the closing sale price per
share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading
days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the
conversion price per share of our common stock;
• During the five business day period immediately following any five consecutive trading day period in which
the trading price per one thousand dollar principal amount of the Notes for each trading day of such period
was less than 98% of the product of the closing price per share of our common stock on such day and the
conversion rate in effect on such day; or
• Upon the occurrence of specified corporate transactions or other specified events.
On or after July 1, 2014, holders may convert their Notes at any time prior to the close of business on the
scheduled trading day immediately preceding the stated maturity date regardless of whether any of the foregoing
conditions is satisfied.
We will deliver cash and shares of our common stock, if any, upon conversion of each $1,000 principal amount
of Notes, as follows:
• An amount in cash (the “principal return”) equal to the sum of, for each of the 20 Volume-Weighted Average
Price (VWAP) trading days during the conversion period, the lesser of the daily conversion value for such
VWAP trading day and fifty dollars (representing 1/20th of one thousand dollars); and
• A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any
excess of the daily conversion value above fifty dollars.
See Note 20, “Subsequent Events,” for a discussion of our repurchase of a portion of the Notes.
As discussed in Note 2, “Significant Account Policies,” the FASB issued FSP APB 14-1 in 2008. The impact of
this new accounting guidance will result in an increase to non-cash interest expense related to the Notes beginning in
fiscal year 2009 for financial statements covering past and future periods.
Credit Facility
In 2005, we entered into the Amended and Restated Credit Agreement, dated as of March 9, 2005, among
Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”).
Effective May 2007, we entered into a third amendment of the Credit Facility that increased the size of the revolving
line of credit from $180.0 million to $200.0 million, maturing in May 2012. The Credit Facility is intended to be
used for working capital and general corporate purposes, and subject to obtaining commitments from existing or
new lenders and satisfaction of other specified conditions, we may increase the amount available under the Credit
Facility to up to $250.0 million.
84
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest rates on borrowings under the Credit Facility are based, at our election, on the London Interbank
Offered Rate, or LIBOR, or the base rate plus an applicable margin. The base rate equals the higher of Bank of
America’s prime rate or 0.500% above the federal funds rate. We also pay a commitment fee on the total unused
commitments of the lenders under the Credit Facility. The applicable margins and commitment fee are based on our
ratio of consolidated funded debt to consolidated earnings before interest expense, taxes, depreciation and
amortization, or EBITDA. The applicable margins range between 0.750% and 1.750% for LIBOR loans and
between 0.000% and 0.750% for base rate loans. The commitment fee ranges between 0.150% and 0.275%. In
addition, we are required to pay a fee for each letter of credit issued under the Credit Facility equal to the applicable
margin for LIBOR loans and a customary fronting fee. As of December 31, 2008 and 2007, there were no amounts
outstanding under the Credit Facility.
Our obligations under the Credit Facility are secured by a lien on substantially all of our assets and by a pledge
of the capital stock of our health plan subsidiaries (with the exception of our California health plan). The Credit
Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens,
mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital
expenditures, investments, and a fixed charge coverage ratio. The Credit Facility also requires us to maintain a ratio
of total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 at any time. At December 31,
2008, we were in compliance with all financial covenants in the Credit Facility.
12.
Income Taxes
The provision for income taxes consisted of the following:
2008
Year Ended December 31,
2007
(In thousands)
2006
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,972
6,916
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36,171
3,073
$24,987
3,143
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,888
39,244
28,130
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,886
(281)
(3,630)
(293)
(471)
(578)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,605
(3,923)
(1,049)
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
45
650
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
$41,493
$35,366
$27,731
A reconciliation of the effective income tax rate to the statutory federal income tax rate is as follows:
Taxes on income at statutory federal tax rate (35%) . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2008
Year Ended December 31,
2007
(In thousands)
$32,794
1,954
618
$36,362
4,313
818
$25,710
2,097
(76)
Reported income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,493
$35,366
$27,731
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
85
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in determining our 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, and local tax laws. We have pursued various strategies to reduce our federal, state and local taxes. As a result,
we have reduced our state income tax expense due to California enterprise zone credits.
During 2008, 2007, and 2006,
tax-related benefits (deficiencies) on share-based compensation were
$(292,000), $853,000 and $1.2 million, respectively. Such amounts were recorded as adjustments to income taxes
payable with a corresponding increase (decrease) to additional paid-in capital.
Deferred tax assets and liabilities are classified as current or non-current according to the classification of the
related asset or liability. Significant components of our deferred tax assets and liabilities as of December 31, 2008
and 2007 were as follows:
December 31,
2008
2007
(In thousands)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,785
1,046
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,724
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,979)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,194)
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,063
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,335
624
911
863
(2,783)
27
(165)
2,806
—
(2)
Deferred tax asset, net of valuation allowance — current . . . . . . . . . . . . . . . .
4,603
8,616
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
971
1,830
(10,698)
5,876
108
1,684
4,667
745
(695)
856
840
(14,453)
3,208
103
885
—
(882)
(693)
Deferred tax asset (liability) net of valuation allowance — long term . . . . . . .
