Molina Healthcare

2009

Annual Report

About Us

Company Profile
Molina Healthcare, Inc. is 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 
individuals. At December 31, 2009, Molina Healthcare’s nine licensed health plan subsidiaries in California, Florida, 
Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington served approximately 1.45 million members. More 
information about Molina Healthcare can be obtained at www.MolinaHealthcare.com.

Historical Highlights

Membership 
(thousands)

Premium Revenues 
($ millions)

EBITDA
($ millions)

Earnings Per Share

1,455

1,256

$3,660

$3,091

1,149

$2,462

$146

$126

$2.15

$2.05

$96

$1.19

‘07

‘08

‘09

‘07

‘08

‘09

‘07

‘08

‘09

‘07

‘08

‘09

Annual Meeting

The annual meeting of stockholders will be held on 
Tuesday, May 4, 2010, 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

www.MolinaHealthcare.com

Financial Highlights

(Dollars in thousands, except per share data)

Revenue:

Premium revenue
Investment income
  Total operating revenue

Expenses:

Medical care costs
General and administrative expenses
Depreciation and amortization
  Total expenses

Gain on purchase of convertible senior notes
Operating income
Interest expense (1)

Income before income taxes (1)
Income tax expense (1)
Net income (1)

Net income per share: (1)

Basic
Diluted

Weighted average number of common shares and potentially  

dilutive common shares outstanding

Operating Statistics:

Ratio of medical care costs paid directly to providers to premium revenue
Ratio of medical care costs not paid directly to providers to premium revenue
Medical care ratio (2)
General and administrative expense 
  ratio excluding premium taxes 
  (core G&A ratio) (3)
Premium taxes included in G&A expense (3)
  Total general and administrative 

  expense ratio (3)

Depreciation and amortization expense ratio (3)
Effective tax rate (1)

Year Ended 
December 31,

2009

2008 (1)

$ 3,660,207
9,149
3,669,356

$ 3,091,240
21,126
3,112,366

3,176,236
399,149
38,110
3,613,495
1,532
57,393
(13,777)

43,616
12,748
30,868

1.19
1.19

$ 

$ 
$ 

2,621,312
344,761
33,688
2,999,761
–
112,605
(13,231)

99,374
39,776
59,598

2.15
2.15

$ 

$ 
$ 

25,984

27,772

84.8%
2.0
86.8%

7.5%
3.4

10.9%
1.0%
29.2%

82.3%
2.5
84.8%

8.0%
3.1

11.1%
1.1%
40.0%

(1)  The Company’s 2008 results have been recast to reflect the adoption of ASC Subtopic 470-20. This resulted in additional interest expense of $4.5 million for 

the year ended December 31, 2008.

(2)  Medical care ratio represents medical care costs as a percentage of premium revenue.
(3)  Computed as a percentage of total operating revenue.

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A1

 
 
 
 
 
To Our Stockholders

The difficulties that our state clients and health plan 
members faced in 2009 made last year a challenging 
one for Molina Healthcare as well. Amid the deepest 
recession  in  nearly  80  years,  we  witnessed  a  chain 
reaction  in  which  many  states  faced  severe  budget 
pressures and, in response, reduced premium rates or 
benefits for health programs we manage. At the same 
time, increasing rates of unemployment contributed 
to  substantial  enrollment  increases  that  in  turn  led 
to short-term increases in medical costs. In addition, 
the  H1N1  flu  epidemic,  which  disproportionately 
affected  the  segment  of  the  population  that  makes 
up the majority of our health plan membership, also 
caused our costs to rise. After a first quarter of solid 
financial  results  for  our  company,  the  combined 
effect of all of these factors steadily accumulated and 
ultimately affected our financial performance for the 
full year. 

While we are obviously disappointed with last year’s 
earnings,  we  believe  that  our  future  rests  on  a 
solid foundation. As a reflection of our competitive 
strength,  we  continue  to  win  new  business  —  such 
as the award of a contract to provide coverage in up 
to 170 counties in Texas under the Children’s Health 
Insurance  Program  —  and  contract  renewals  such 
as  in  Michigan,  where  we  will  expand  our  services 
from 42 to 46 counties under a new agreement that 
went into effect last October. Clearly, the recognized 
quality of our health plans positions us favorably for 
new business opportunities. In addition, we continue 
to diversify our revenue sources, both geographically 
and in our service offerings. Our acquisition of the 
Health  Information  Management  (HIM)  business 
unit  of  Unisys  Corporation,  announced  in  January 
2010,  adds  momentum  to  this  trend  along  with  a 
number of competitive advantages for our company.

In  2010,  Molina  Healthcare  observes  its  30th 
anniversary.  It  is  a  time  for  celebrating  how  we 
have  grown  from  a  small,  local  healthcare  provider 
into  an  organization  with  a  coast-to-coast  presence 
and  a  reputation  as  a  leader  in  our  field.  It  is  also 
a  time  for  noting  that  our  experience  is  deep  and 
reliable. During our three decades, we have learned 
how  to  manage  during  all  phases  of  the  economic 
cycle.  Based  on  that  experience,  we  believe  we  are 
making  the  appropriate  responses  to  the  current 
environment and that we have positioned ourselves 
advantageously for the future.

Weathering a Turbulent Economy

The  turbulence  in  the  U.S.  economy  was  the  single 
biggest challenge facing our industry in 2009. With 
unemployment  up  and  consumer  spending  down, 
state tax revenues experienced their sharpest decline 
in  nearly  half  a  century.  Revenue  shortages,  in 
turn,  created  large  gaps  for  those  states  that  are 
required  to  balance  their  budgets  each  year.  In 
response, some states in which we operate, including 
Michigan, Missouri, Washington, and New Mexico, 
cut  Medicaid  premium  rates.  Others  reduced 
benefits  they  cover  under  managed  care.  In  Ohio 
and  California,  rate  increases  mitigated  some  of 
the  effects  of  a  weak  economy.  Still,  premium  cuts 
created  an  overall  negative  impact  on  our  medical 
margins last year.

Nowhere  was  the  budget  crisis 
facing  state 
governments seen more acutely than in the state of 
California, where we manage health plans in five of 
the  state’s  58  counties.  Our  results  in  Los  Angeles, 
San  Diego,  and  Yolo  counties  were  particularly 
disappointing.  In  San  Diego  County,  we  have  been 
participating in the Access for Infants and Mothers, 
or AIM, program. As hospital costs have increased, 
premiums for the AIM program have not kept pace. 
In  Los  Angeles  County,  which  is  larger  than  the 
combined  Medicaid  markets  of  45  states,  we  have 
experienced  net  premium  decreases  in  the  face  of 
rising medical costs. 

In  response  to  these  challenges,  we  have  decided 
to  leave  Yolo  County  effective  February  2010  and 
to  leave  the  AIM  program  in  San  Diego  County 
effective  July  2010.  We  remain  committed  to  Los 
Angeles County, a market as large geographically as 
the state of Connecticut, and a county that we believe 
has enormous long-term potential. 

We also remain committed to the state of California 
as  a  whole,  and  not  merely  because  it  is  where 
Molina began. Even with the challenges the state now 
faces  —  challenges  that  we  share  simply  by  doing 
business  in  California  —  we  believe  our  presence 
will prove to be a strategic advantage over the long 
term.  California  has  roughly  7  million  Medicaid 
beneficiaries — more than any other state — and has 
the  country’s  second  largest  Medicaid  expenditure 
by state. Since all of the healthcare reform proposals 
currently  under  consideration  by  Congress  involve 

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Awareness

Molina  Healthcare  is  devoted  to  creating  awareness  about  important 
health issues that can help build healthier lifestyles. Whether it’s through 
a world record breaking attempt or an all-employee walking challenge, 
shedding  light  on  these  life-changing  topics  can  impact  lives  and 
encourage positive change.

Top  right:  Molina  Healthcare  and    Florida  International  University  in  Miami 
break the Guinness World Record for the most people yo-yoing simultaneously. 
Nearly  560  people  yo-yoed  together  in  an  effort  to  create  awareness  about  the 
adverse effects of yo-yo dieting. Bottom right: “We Heart Your Health” – During 
National Heart Health Month in February, health educators from several different 
states  teach  local  children  about  heart  health  and  demonstrate  how  to  prepare 
heart healthy snacks. The children are then encouraged to share these tips with 
their families, including parents and grandparents who may be more susceptible 
to heart disease.

 
 
 
 
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Health Education and Access

Molina Healthcare’s top priority is to provide the communities that we 
serve with access to high quality care. By reaching out to members in 
the community, including seniors, parents, children, and families, we are 
able  to  teach  them  how  to  live  healthier.  By  sending  health  educators 
to  schools  or  by  hosting  community  events,  Molina  Healthcare  is  a 
resource to its community.

Top  left:  Molina  Healthcare  of Washington  and  Compass  Health  break  down 
the  walls  between  physical  and  mental  health  care  by  partnering  to  establish 
a  clinic  that  provides  services  for  both.  Bottom  left:  Dr.  Amaro  from  Molina 
Medical Group educates Spanish-speaking viewers about the H1N1 vaccine via 
a live demonstration with a news anchor on Univision TV in Los Angeles. 

 
 
 
 
future Medicaid expansion, it is reasonable to believe 
that  a  healthcare  overhaul,  whenever  it  comes 
and  whatever  form  it  may  take,  will  benefit  states 
with  the  largest  Medicaid  enrollments,  such  as 
California,  Texas,  and  Florida.  We  have  worked 
in  California  for  three  decades,  and  we  know  the 
territory. We strongly believe that maintaining our 
focus on quality and efficiency, along with making 
changes  in  provider  contracting  and  utilization 
management  and  continuing  to  collaborate  with 
state agencies, is the right formula for success over 
time in this critical state.

Handling a Flu Season Like Few Others

A  confluence  of  circumstances  surrounding  last 
year’s  H1N1  flu  pandemic  also  adversely  affected 
our  results.  For  one  thing,  unlike  the  seasonal 
flu  for  which  we  prepare  each  year,  the  H1N1 
virus  posed  a  much  greater  health  risk  for  younger 
people  than  for  older  adults.  Nationwide,  the  great 
majority  of  our  members  are  young  mothers  and 
children.  Compounding  this  demographic  factor 
was  a  geographic  one.  In  California,  Washington, 
Michigan,  and  Ohio,  which  together  account  for 
more than 75% of our membership, the incidence of 
H1N1 exceeded the national average. More cases of 
flu translated into more patient care, which increased 
our medical care ratio.

Rising Unemployment and  
Rising Short-Term Costs

The economy affected our company in another way 
as  well,  as  rising  unemployment  throughout  2009 
drove  higher  enrollment  in  our  health  plans.  Last 
year,  we  witnessed  a  16%  increase  in  enrollment, 
compared  to  a  9%  increase  in  2008.  Historically, 
our  studies  have  shown  that  new  members  drive 
higher medical costs during their first nine months 
of enrollment.

HIM: Acquiring an Important Advantage

In  early  2010,  we  announced  our  entry  into  an 
agreement  to  acquire  the  Health  Information 
Management (HIM) business of Unisys Corporation. 
We believe that this acquisition will lay the foundation 
for an exciting new opportunity for our company. 

HIM,  which  like  Molina  has  been  serving  public 
sector healthcare programs for nearly 30 years, will 
be both a complementary and synergistic addition to 

our business. HIM provides state Medicaid programs 
with  business  process  outsourcing  and  Medicaid 
management  information  services  (MMIS)  which 
include  system  design,  development,  maintenance, 
integration, and consulting. The HIM business also 
provides  fiscal  agent  services  for  states,  including 
benefit plan and program management, member and 
provider  services,  claims  payment,  and  fraud  and 
abuse detection.

Last year, HIM generated approximately $110 million 
in  revenue  from  contracts  with  the  states  of  West 
Virginia,  New  Jersey,  and  Louisiana.  In  Maine  and 
Idaho,  the  HIM  business  is  also  in  the  process  of 
implementing  new  MMIS  systems.  In  acquiring 
the  HIM  business  for  $135  million  in  cash,  we  will 
also  assume  these  state  contracts  and  the  business’ 
intellectual  property.  We  also  expect  to  add  to  our 
company the approximately 900 employees of Unisys 
Corporation  who  have  been  operating  the  business 
up to now.