4,488
(10,136)
Net deferred income tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,091
$ (1,520)
At December 31, 2008, we had federal and state net operating loss carryforwards of $422,000 and $10.9 mil-
lion, respectively. The federal net operating loss begins expiring in 2011, and state net operating losses begin
expiring in 2013. The utilization of the net operating losses is subject to certain limitations under federal and state
law.
We have determined that as of both December 31, 2008, and December 31, 2007, $695,000 of deferred tax
assets did not satisfy the recognition criteria set forth in SFAS 109. Accordingly, a valuation allowance has been
recorded for these amounts. This valuation allowance primarily relates to the uncertainty of realizing certain state
86
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
net operating loss carryforwards. In the future, if we determine that the realization of the net operating losses is more
likely than not, the reversal of the related valuation allowance will reduce the provision for income taxes.
During 2008, $7.4 million of net deferred tax assets were established with a corresponding reduction to
goodwill for certain acquired intangible assets in connection with the 2007 purchase of Mercy CarePlus.
Additionally during 2008, $2.2 million of deferred tax assets relating to the 2006 purchase of the Cape Health
Plan were derecognized which resulted in a corresponding increase to goodwill under purchase accounting.
Accruals for uncertain tax positions are provided for in accordance with the requirements of FIN 48. Pursuant
to FIN 48, tax benefits are recognized only if the tax position is “more likely than not” of being sustained. We are
subject to income taxes in the U.S. 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 audit. The provision for income taxes includes the impact of reserve provisions and changes to
reserves that are considered appropriate.
The roll forward of our unrecognized tax benefits is as follows (in thousands):
Gross unrecognized tax benefits at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in tax positions for current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse in statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(10,278)
(3,310)
2,682
(2,061)
892
—
399
Gross unrecognized tax benefits at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,676)
As of December 31, 2008, we had $11.7 million of unrecognized tax benefits of which $5.8 million, if fully
recognized, would affect our effective tax rate. We anticipate a decrease of $165,000 to our liability for
unrecognized tax benefits within the next twelve-month period due to normal expiration of tax statutes.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income
tax expense. As of December 31, 2008, and December 31, 2007, we had accrued $1.4 million and $638,000,
respectively, for the payment of interest and penalties.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for
calendar years 2005 through 2008. We are under examination, or may be subject to examination, in certain state and
local jurisdictions, with the major jurisdictions being California, Missouri, and Michigan, for the years 2004
through 2008. Our subsidiary, HCLB, is being examined by the IRS for the year ended May 2006. The IRS has
issued a notice of proposed adjustment to decrease HCLB’s compensation deductions and related tax loss for the
year ended May 2006 by approximately $16 million. If sustained, the reduction in the tax loss would increase taxes
payable by $5.4 million. Management disagrees with the IRS assessment and believes that adequate accruals have
been provided for the HCLB examination.
13. Employee Benefits
We sponsor a defined contribution 401(k) plan that covers 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
87
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognized in connection with our contributions to the 401(k) plan totaled $3.9 million, $3.6 million and
$2.5 million in the years ended December 31, 2008, 2007, and 2006, 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.
14. Related Party Transactions
We have an equity investment in a medical service provider that provides certain vision services to our
members. We account for this investment under the equity method of accounting because we have an ownership
interest in the investee that provides us with significant influence over operating and financial policies of the
investee. As of December 31, 2008 and 2007, our carrying amount for this investment totaled $3.6 million and
$3.5 million, respectively. During 2007, we paid this provider a $0.9 million network access fee that was fully
amortized as of June 30, 2008. During 2008, we advanced this provider $1.3 million, of which $417,000 remained
outstanding as of December 31, 2008. We expect to collect this outstanding advance in the first quarter of 2009. For
the years ended December 31, 2008, 2007 and 2006, we paid $15.4 million, $10.9 million, and $7.9 million,
respectively, for medical service fees to this provider.
We are a party to a fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific Hospital”). Pacific
Hospital is owned by Abrazos Healthcare, Inc., the shares of which are held as community property by the husband
of Dr. Martha Bernadett, our Executive Vice President, Research and Development. Amounts paid under the terms
of this fee-for-service agreement were $242,000, $157,000 and $357,000 for the years ended December 31, 2008,
2007 and 2006, respectively. We also have a capitation arrangement with Pacific Hospital, where we pay a fixed
monthly fee based on member type. We paid Pacific Hospital for capitation services totaling approximately
$3.8 million, $4.8 million and $1.7 million for the years ended December 31, 2008, 2007 and 2006, respectively. We
believe that both arrangements with Pacific Hospital are based on prevailing market rates for similar services. Also
as of December 31, 2008, we had an advance outstanding to Pacific Hospital totaling $23,000, which will offset
capitation payments in 2009.