With HIM’s capabilities incorporated into our own, 
Molina  will  be  able  to  offer  states  a  comprehensive 
solution  previously  unavailable  in  the  marketplace. 
Our  two  largest  competitors  in  this  market  are 
information  technology  companies,  not  medical 
service providers or health plans. We believe Molina’s 
expertise  as  a  managed  care  organization  gives  us 
unique  knowledge  that  will  allow  us  to  integrate  a 
broad  array  of  health  services  delivery  information 
for states and to optimize efficiency in ways that will 
reduce costs.

Once  the  acquisition  is  finalized,  Molina  will  touch 
4.3 million Medicaid beneficiaries every day — nearly 
triple the number we reach with our health plans. As a 
result, we are greatly expanding our national footprint, 
and  we  believe  our  company  will  be  recognized  as 
a  leader  not  only  in  Medicaid  managed  care,  but 
throughout the entire Medicaid field.

The HIM acquisition also diversifies our product mix 
and revenue stream. In contrast to our health plans, in 
which we assume financial risk in managing the care 
of  individual  members,  we  will  provide  healthcare 
information  management  services  to  states  on  a 
non-risk,  fee-for-service  basis.  We  will  also  be  able 
to  pursue  two  segments  of  the  market  our  company 
has not addressed before: (1) states lacking Medicaid 
managed  care  programs,  and  (2)  states  that  did  not 
meet our managed care plan criteria for entry.

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A5

 
 
 
 
for  high  standards  of  quality,  we  continue  to  lead 
the  industry  in  holding  down  administrative  costs. 
Today, that expertise, accumulated over the span of 
three decades, remains a unique and powerful asset 
for our company. It positions us to succeed even in 
today’s  challenging  economic  environment  and  to 
emerge stronger than ever before.

Our mission — providing quality care in an efficient 
and  caring  manner  —  is  more  important  than 
ever.  Our  singular  strengths  give  us  a  unique 
opportunity. We intend to make the most of them 
in  ways  that  serve  taxpayers,  plan  members,  and 
you, our stockholders.

Sincerely,

J. Mario Molina, M.D.
President and Chief Executive Officer

Finally, HIM provides Molina with another platform 
for growth. Thirty-one states use mainframe systems 
that  are  no  longer  current;  many  are  more  than 
20  years  old.  Aging  systems,  combined  with  the 
Medicaid  Information  Technology  Architecture, 
or  MITA,  initiative  developed  by  the  Centers  for 
Medicare and Medicaid Services, make it likely that 
many  states  will  procure  new  systems  in  the  near 
future.  Because  HIM’s  state-of-the-art  systems  are 
already MITA-aligned, we are in an excellent position 
to compete for these new business opportunities.

Achieving a Qualitative Difference

For  us,  quality  has  long  been  both  a  point  of 
pride  and  a  point  of  distinction.  It  is  an  operating 
philosophy that is part of our company’s DNA as a 
member-centered organization that began as a direct 
provider of care to individuals.

Across  the  country,  just  22%  of  all  Medicaid 
plans  have  received  accreditation  by  the  National 
Committee  for  Quality  Assurance.  We  remain 
extremely  proud  that  each  of  our  eligible  health 
plans has earned NCQA accreditation. In 2009, our 
Ohio  and  Texas  health  plans  became  the  latest  to 
achieve  this  distinction.  As  we  commemorate  our 
30th anniversary, we will remain intensely focused 
on quality, not just as a heritage, but as a strategic 
imperative  that  builds  patient  and  physician 
satisfaction, wins new members to our health plans, 
and helps earn new and renewed contracts.

A Look Ahead

The financial headwinds that buffeted our economy, 
our state partners and our company in 2009 did not 
arise overnight. They will not subside overnight. Even 
as the overall economy shows signs of recovery, we 
anticipate that states will continue to face budgetary 
constraints during 2010.

For  the  near  term,  our  primary  goal  is  to  improve 
our profitability. Our founder, Dr. C. David Molina, 
often  said  that  ours  is  a  business  of  nickels  —  a 
business  that  requires  rigorous  attention  to  detail. 
In  keeping  with  that,  we  will  selectively  pursue 
opportunities  for  growth  and  diversification  that 
move  us  toward  that  goal.  Meanwhile,  while 
holding  quality  paramount,  we  will  aggressively 
act  on  opportunities  to  trim  unnecessary  costs 
from  our  business.  We  believe  we  are  exceptionally 
well  suited  to  this  task.  While  earning  recognition 

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A7

Community

Molina  Healthcare  is  committed  to  community  service  and  to  having  
a  positive  impact  on  the  communities  we  serve.  For  30  years,  we’ve 
built  meaningful  partnerships  with  community-based  organizations 
and  participated  in  engaging  outreach  efforts.  Molina  has  developed 
an innovative model of community service by actively contributing as a 
dedicated community member.

Top  right:  Molina  Medical  Group  launches  the  Neighborhood  Shuttle,  a 
community  van  that  provides  North  Long  Beach  residents  with  a  free  ride  to 
places  they  need  to  get  to  locally.  Popular  stops  include  the  church,  library, 
grocery store, pharmacy and doctor’s office. Bottom right: Community members 
collaborate  to  paint  a  mural  at  a  Molina  Medical  clinic  in  Long  Beach  in  an 
effort to beautify the city. Local students, employees and families were invited to 
participate in this hands-on project.

 
 
 
 
Officers & Key Executives 
J. Mario Molina, MD
Chairman of the Board, President and
Chief Executive Officer 

Terry P. Bayer, JD, MPH
Chief Operating Officer

Amir P. Desai
Vice President, Chief Information Officer

John C. Molina, JD
Chief Financial Officer

Mark L. Andrews, Esq.
Chief Legal Officer and Corporate Secretary

Board of Directors

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 and 
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
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

Common Stock
The common stock of Molina Healthcare, Inc. 
is  traded  on  the  New  York  Stock  Exchange 
(NYSE) under the symbol, MOH.

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. 

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A8

 
 
 
 
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, 2009

or

n

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

Commission File Number 1-31719

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). n 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. ¥

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 ¥

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). n Yes
¥ No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2009, the last business day of our
most recently completed second fiscal quarter, was approximately $255 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, 2009).