15. Commitments and Contingencies
Leases
We lease office space, clinics, equipment, and automobiles under agreements that expire at various dates
through 2018. Future minimum lease payments by year and in the aggregate under all non-cancelable operating
leases, including those payments described in Note 14, “Related Party Transactions,” consist of the following
approximate amounts:
Year ending December 31,
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 15,514
15,321
14,883
13,771
11,954
40,867
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112,310
Rental expense related to these leases totaled $17.5 million, $18.1 million and $12.2 million for the years
ended December 31, 2008, 2007, and 2006, respectively.
88
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employment Agreements
During 2001 and 2002, we entered into employment agreements with three current executives with initial
terms of one to three years, subject to automatic one-year extensions thereafter. In most cases, should the executive
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 Target Bonus, as defined, for the year of termination, in addition to full vesting of 401(k) employer
contributions and stock options, and continued health and welfare benefits for the earlier of 18 months or the date
the executive receives substantially similar benefits from another employer. If any of the executives are terminated
for cause, no further payments are due under the contracts.
In most cases, if termination occurs within two years following a Change of Control, the employee will receive
two times their base salary and Target Bonus for the year of termination in addition to full vesting of 401(k)
employer contributions and stock options and continued health and welfare benefits for the earlier of three years or
the date the executive receives substantially similar benefits from another employer.
Executives who receive severance benefits, whether or not in connection with a Change of Control, will also
receive all accrued benefits for prior service including a pro rata Target Bonus for the year of termination.
Legal Proceedings
The health care industry is 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. The outcome of such legal actions is
inherently uncertain. Nevertheless, we believe that these actions, when finally concluded and determined, are not
likely to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Professional Liability Insurance
We carry medical malpractice insurance for health care services rendered through our clinics in California.
Claims-made coverage under this policy is $1.0 million per occurrence with an annual aggregate limit of
$3.0 million for each of the years ended December 31, 2008, 2007, and 2006. We also carry claims-made managed
care errors and omissions professional liability insurance for our HMO operations. This insurance is subject to a
coverage limit of $10.0 million per occurrence and $10.0 million in the aggregate for each policy year.
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 may lead 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 consolidated financial position, results of operations, or cash flows.
89
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Regulatory Capital and Dividend Restrictions
Our principal operations are conducted through our health plan subsidiaries operating in California, Florida,
Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Washington and Utah. Our health plans are subject to state
regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by
each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us as
the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the
financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations)
which may not be transferable to us in the form of loans, advances or cash dividends was $355.0 million at
December 31, 2008, and $332.2 million at December 31, 2007. The National Association of Insurance
Commissioners, or NAIC, adopted rules effective December 31, 1998, which, if implemented by the states, set
new minimum capitalization requirements for insurance companies, HMOs and other entities bearing risk for health
care coverage. The requirements take the form of risk-based capital (RBC) rules. Michigan, Nevada, New Mexico,
Ohio, Texas, Washington, and Utah have adopted these rules, which may vary from state to state. California has not
yet adopted NAIC risk-based capital requirements for HMOs and has not formally given notice of its intention to do
so. Such requirements, if adopted by California, may increase the minimum capital required for that state.
As of December 31, 2008, our health plans had aggregate statutory capital and surplus of approximately
$362.5 million compared with the required minimum aggregate statutory capital and surplus of approximately
$211.1 million. All of our HMOs were in compliance with the minimum capital requirements at December 31,
2008. We have the ability and commitment to provide additional capital to each of our health plans when necessary
to ensure that statutory capital and surplus continue to meet regulatory requirements.
16. Stock Plans
In 2002, we adopted the 2002 Equity Incentive Plan (the “2002 Plan”), which provides for the award of stock
options, restricted stock, performance shares, and stock bonuses to the company’s officers, employees, directors,
consultants, advisors, and other service providers. The 2002 Plan became effective upon our initial public offering
(“IPO”) of common stock in July 2003, and allowed for the issuance of 1.6 million shares of common stock.
Beginning January 1, 2004, shares eligible for issuance automatically increase by the lesser of 400,000 shares or 2%
of total outstanding capital stock on a fully diluted basis, unless the board of directors affirmatively acts to nullify
the automatic increase. There were 3.6 million shares reserved for issuance under the 2002 Plan as of January 1,
2008.
Restricted stock 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 five years from the date of grant. Stock
option awards have an 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 July 2002, we adopted the 2002 Employee Stock Purchase Plan (the “ESPP”), which also became effective
upon our IPO in July 2003. During each six-month offering period, 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 the
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. Under the ESPP, we issued 86,400 and 48,000 shares of our
common stock during the years ended December 31, 2008 and 2007, respectively. Beginning January 1, 2004, and
each year until the 2.2 million maximum aggregate number of shares reserved for issuance is reached, shares
available for issuance under the ESPP automatically increase by 1% of total outstanding capital stock. The number
of unissued common shares available for future grants under the 2002 Plan and the ESPP was 3.9 million and
3.6 million as of December 31, 2008 and 2007, respectively.