As of March 5, 2010, approximately 25,700,000 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding.

Portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders to be held on May 4, 2010, 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

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item X.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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.

Page

1
13
14
30
30
30
30

31
33
35
58
59
107
107
107

110
110

111
111
111

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112
113

PART IV

Item 1: Business

Overview

PART I

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 licensed health plans in the states of California, Florida,
Michigan, Missouri, 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 organi-
zation. 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 and state governments. Increasingly, we also
derive revenues from the federal Centers for Medicare and Medicaid Services, or CMS, in connection with our
Medicare services. As of December 31, 2009, approximately 1,455,000 members were enrolled in our health plans.

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 is thus
financially “at risk” for the medical care of its members. Each health plan contracts with health care providers in the
relevant communities or states in which it operates, including primary care physicians, specialist physicians,
physician groups, hospitals, and other medical care providers. These health care providers then provide medical
care to the health plan’s enrolled members. 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. Our California health plan also operates 17 of its own primary care community clinics; we have a
Virginia subsidiary which manages three county-owned primary care community clinics in Fairfax County,
Virginia; and our Washington health plan recently began operating its own behavioral health clinic.

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. Key milestones in our history have included the following:

Year

1980
1985
1994
1997
1999

2000
2003

2004
2005
2006

2007

Milestone

Molina Medical Centers founded in Los Angeles, California by Dr. C. David Molina
Obtained HMO license in California
Acquired minority interest in Michigan health plan
Utah health plan established as start-up operation
Incorporated in California as “American Family Care, Inc.,” parent of the California and Utah
health plan subsidiaries
Acquired controlling interest in Michigan and Washington health plans
Company name changed to Molina Healthcare, Inc., a California corporation
Reincorporated in Delaware, and completed initial public offering and listing of shares for trading
on the New York Stock Exchange under the symbol, MOH
Acquired the New Mexico health plan
Ohio health plan established as start-up operation
The California, Michigan, Utah, and Washington health plans began operating Medicare Advantage
Special Needs plans
Acquired the Cape Health Plan in Michigan, merging it into the Michigan health plan
Texas health plan established as start-up operation
The California, Michigan, New Mexico, Texas, Utah, and Washington health plans began enrolling
members in Medicare Advantage plans with prescription drug coverage, or MA-PD plans
Acquired the Missouri health plan

1

Year

2008

2009

The New Mexico and Texas health plans began operating Medicare Advantage Special Needs plans
Florida health plan established as a start-up operation
The Ohio health plan began operating a Medicare Advantage Special Needs plan

Milestone

On January 18, 2010, we entered into a definitive agreement to acquire the Health Information Management,
or HIM, business of Unisys Corporation. The HIM business provides design, development, implementation, and
business process outsourcing solutions to state governments for their Medicaid Management Information Systems,
or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement
programs. The HIM business currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New
Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida
Medicaid program. The acquisition is expected to close in the first half of 2010. We intend to operate the HIM
business under the name, Molina Medicaid Solutions.

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, or NYSE, rules, on
May 11, 2009, 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. Prior to the implementation of
the American Recovery and Reinvestment Act of 2009, or ARRA, the average matching rate that the federal government
paid was 57 percent nationwide; states contributed the remaining 43 percent. The federal matching rates have both a floor

2

(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 ARRA, enacted on February 17, 2009, states were scheduled to receive approximately
$87 billion in assistance for their Medicaid programs through a temporary increase in the FMAP match rate.
The funding is effective from October 1, 2008 to December 31, 2010. Under ARRA, every state has received
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 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 provided 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 a minimum federal amount of 65 percent.

On March 10, 2010, the United States Senate approved legislation which would allocate $25 billion to the
extension by six months of the 6.2% increase in the FMAP provided under ARRA. If this legislation is passed by the
House and signed into law by President Obama, the increased FMAP paid to the states will continue through
June 30, 2011.

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 capitation payments for the covered health care 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 2009, each of our health plans in California, Michigan, New Mexico, Ohio,
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 Medicare 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, 2009 was approximately 12,000 members. Our 2009 premium revenues
from Medicare across all health plans represented approximately 3.7% of our total premium revenues.

3

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, 2009, our
Washington health plan served approximately 20,000 such members under one such program, that state’s “Basic
Health Plan.”

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 30 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, in 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 16,000 of
Fairfax County’s uninsured residents. In 2010, our Washington health plan teamed with Compass Health to launch
Molina Medical at Compass Health, a treatment center focused on integrating primary care and behavioral health
services. 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 30 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

4

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 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
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 while delivering competitive returns for our investors.
We seek to provide quality care and accessible services in an efficient and caring manner to Medicaid, CHIP,
Medicare, and other financially vulnerable members. To achieve these objectives, 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 30 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, or 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, 2009, our health plans were located in California, Florida, Michigan, Missouri,
New Mexico, Ohio, Texas, Utah, and Washington. Additionally, we operate three county primary care clinics
in Virginia. As of December 31, 2009, we ceased serving members in Nevada. An overview of our health plans and
their principal governmental program contracts with the relevant state authority is provided below:

State

Expiration Date

Contract Description or Covered Program

California . . . .

3-31-12

California . . . .

12-31-12

California . . . .

3-31-11

California . . . .

6-30-10

California . . . .

6-30-10

Florida . . . . . .
Michigan . . . .
Missouri. . . . .
New Mexico. .

8-31-12
9-30-10
6-30-10
6-30-11

Ohio . . . . . . .

6-30-10

Texas . . . . . . .

8-31-10

Utah . . . . . . .
Washington . .

6-30-10
12-31-10

Washington . .

6-30-10

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
DHS.
Two Plan Model Medi-Cal contract for Riverside and San Bernardino
Counties (Inland Empire) with DHS.
Medi-Cal contract for San Diego Geographic Managed Care Program with
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.
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 and CHIP contracts 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, New Mexico, Ohio, 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, New Mexico, Ohio, Texas, Utah, and Washington have also
entered into a standardized form of contract with CMS with respect to their operations of a MA-PD plan. These
contracts are renewed annually and were most recently renewed as of January 1, 2010.

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.

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 per member
per month amount, or PMPM, with the PMPM 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. 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, 2009, our California health plan served 351,000 members. Our plan serves
the counties of Los Angeles, Riverside, San Bernardino, San Diego, and Sacramento. Our Medi-Cal members in

6

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. As of December 31, 2009, our Florida plan served approximately 50,000 members, and operated in

7 of the state’s 67 counties.

Michigan. As of December 31, 2009, our Michigan health plan served 223,000 members, and operated in

46 of the state’s 83 counties, including the Detroit metropolitan area.

Missouri. As of December 31, 2009, our Missouri health plan served 78,000 members, and operated in 57 of

the state’s 114 counties.

New Mexico. As of December 31, 2009, our New Mexico health plan served 94,000 members, and operated

in all of New Mexico’s 33 counties.

Ohio. As of December 31, 2009, our Ohio health plan served 216,000 members, and operated in 50 of the

state’s 88 counties.

Texas. As of December 31, 2009, our Texas health plan served 40,000 members, serving STAR and CHIP
members in 11 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
ABDs and includes a long-term care component.

Utah. As of December 31, 2009, our Utah health plan served 69,000 members including 4,000 Medicare
Advantage SNP members. Our Utah health plan serves Medicaid members in 25 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, and, as of December 31,
2009, provided comprehensive medical services to over 16,000 of the county’s uninsured residents.

Washington. As of December 31, 2009, our Washington health plan served 334,000 members, and operated
in 34 of the state’s 39 counties. In February 2010, our Washington health plan began operating a behavioral health
clinic under the name, Molina Medical at Compass Health.

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, 2009:

Primary Care
Physicians

Specialists

Hospitals

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,015
707
2,491
2,001
1,568
1,828
1,369
1,261
3,089

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,329

7,320
931
5,351
6,156
6,549
11,581
5,421
3,936
6,256

53,501

72
60
71
96
63
106
61
39
88

656

Physicians. We contract with both primary care physicians and specialists, many of whom are organized into
medical groups or independent practice associations, or IPAs. 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, and our Washington health plan recently opened a behavioral
health clinic.

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

8

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 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.

9

• 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 (such as those that may be
required by the Health Insurance Portability and Accountability Act of 1996, or 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, encompassing
traditional medical management and the improvement of our internal operations. We have staff assigned full-time to the
development and implementation of a uniform, efficient, and quality-based medical care delivery model for our health
plans. These employees coordinate and implement Company-wide programs and strategic initiatives such as preparation
of the HEDIS and accreditation by the NCQA. We use measures established by the NCQA in credentialing the physicians
in our network. We routinely use peer review to assess the quality of care rendered by providers. At December 31, 2009, all
of our eligible health plans were accredited by the NCQA. Our Missouri plan will begin the NCQA review and
accreditation process in 2010, and our Florida 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 second quarter of 2010.

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 the
competitive landscape is subject to ongoing changes as a result of business consolidations and new strategic
alliances. We compete with a large number of national, regional, and local Medicaid service providers, principally
on the basis of size, location, and quality of provider network, quality of service, and reputation. Competition can
vary considerably from state to state. 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.

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.

10

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 highly regulated by both state and federal government agencies. Regulation of managed
care products and health care services varies from jurisdiction to jurisdiction, and changes in applicable laws and
rules can occur frequently. Regulatory agencies generally have discretion to issue regulations and interpret and
enforce laws and rules.

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 operating health plans are licensed to operate as health maintenance organizations, or HMOs, in each
of California, Florida, Michigan, Missouri, 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 file quarterly reports on its operating results with the appropriate state
regulatory agencies. These reports are accessible for public viewing. Each health plan undergoes periodic
examinations and reviews by the state in which it operates. The health plans generally must obtain approval from
the state before declaring dividends in excess of certain thresholds. Each health plan must maintain its net worth at
an amount determined by statute or regulation. The minimum statutory net worth requirements differ by state, and
are generally based on statutory minimum risk-based capital, or RBC, requirements. The RBC requirements are
based on guidelines established by the National Association of Insurance Commissioners, or NAIC, and are
administered by the states. Our Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington health plans
are subject to RBC requirements. Any acquisition of another plan’s members or its state contracts must also be
approved by the state, and our ability to invest in certain financial securities may be prescribed by statute.

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

11

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 three 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.

Medicare. Medicare is a federal program that provides eligible persons age 65 and over and some disabled
persons a variety of hospital, medical insurance, and prescription drug benefits. Medicare is funded by Congress,
and administered by CMS. Medicare beneficiaries have the option to enroll in a Medicare Advantage plan. Under
Medicare Advantage, managed care plans contract with CMS to provide benefits that are comparable to original
Medicare in exchange for a fixed PMPM that varies based on the county in which a member resides, the
demographics of the member, and the member’s health condition.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, made numerous
changes to the Medicare program, including expanding the Medicare program to include a prescription drug benefit.
Since 2006, Medicare beneficiaries have had the option of selecting a new prescription drug benefit from an existing
Medicare Advantage plan. The drug benefit, available to beneficiaries for a monthly premium, is subject to certain
cost sharing depending upon the specific benefit design of the selected plan. Plans are not required to offer the same
benefits, but are required to provide coverage that is at least actuarially equivalent to the standard drug coverage
delineated in the MMA.

On July 15, 2008, the Medicare Improvements for Patients and Providers Act, or MIPPA, became law and, in
September 2008, CMS promulgated implementing regulations. MIPPA impacts a broad range of Medicare
activities and impacts all types of Medicare managed care plans. MIPPA and subsequent CMS guidance place

12

prohibitions and limitations on certain sales and marketing activities of Medicare Advantage plans. Among other
things, Medicare Advantage plans are not permitted to make unsolicited outbound calls to potential members or
engage in other forms of unsolicited contact, establish appointments without documented consent from potential
members, or conduct sales events in certain provider-based settings. MIPPA also establishes certain restrictions on
agent and broker compensation.

HIPAA.

In 1996, Congress enacted 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.

ARRA 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.

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, 2009, we had approximately 2,800 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 X: Executive Officers of the Registrant

J. Mario Molina, M.D., 51, 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., 45, 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 30 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., 52, 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, 59, 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 26 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

13

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, 63, 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.