90
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table illustrates the components of our stock-based compensation expense as reported in general
and administrative expenses in the consolidated statements of income:
2008
Year Ended December 31,
2007
2006
Pretax
Charges
Net-of-Tax
Amount
Pretax
Charges
Net-of-Tax
Amount
Pretax
Charges
Net-of-Tax
Amount
(In thousands)
$5,171
$3,206
$3,751
$2,335
$2,257
$1,404
Restricted stock awards . . . . . . .
Stock options (including shares
issued under our ESPP) . . . . .
2,640
1,637
3,437
2,139
3,248
2,020
Total . . . . . . . . . . . . . . . . . . . . .
$7,811
$4,843
$7,188
$4,474
$5,505
$3,424
For both restricted stock and stock option awards, the expense is recognized over the vesting period, generally
straight-line over four years. As of December 31, 2008, there was $14.2 million of unrecognized compensation cost
related to unvested restricted stock awards, which we expect to recognize over a weighted-average period of
2.8 years. Also as of December 31, 2008, there was $1.8 million of unrecognized compensation expense related to
unvested stock options, which we expect to recognize over a weighted-average period of 1.6 years.
The total fair value of restricted shares vested during the years ended December 31, 2008, 2007, and 2006 was
$2.5 million, $2.6 million, and $2.0 million, respectively. Unvested restricted stock activity for the year ended
December 31, 2008 was as follows:
Weighted-
Average Grant Date
Fair Value
Shares
Unvested balance as of December 31, 2007 . . . . . . . . . . . . . . . . . . . .
235,413
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,000
(89,446)
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(67,012)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . .
470,955
$34.14
$30.96
$32.04
$33.75
$31.95
The total intrinsic value of stock options exercised during the years ended December 31, 2008, 2007, and 2006
amounted to $69,000, $4.3 million, and $3.8 million, respectively. Stock option activity for the year ended
December 31, 2008 was as follows:
Outstanding at December 31, 2007 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Options
733,713
12,000
(18,987)
(61,387)
Outstanding at December 31, 2008 . . . . . . . . . . . .
665,339
Weighted-
Average
Exercise
Price
$30.45
$33.57
$27.85
$33.70
$30.29
Exercisable and expected to vest at December 31,
2008(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
638,532
$30.21
Exercisable at December 31, 2008 . . . . . . . . . . . .
427,450
$29.87
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
(000s)
6.9
6.8
6.2
$87
$87
$87
(a) Stock options exercisable and expected to vest at December 31, 2008 information is based on a forfeiture rate
of 12.9%.
91
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of information about stock options outstanding and exercisable at December 31,
2008:
Range of Exercise Prices
$4.50 - $27.49. . . . . . . . . . . . . . .
$28.66 - $28.66 . . . . . . . . . . . . . .
$29.17 - $30.85 . . . . . . . . . . . . . .
$31.32 - $44.29 . . . . . . . . . . . . . .
Options Outstanding
Options Exercisable
Number
Outstanding
at
December 31,
2008
Weighted-
Average
Remaining
Contractual
Life (Years)
164,170
174,744
12,700
313,725
665,339
5.0
7.1
7.3
7.7
6.9
Weighted-
Average
Exercise
Price
$23.11
$28.66
$30.12
$34.95
$30.29
Number
Exercisable
at
December 31,
2008
161,053
113,100
7,682
145,615
427,450
Weighted-
Average
Exercise
Price
$23.08
$28.66
$29.97
$38.30
$29.87
In the year ended December 31, 2008, a total of 12,000 stock options were granted. The Black-Scholes
valuation model was used to estimate the fair value of stock options at grant date based on the assumptions noted in
the following table. The risk-free interest rate is based on the implied yield on U.S. treasury zero coupon issues for
the expected option term. The expected volatility is based on historical volatility levels of our common stock.
Beginning in the first quarter of 2008, we used an expected term for each option award based on historical
experience of employee post-vesting exercise and termination behavior. Prior to 2008, the expected option term of
each award granted was calculated using the “simplified method” in accordance with Staff Accounting
Bulletin No. 107. This change did not produce materially different valuation results for the stock options awarded
in 2008. The assumptions disclosed below represent a weighted-average of the assumptions used for all of our stock
option grants throughout each of the years presented.
Year Ended December 31,
2007
2006
2008
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant date weighted-average fair value . . . . . . . . . . . . . . . . . . . . . . . . $12.80
4
0%
2.5%
4.5%
45.3% 47.1%
6
0%
4.5%
53.1%
6
0%
$16.37
$16.01
17. Stockholders’ Equity
As described in Note 16, “Stock Plans,” we award shares of restricted stock to employees and others under our
equity incentive plan. When these shares vest, employees may choose to settle their associated tax obligation by
instructing us to withhold the number of shares that will settle the tax obligation based on the current market value of
the stock. When we settle tax obligations associated with the vesting of restricted stock awards in this manner, we
retire the stock used. During 2008, we retired 18,464 shares of common stock, totaling $555,000. During 2007, we
retired 14,391 shares of common stock, totaling $480,000.