Item 1A: Risk Factors

RISK FACTORS

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This annual report on Form 10-K and the documents we incorporate by reference in this report contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Other than statements of historical fact, all statements that we include in this report and in the documents we
incorporate by reference may be deemed to be forward-looking statements for purposes of the Securities Act and the
Exchange Act. Such forward-looking statements may be identified by words such as “anticipates,” “believes,”
“could,” “estimates,” “expects,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “will,” or
similar words or expressions.

Investing in our securities involves a high degree of risk. Before making an investment decision, you should
carefully read and consider the following risk factors, as well as the other information we include or incorporate by
reference in this report and the information in the other reports we file with the 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. 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.

14

Risks Related to our Health Plan Business

State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts or changes in
member eligibility thresholds or criteria which could compress our profit margins.

With the exception of the relatively small portion of our revenues which come from Medicare, nearly all of our
premium revenues come from the joint federal and state funding of the Medicaid and CHIP programs. Due to high
unemployment levels, Medicaid enrollment levels and Medicaid costs are continuing to increase at the same time
that state budgets are suffering from unprecedented deficits. In June 2009, 46.9 million members were enrolled in
the Medicaid program throughout the nation, nearly 3.3 million more than in June 2008, representing the largest
one-year increase since the inception of the Medicaid program. 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. The National Association of State Medicaid Directors estimates that state budget shortfalls in the coming
fiscal year, which begins in July in most states, will total $140 billion. Because Medicaid is one of the largest
expenditures in every state budget, and one of the fastest-growing, it will likely be a prime target for cost-
containment efforts. Thus, the sufficiency of the funding under our various state contracts, or the rates we expect to
be paid during the course of a year, will be in jeopardy during 2010 while the state budget crises persist. All of the
states in which we currently operate our health plans are currently facing significant budgetary pressures. Moreover,
because Medicaid enrollment often lags behind unemployment, increases in Medicaid enrollment in 2010 could be
even greater than it was in 2009, putting even greater pressure on state budgets.

As part of the American Recovery and Reinvestment Act of 2009, or ARRA, the federal government increased
the amount of funding for federal Medicaid matching by approximately $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 unem-
ployment rate. As a result of the passage of this legislation, the share of Medicaid costs that are paid for by the
federal government has gone up, and the share of costs that are paid for by the states has gone 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 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 and thresholds, 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. In addition, the $87 billion in increased Medicaid funding provided by ARRA will expire as of
December 31, 2010, in the middle of many states’ fiscal years. On March 10, 2010, the United States Senate
approved legislation which would allocate $25 billion to the extension by six months of the 6.2% increase in the
FMAP provided under ARRA. If this legislation is passed by the House and signed into law by President Obama, the
increased FMAP paid to the states will continue through June 30, 2011. Unless increased Medicaid funding similar
to that provided under ARRA is renewed, the impending loss of this federal funding may cause states to curtail their
health care programs or to slash membership in the middle of their fiscal year. Such an action could result in the
abrupt loss of a significant number of our enrollees.

Because of their budget deficits, some of the states in which we operate may unexpectedly reduce the rates paid
to our health plans or carve out certain elements of their Medicaid benefits, thereby undermining the assumptions
used to generate our earnings projections. For instance, effective October 1, 2009, the state of Missouri carved out
pharmacy from its Medicaid benefit package, and effective February 1, 2010 the state of Ohio did likewise with its
pharmacy benefit. The provision of this benefit by our Missouri and Ohio health plans, respectively, had previously
been a significant source of earnings for those health plans. Many states have moved to cut optional benefits in the
face of budgetary pressures. There is a risk that cutting such benefits may drive Medicaid patients into expensive
emergency rooms, further exacerbating the cost of the Medicaid program to a state. Any unexpected rate cuts or
changes in benefit packages could have a material adverse effect on our business, financial condition, cash flows, or
results of operations.

15

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
example, if our overall medical care ratio for 2009 of 86.8% had been one percentage point higher, or 87.8%, our
earnings for 2009 would have been $0.18 per diluted share rather than our actual 2009 earnings of $1.19 per diluted
share, an 85% 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. This was demonstrated in the third and fourth quarters of 2009, when our medical costs
exceeded our previous estimates as a result of much higher utilization due to widespread influenza-related illness
across the Company’s health plans, higher medical costs associated with our rapid enrollment growth and the higher
costs associated with new members, and higher emergency room costs. 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.

Our business may be negatively affected by the enactment of health care or health insurance reforms.

In response to 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 proposals include policy changes that
could 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 our enrollment
levels, our required payment of excise or premium taxes, our 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. One proposal for partially
financing the cost of health care reform is to assess an excise tax on the revenues of health plans based on their
market share. If adopted as proposed, such an excise tax would have a significant impact on our profitability.

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.

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

16

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 lines of business or populations, such as with respect to Medicare Advantage or ABD
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 2010 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 IBNP estimation methods we use and the resulting reserves that we establish are reviewed and updated,
and adjustments, if deemed necessary, are reflected in the current period. Given the numerous uncertainties inherent
in such estimates, our actual claims liabilities for a particular quarter or other period could differ significantly from
the amounts estimated and reserved for that quarter or period. Our actual claims liabilities have varied and will
continue to vary from our estimates, particularly in times of significant changes in utilization, medical cost trends,
and populations and markets served.

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.

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, 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. 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.

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, 2009, 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,

17

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, and our operations, liquidity, and capital resources could be
materially adversely affected.

Adverse equity and credit market conditions may have a material adverse affect on our liquidity or our
ability to obtain financing on acceptable terms.

The securities and credit markets have been experiencing significant volatility and disruption over the past
eighteen months. The availability of credit from virtually all types of lenders has been significantly affected. Such
conditions may persist throughout 2010. In the event we need access to additional capital to pay our operating
expenses, make payments on our indebtedness, pay capital expenditures, fund net worth requirements, or fund
acquisitions, our ability to obtain such capital may be limited and the cost of any such capital may be significant.

Our access to additional financing will depend on a variety of factors such as prevailing economic and equity
and credit market conditions, the general availability of credit, our credit ratings and credit capacity, and
perceptions of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities
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.

We derive our premium revenues from a relatively small number of state health plans.

We currently derive our premium revenues from nine state health plans. If we were unable to continue to
operate in any of those nine states, 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 an abrupt loss of
membership, significant rate reductions, a loss of a material contract, legislative actions, changes in Medicaid
eligibility methodologies, catastrophic claims, an epidemic 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 Florida, 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.

Minimum medical cost floors could limit our profitability.

Our New Mexico health plan is subject to a minimum medical expense level as a percentage of the premium
revenue it receives. Our Florida health plan is subject to minimum behavioral health expense levels as a percentage
of its behavioral health premium revenues. In both states, premium revenue recoupment may occur if these levels
are not met. In addition, our Ohio health plan is subject to certain limits on its administrative costs, and our Texas
health plan is required to pay an experience rebate to the state of Texas in the event its profits exceed certain
established levels. Other states may adopt similar medical cost floors. For instance, a proposal has been made in the

18

state of Washington to establish a minimum medical cost floor of 86% of premiums received. These regulatory
requirements or new requirements could limit our ability to increase or maintain our overall profits as a percentage
of revenues. Moreover, state governments may disagree with our interpretation or application of the contract
provisions governing these medical cost floor requirements, which could result in our having to adjust the amount of
our obligations under these provisions. Any changes to the terms of these provisions, or the adoption of new or
similar provisions, could adversely affect our business, financial condition, cash flows, or results of operations.

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 an 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 —
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

19

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.

In order to close on the acquisition of the HIM business, the parties must first obtain regulatory approvals from
each of the states of West Virginia, Louisiana, New Jersey, Idaho, Maine, and Florida, as well as various consents to
assignment of contract by various vendors. In addition, the parties must also satisfy numerous other conditions to
closing. There can be no assurances that the parties will be successful in obtaining the necessary state approvals or
contract assignments. In the event the parties are unable to satisfy all of the closing conditions, the Company may be
unable to close on its acquisition of the HIM business.

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 2006, we had total premium revenue of $2.0 billion. In fiscal year 2009, we
had total premium revenue of $3.7 billion, an increase of 84% 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.

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 government. The final amounts we ultimately
receive under government contracts may be different from the amounts we initially recognize in our financial statements.

20

Our business depends on our information and medical management systems, and our inability to
effectively integrate, manage, and keep secure our information and medical management systems, could
disrupt our operations.

Our business is dependent on effective and secure information systems that assist us in, among other things,
processing provider claims, monitoring utilization and other cost factors, supporting our medical management
techniques, and providing data to our regulators. Our providers also depend upon our information systems for
membership verifications, claims status, and other information. If we experience a reduction in the performance,
reliability, or availability of our information and medical management systems, our operations, ability to pay
claims, and ability to produce timely and accurate reports could be adversely affected. In addition, if the licensor or
vendor of any software which is integral to our operations were to become insolvent or otherwise fail to support the
software sufficiently, our operations could be negatively affected.

Our information systems and applications require continual maintenance, upgrading, and enhancement to
meet our operational needs. Moreover, our acquisition activity requires transitions to or from, and the integration of,
various information systems. If we experience difficulties with the transition to or from information systems or are
unable to properly implement, maintain, upgrade or expand our system, we could suffer from, among other things,
operational disruptions, loss of members, difficulty in attracting new members, regulatory problems, and increases
in administrative expenses.

Our business requires the secure transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in
compromises or breaches of our security systems and member data stored in our information systems. Anyone who
circumvents our security measures could misappropriate our confidential information or cause interruptions in
services or operations. The internet is a public network, and data is sent over this network from many sources. In the
past, computer viruses or software programs that disable or impair computers have been distributed and have
rapidly spread over the internet. Computer viruses could be introduced into our systems, or those of our providers or
regulators, which could disrupt our operations, or make our systems inaccessible to our members, providers, or
regulators. We may be required to expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. Because of the confidential health information we
store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and
loss. Our security measures may be inadequate to prevent security breaches, and our business operations would be
negatively impacted by cancellation of contracts and loss of members if security breaches are not prevented.

Because our corporate headquarters are located in Southern California, our business operations may be
significantly disrupted as a result of a major earthquake.

Our corporate headquarters is located in Long Beach, California. In addition, the claims of our health plans are
also processed in Long Beach. Southern California is exposed to a statistically greater risk of a major earthquake
than most other parts of the 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 disaster recovery plan will be
successful or that the business operations of all our health plans, including those that are remote from any such
event, would not be substantially impacted by a major Southern California earthquake.

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.

21

The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private
insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures,
some states may reduce rates paid to providers, which may further discourage participation in the Medicaid
program.

In some markets, certain providers, particularly hospitals, physician/hospital organizations, and some 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
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.

The insolvency of a delegated provider could obligate us to pay their referral claims which could have an
adverse effect on our business, cash flows, or results of operations.

Circumstances may arise where providers to whom we have delegated risk, due to insolvency or other
circumstances, are unable to pay claims they have incurred with third parties in connection with referral services
provided to our members. The inability of delegated providers to pay referral claims presents us with both
immediate financial risk and potential disruption to member care. Depending on states’ laws, we may be held liable
for such unpaid referral claims even though the delegated provider has contractually assumed such risk. 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 funds are frequently in the form of
segregated funds received from the provider and held by us or placed in a third-party financial institution. These
funds may be used to pay claims that are the financial responsibility of the provider in the event the provider is
unable to meet these obligations. However, there can be no assurances that these precautionary steps will fully
protect us against the insolvency of a delegated provider. Liabilities incurred or losses suffered as a result of
provider insolvency could have an adverse effect on our business, financial condition, cash flows, or results of
operations.

Regulatory actions and negative publicity regarding Medicaid managed care and Medicare Advantage
may lead to programmatic changes and intensified regulatory scrutiny and regulatory burdens.

Several of our health care competitors have recently been involved in governmental investigations and
regulatory actions which have resulted in significant volatility in the price of their stock. In addition, there has been
negative publicity and proposed programmatic changes regarding Medicare Advantage private fee-for-service
plans, a part of the Medicare Advantage program in which the Company does not participate. 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.

22

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 $15 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. 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.