In April 2008, our board of directors authorized the repurchase of up to $30 million of our common stock on
the open market or through privately negotiated transactions. We used working capital to fund the repurchases under
this program. The timing and amount of repurchases were primarily made pursuant to a Rule 10b5-1 trading plan
effective as of May 5, 2008, and terminated when the aggregate cost of the repurchases totaled $30 million on
June 12, 2008. During the quarter ended June 30, 2008, we repurchased approximately 1.1 million shares. These
shares were subsequently retired in 2008.
In July 2008, our board of directors authorized the repurchase of up to an additional one million shares of our
common stock. We used working capital to fund the repurchases under this program. The timing and amount of
92
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
repurchases were primarily made pursuant to a Rule 10b5-1 trading plan effective as of August 1, 2008. During the
third and fourth quarters of 2008, we repurchased approximately 812,000 shares for an aggregate purchase price of
$20 million. These shares were subsequently retired in 2008.
In December 2008, we filed a shelf registration statement on Form S-3 with the Securities and Exchange
Commission covering the issuance of up to $300 million of securities, including common stock or debt securities,
and up to 250,000 shares of our common stock, offered by selling stockholders. We may publicly offer securities
from time to time at prices and terms to be determined at the time of the offering.
See Note 20, “Subsequent Events,” regarding our share and convertible senior notes repurchase program that
began in 2009.
18. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2008 and
2007.
Premium revenue . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
For The Quarter Ended
March 31,
2008
June 30,
2008
September 30,
2008
December 31,
2008
(In thousands)
$729,638
24,451
22,179
13,155
$761,153
30,258
27,951
16,516
$791,554
30,429
28,449
17,186
$
$
0.46
0.46
$
$
0.59
0.59
$
$
0.63
0.62
$808,895
27,467
25,312
15,541
$
$
0.58
0.58
For The Quarter Ended
March 31,
2007
June 30,
2007
September 30,
2007
December 31,
2007
(In thousands)
$556,235
16,595
15,470
9,592
$607,127
22,284
21,559
13,314
$628,402
28,815
28,285
17,513
$
$
0.34
0.34
$
$
0.47
0.47
$
$
0.62
0.62
$670,605
30,633
28,382
17,911
$
$
0.63
0.63
(1) Potentially dilutive shares issuable pursuant to the Company’s 2007 offering of convertible senior notes were
not included in the computation of diluted net income per share because to do so would have been anti-dilutive
for the years ended December 31, 2008 and 2007.
93
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Condensed Financial Information of Registrant
Following are our parent company only condensed balance sheets as of December 31, 2008 and 2007, and our
condensed statements of income and condensed statements of cash flows for each of the three years in the period
ended December 31, 2008.
Condensed Balance Sheets
December 31,
2008
2007
(In thousands except per-
share data)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,776
9,745
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,119
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,762
13,247
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,228
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,877
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,471
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,721
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,364
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
568,224
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,869
20,477
Advances to related parties and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 36,286
61,970
—
4,072
6,705
9,234
118,267
37,448
1,742
—
548,931
1,583
19,933
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $748,003
$727,904
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,595
200,000
12,744
237,339
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,222
200,000
8,204
237,426
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized, outstanding 26,725 shares
at December 31, 2008 and 28,444 shares at December 31, 2007 . . . . . . . . . . . . . . .
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain (loss), net of tax. . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (1,201 shares, at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
28
—
146,179
(2,310)
387,158
(20,390)
—
185,808
272
324,760
(20,390)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510,664
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $748,003
490,478
$727,904
94
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Income
2008
Year Ended December 31,
2007
(In thousands)
2006
Revenue:
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $190,361
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
2,733
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$154,071
186
2,915
$120,036
144
1,361
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
193,271
157,172
121,541
21,759
143,709
18,980
22,042
114,616
15,101
20,764
91,347
10,162
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,448
151,759
122,273
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,823
(8,651)
5,413
(4,485)
(732)
(2,239)
Income (loss) before income taxes and equity in net income of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss before equity in net income of subsidiaries . . . . . . . . . . . . . . . . .
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172
1,260
(1,088)
63,486
928
2,333
(1,405)
59,735
(2,971)
(610)
(2,361)
48,088
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,398
$ 58,330
$ 45,727
95
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Cash Flows
2008
Year Ended December 31,
2007
(In thousands)
2006
$ 17,532
$ 23,500
$ 24,205
(51,260)
(20,613)
29,181
—
(17,723)
5,684
(2,996)
(57,727)
—
50,000
—
(5,000)
(459)
—
1,227
2,416
48,184
14,662
2,736
Operating activities:
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Net dividends from and capital contributions to subsidiaries . . . . . . . . . . .
Purchases of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid in business purchase transactions . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in amounts due to and due from affiliates . . . . . . . . . . . . . . . . .
Change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . .
Financing activities:
Treasury stock purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of convertible senior notes . . . . . . . . . . . . . . . . .
Repayments of amounts borrowed under credit facility . . . . . . . . . . . . . .
Payment of credit facility fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of convertible senior notes fees . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock compensation . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock plan
42,872
(25,515)
56,833
(1,000)
(33,047)
(6,542)
3,170
36,771
(49,940)
—
—
—
—
—
43
(16,890)
(74,604)
29,946
(80,045)
(20,159)
2,887
1,192
(157,673)
—
—
200,000
(45,000)
(551)
(6,498)
853
purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,084
4,257
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . .
(47,813)
153,061
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . .
6,490
36,286
18,888
17,398
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42,776
$ 36,286
$ 17,398
96
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Notes to Condensed Financial Information of Registrant
Note A — Basis of Presentation
Molina Healthcare, Inc. (Registrant) was incorporated on July 24, 2002. Prior to that date, Molina Healthcare
of California (formerly known as Molina Medical Centers) operated as a California HMO and as the parent
company for Molina Healthcare of Utah, Inc. and Molina Healthcare of Michigan, Inc. 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 parent company-only financial statements 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, cre-
dentialing, 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 2008, 2007, and 2006 for these services totaled $190.4 million, $154.1 million, and
$120.0 million, respectively, which are included in operating revenue.
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 — Capital Contribution and Dividends
During 2008, 2007, and 2006, the Registrant received dividends from its subsidiaries totaling $91.5 million,
$39.0 million, and $22.5 million, respectively. Such amounts have been recorded as a reduction to the investments
in the respective subsidiaries.
During 2008, 2007, and 2006, the Registrant made capital contributions to certain subsidiaries totaling
$48.6 million, $55.9 million, and $73.8 million, respectively, 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.
Note D — Related Party Transactions
The Registrant has an equity investment in a medical service provider that provides certain vision services to
its members. The Registrant accounts for this investment under the equity method of accounting because it has an
ownership interest in the investee in excess of 20%. As of December 31, 2008 and 2007, the Registrant’s carrying
amount for this investment totaled $3.6 million and $3.5 million, respectively. During 2007, the Registrant paid this
provider a $0.9 million network access fee that was fully amortized as of June 30, 2008. During 2008, the Registrant
advanced this provider $1.3 million, of which $417,000 remained outstanding as of December 31, 2008. We expect
to collect this outstanding advance in the first quarter of 2009. For the years ended December 31, 2008, 2007, and
2006, the Registrant paid $15.4 million, $10.9 million, and $7.9 million, respectively, for medical service fees to
this provider.
The Registrant is a party to a fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific
Hospital”). Pacific Hospital is owned by Abrazos Healthcare, Inc., the shares of which are held as community
97
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
property by the husband of Dr. Martha Bernadett, the Registrant’s Executive Vice President, Research and
Development. Amounts paid under the terms of this fee-for-service agreement were $242,000, $157,000, and
$357,000 for the years ended December 31, 2008, 2007, and 2006, respectively. The Registrant also has a capitation
arrangement with Pacific Hospital, where the Registrant pays a fixed monthly fee based on member type. The
Registrant paid Pacific Hospital for capitation services totaling approximately $3.8 million, $4.8 million and
$1.7 million for the years ended December 31, 2008, 2007, and 2006, respectively. The Registrant believes that both
arrangements with Pacific Hospital are based on prevailing market rates for similar services. Also as of Decem-
ber 31, 2008, the Registrant had an advance outstanding to this provider totaling $23,000 which will be offset to
capitation payments in 2009.
Note 20. Subsequent Events
In January 2009, the board of directors authorized the repurchase of up to $25 million in aggregate of either our
common stock or our 3.75% convertible senior notes due 2014. The repurchase program will be funded with
working capital, and repurchases may be made from time to time on the open market or through privately negotiated
transactions. The repurchase program extends through June 30, 2009, but we reserve the right to suspend or
discontinue the program at any time.
Under this program, we settled the repurchase of $13.0 million face amount of our convertible senior notes on
February 18, 2009 (see Note 11, “Long-Term Debt” for a description of the Notes). We repurchased the notes at an
average price of $74.25 per $100 principal amount, for a total of $9.6 million. Including accrued interest of
approximately $186,000, our total payment was $9.8 million.
Also under this program, we repurchased approximately 724,000 shares of our common stock for an aggregate
purchase price of $13.3 million (average cost of approximately $18.33 per share) during the period beginning
February 27, 2009, through March 13, 2009. As of March 13, 2009, we had $1.7 million remaining to spend under
this repurchase program. If we were to repurchase shares at an average cost of $20 per share, for example, this would
result in the repurchase of approximately 85,000 additional shares.
On March 1, 2009 we awarded 364,700 shares of restricted stock to our officers and employees, primarily in
connection with an annual recognition program. These shares will vest in equal annual installments over the four-
year period following the date of grant.
98
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.
Changes in Internal Controls: There were no changes in our internal control over financial reporting during
the three months ended December 31, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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, 2008. 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.
Based on our assessment, management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2008, based on those criteria.
The effectiveness of the Company’s internal control over financial reporting has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report appearing on the page
immediately following, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008.
Item 9B. Other Information
None.
99
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, 2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (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.
In our opinion, Molina Healthcare, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, 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, 2008 and 2007, and
the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008 and our report dated March 16, 2008 expressed an unqualified opinion thereon.
Los Angeles, California
March 16, 2009
/s/ ERNST & YOUNG LLP
100
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
(a) Directors of the Registrant
Information concerning our directors will appear in our Proxy Statement for our 2009 Annual Meeting of
Stockholders under “Proposal No. 1 — Election of Two Class I Directors.” This portion of the Proxy Statement is
incorporated herein by reference.
(b) Executive Officers of the Registrant
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 4 of Part I of this Annual Report on Form 10-K
under the caption “Executive Officers,” and will also appear in our Proxy Statement for our 2009 Annual Meeting of
Stockholders. Such portion of the Proxy Statement is incorporated herein by reference.
(c) Corporate Governance
Information concerning certain corporate governance matters will appear in our Proxy Statement for our 2009
Annual Meeting of Stockholders under “Corporate Governance,” “Corporate Governance and Nominating Com-
mittee,” “Corporate Governance Guidelines,” and “Code of Business Conduct and Ethics.” These portions of our
Proxy Statement are incorporated herein by reference.
(d) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of
a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC, and to
furnish us with copies of the forms. Purchases and sales of our equity securities by such persons are published on our
website at www.molinahealthcare.com. Based on our review of the copies of such reports, on our involvement in
assisting our reporting persons with such filings, and on written representations from our reporting persons, we
believe that, during 2008, each of our officers, directors, and greater than ten percent stockholders complied with all
such filing requirements on a timely basis, with the single exception of one Form 4 for our chief information officer,
Amir Desai, which due to an oversight we filed on August 18, 2008 with respect to a sale of 645 shares on July 28,
2008.
Item 11. Executive Compensation
The information which will appear in our Proxy Statement for our 2009 Annual Meeting under the captions
“Compensation Committee Interlocks,” “Non-Employee Director Compensation,” and “Compensation Discussion
and Analysis,” is incorporated herein by reference. The information which will appear in our Proxy Statement under
the caption “Compensation Committee Report” is not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information concerning the security ownership of certain beneficial owners and management will appear in
our Proxy Statement for our 2009 Annual Meeting of Stockholders under “Information About Stock Ownership.”
This portion of the Proxy Statement is incorporated herein by reference. The information required by this item
regarding our equity compensation plans is set forth in Part II, Item 5 of this report and incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning certain relationships and related transactions will appear in our Proxy Statement for
our 2009 Annual Meeting of Stockholders under “Related Party Transactions.” Information concerning director
101
independence will appear in our Proxy Statement under “Director Independence.” These portions of our Proxy
Statement are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services will appear in our Proxy Statement for our 2009
Annual Meeting of Stockholders under “Disclosure of Auditor Fees.” This portion of our Proxy Statement is
incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) The consolidated financial statements and exhibits listed below are filed as part of this report.
(1) The Company’s consolidated financial statements, the notes thereto and the report of the Inde-
pendent Registered Public Accounting Firm are on pages 60 through 98 of this Annual Report on Form 10-K
and are incorporated by reference.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — At December 31, 2008 and 2007
Consolidated Statements of Operations — Years ended December 31, 2008, 2007, and 2006
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2008, 2007, and
2006
Consolidated Statements of Cash Flows — Years ended December 31, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
(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.
102
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 16th day of March, 2009.
SIGNATURES
MOLINA HEALTHCARE, INC.
By: /s/
Joseph M. Molina, M.D.
Joseph M. Molina, M.D.
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.
Signature
Title
Date
/s/
/s/
/s/
/s/
/s/
/s/
/s/
/s/
/s/
Joseph M. Molina, M.D.
Joseph M. Molina, M.D.
Chairman of the Board, Chief Executive
Officer, and President (Principal Executive
Officer)
March 16, 2009
John C. Molina, J.D.
John C. Molina, J.D.
Director, Chief Financial Officer, and
Treasurer (Principal Financial Officer)
March 16, 2009
Joseph W. White, CPA, MBA
Joseph W. White, CPA, MBA
Charles Z. Fedak, CPA, MBA
Charles Z. Fedak, CPA, MBA
Frank E. Murray, M.D.
Frank E. Murray, M.D.
Steven Orlando, CPA
Steven Orlando, CPA
Sally K. Richardson
Sally K. Richardson
Ronna Romney
Ronna Romney
John P. Szabo, Jr.
John P. Szabo, Jr.
Chief Accounting Officer (Principal
Accounting Officer)
March 16, 2009
Director
March 16, 2009
Director
March 16, 2009
Director
March 16, 2009
Director
Director
March 16, 2009
March 16, 2009
Director
March 16, 2009
103
Number
Description
Method of Filing
INDEX TO EXHIBITS
3.1
Certificate of Incorporation
3.2
Amended and Restated Bylaws
4.1
Indenture dated as of October 11, 2008
4.2
4.3
10.1
First Supplemental Indenture dated as of October
11, 2008
Global Form of 3.75% Convertible Senior Note
due 2014
2000 Omnibus Stock and Incentive Plan
10.2
2002 Equity Incentive Plan
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Stock Option Agreement under 2002
Equity Incentive Plan
2002 Employee Stock Purchase Plan
2005 Molina Deferred Compensation Plan
adopted November 6, 2006
2005 Incentive Compensation Plan
Form of Restricted Stock Award Agreement
(Executive Officer) under Molina Healthcare, Inc.
2002 Equity Incentive Plan
Form of Restricted Stock Award Agreement
(Outside Director) under Molina Healthcare, Inc.
2002 Equity Incentive Plan
Form of Restricted Stock Award Agreement
(Employee) under Molina Healthcare, Inc. 2002
Equity Incentive Plan
10.10 Employment Agreement with J. Mario
Molina, M.D. dated January 2, 2002
10.11 Amendment to Employment Agreement with J.
Mario Molina dated July 1, 2006
10.12 Employment Agreement with John C. Molina
dated January 1, 2002
10.13 Employment Agreement with Mark L. Andrews
dated December 1, 2001
10.14 Change in Control Agreement dated June 15,
2006 with Terry Bayer
10.15 Change in Control Agreement dated May 29,
2008 with James W. Howatt, M.D.
10.16 Change in Control Agreement dated March 1,
2008 with Joseph White
10.17 Form of Indemnification Agreement
10.18 Amended and Restated Credit Agreement, dated
as of March 9, 2005, among Molina Healthcare,
Inc., as the Borrower, certain lenders, and Bank
of America, N.A., as Administrative Agent
Filed as Exhibit 3.2 to registrant’s Registration
Statement on Form S-1 filed December 30, 2002.
Filed as Exhibit 3.2 to registrant’s Form 8-K filed
February 17, 2009.
Filed as Exhibit 4.1 to registrant’s Form 8-K filed
October 5, 2008.
Filed as Exhibit 4.2 to registrant’s Form 8-K filed
October 5, 2008.
Filed as Exhibit 4.3 to registrant’s Form 8-K filed
October 5, 2008.
Filed as Exhibit 10.12 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.13 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.3 to registrant’s Form 10-K filed
March 14, 2007.
Filed as Exhibit 10.14 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.4 to registrant’s Form 10-Q filed
November 9, 2006.
Filed as Appendix A to registrant’s Proxy Statement
filed March 28, 2005.
Filed as Exhibit 10.1 to registrant’s Form 10-Q filed
August 9, 2005.
Filed as Exhibit 10.1 to registrant’s Form 10-Q filed
August 9, 2005.
Filed as Exhibit 10.1 to registrant’s Form 10-Q filed
August 9, 2005.
Filed as Exhibit 10.7 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.2 to registrant’s Form 10-Q filed
August 8, 2006.
Filed as Exhibit 10.8 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.9 to registrant’s Form S-1 filed
December 30, 2002.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
June 16, 2006.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
May 30, 2007.
Filed as Exhibit 10.15 to registrant’s Form 10-K
filed March 17, 2008.
Filed as Exhibit 10.14 to registrant’s Form 10-K
filed March 14, 2007.
Filed as Exhibit 10.1 to registrant’s current report on
Form 8-K filed March 10, 2005.
Number
Description
Method of Filing
10.19 First Amendment and Waiver to the Amended
and Restated Credit Agreement, dated as of
October 5, 2005, among Molina Healthcare, Inc.,
certain lenders, and Bank of America, N.A., as
Administrative Agent
10.20 Second Amendment and Waiver to the Amended
and Restated Credit Agreement, dated as of
November 6, 2006, among Molina Healthcare,
Inc., certain lenders, and Bank of America, N.A.,
as Administrative Agent
10.21 Third Amendment and Waiver to the Amended
and Restated Credit Agreement, dated as of May
25, 2008, among Molina Healthcare, Inc., certain
lenders, and Bank of America, N.A., as
Administrative Agent
31.1
12.1
21.1
23.1
10.22 Office Lease with Pacific Towers Associates for
200 Oceangate Corporate Headquarters.
Computation of Ratio of Earnings to Fixed
Charges
List of subsidiaries
Consent of Independent Registered Public
Accounting Firm
Section 302 Certification of Chief Executive
Officer
Section 302 Certification of Chief Financial
Officer
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.
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.
31.2
32.1
32.2
Filed as Exhibit 10.1 to registrant’s current report on
Form 8-K filed October 13, 2005.
Filed as Exhibit 10.1 to registrant’s Form 10-Q filed
November 9, 2006.
Filed as Exhibit 10.1 to registrant’s Form 8-K filed
May 31, 2008.
Filed as Exhibit 10.34 to registrant’s Form 10-K
filed March 17, 2008.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
200 Oceangate - Suite 100
Long Beach, California 90802
www.MolinaHealthcare.com
© 2009 Molina Healthcare, Inc.
All rights reserved.