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 subject to ongoing changes from
business consolidations, new strategic alliances, and aggressive marketing practices by other managed care
organizations. We compete for members principally on the basis of size, location, and quality of provider network,
benefits supplied, quality of service, and reputation. A number of these competitive elements are partially
dependent upon and can be positively affected by the financial resources available to a health plan. Many other
organizations with which we compete, including large commercial plans, have substantially greater financial and

23

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 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 subsid-
iaries 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, 2009, 2008, and 2007 without approval of the
regulatory authorities were approximately $9.0 million, $7.6 million, and $18.7 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
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.

24

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:

• state and federal budget pressures,

• 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,

• changes in government payment levels,

• adverse publicity regarding health maintenance organizations and other managed care organizations,

• government action regarding member eligibility,

• changes in state mandatory programs,

• conditions generally affecting the managed care industry or our provider networks,

• the success of our operating or acquisition strategy, including our acquisition of the HIM business of Unisys

Corporation,

• 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 maintain or initiate
research coverage of our Company and our shares, and this could depress the market for our shares.

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 57% 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. In

25

addition, any change in control of our state health plans would require the approvals of the applicable insurance
regulator in each state in which we operate.

Our certificate of incorporation and bylaws also contain provisions that could have the effect of delaying,
deferring, or preventing a change in control of our Company that stockholders may consider favorable or beneficial.
These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors
and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock. These provisions include:

• a staggered board of directors, so that it would take three successive annual meetings to replace all directors,

• prohibition of stockholder action by written consent, and

• advance notice requirements for the submission by stockholders of nominations for election to the board of

directors and for proposing matters that can be acted upon by stockholders at a meeting.

In addition, changes of control are often subject to state regulatory notification, and in some cases, prior approval.

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.

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, 2009, our investments in auction rate securities included amounts designated as
available-for-sale securities totaling $26.9 million par value (fair value of $23.0 million). As a result of the
changes in fair value of auction rate securities designated as available-for-sale, we recorded unrealized gains of
$0.8 million ($0.5 million, net of tax) to accumulated other comprehensive income for the year ended December 31,
2009, and we recorded unrealized losses of $7.6 million ($4.7 million, net of tax) to other comprehensive loss for the
year ended December 31, 2008. We deem the cumulative unrealized losses on these securities 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. If we determine
that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appro-
priate. For our investments in auction rate securities, we do not intend to sell, nor is it more likely than not that we
will be required to sell, these investments before recovery of their cost. However, if we were to sell these
investments before recovery of their cost, we would be required to record a charge to earnings for any accumulated
losses, which would impact our earnings for the quarter in which such event occurred.

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-ma-
turity. 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

26

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. 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.

Another flu epidemic in 2010 or other kind of epidemic in one or more of the states in which we operate
a health plan could significantly increase utilization rates and medical costs.

Our results during 2009 were significantly impacted by the widespread incidence of the H1N1 flu in the states
in which we operate our health plans. The recurrence in 2010 of the H1N1 flu, another variant of the flu, or the
outbreak and rapid spread of any other highly contagious and potentially virulent disease, could increase the
utilization rates among our members, resulting in significantly increased outpatient, inpatient, emergency room,
and pharmacy costs.

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.

Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our
profitability.

We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by changes in
the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and
liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws, including pending tax

27

law changes. In addition, we are subject to the routine examination of our income tax returns by the Internal Revenue
Service and other local and state tax authorities. We regularly assess the likelihood of outcomes resulting from these
examinations to determine the adequacy of our estimated income tax liabilities. Adverse outcomes from tax exam-
inations, or the accounting reversal of any tax benefits or revenue previously recognized by the Company, could have an
adverse effect on our provision for income taxes, estimated income tax liabilities, or results of operations.

We are dependent on our executive officers and other key employees.

Our operations are highly dependent on the efforts of our executive officers. The loss of their leadership, knowledge,
and experience could negatively impact our operations. Replacing many of our executive officers might be difficult or
take an extended period of time because a limited number of individuals in the managed care industry have the breadth
and depth of skills and experience necessary to operate and expand successfully a business such as ours. Our success is
also dependent on our ability to hire and retain qualified management, technical, and medical personnel. We may be
unsuccessful in recruiting and retaining such personnel which could negatively impact our operations.

Risks Related to the Operation of the Health Information Management Business

The following risk factors are contingent upon the successful closing of our acquisition of the HIM business of
Unisys Corporation, which is expected to close in the first half of 2010. We intend to operate the HIM business under
the name, Molina Medicaid Solutions.

We have not previously operated a health information management business.

Our Company and senior management personnel have not previously operated a health information man-
agement business such as the HIM business, and there may be various aspects of the business with which we are
unfamiliar. Although we expect most of the existing HIM business personnel to join our Company to continue to
operate the HIM business, our lack of familiarity with the day-to-day operational issues of the HIM business, as well
as our lack of experience in responding to requests for proposal to secure new HIM or MMIS business, may
negatively impact the growth, future prospects, and the overall profitability of the HIM business.

We may have difficulty integrating the HIM business and its operations.

In connection with the acquisition of the HIM business, we are hiring approximately 900 new employees. These
employees were not previously familiar with our operations or our corporate culture. In addition, to operate the HIM
business, we will be required to develop new internal controls, accounting policies, accounting infrastructure, reg-
ulatory schemes, compliance requirements, and disclosure controls. Our inability to effectively integrate the new HIM
business could have a material adverse effect on our business, financial condition, cash flows, or results of operations.

We may be unable to retain or renew the state government contracts of the HIM business on terms
consistent with our expectations or at all.

The HIM business currently has management contracts in only six states. If, after the closing, we were unable
to continue to operate in any of those six states, or if the HIM business’ current operations in any of those six states
were significantly curtailed, the revenues and cash flows of the HIM business could decrease materially, and as a
result our profitability would be negatively impacted.

If we have underestimated the operating cost and capital outlay projections for the HIM business, our
profitability could be adversely affected.

In negotiating the purchase price for the HIM business, we estimated the operating costs and capital outlays
required to operate the business as a Molina entity. In the event we have underestimated the costs associated with the
HIM business, the profitability of that business may be significantly less than expected.

28

Because of the complexity and duration of the services and systems required to be delivered under the
government contracts of the HIM business, there are substantial risks associated with full performance
under the contracts.

The state contracts of the HIM business typically require significant investment in the early stages that is
expected to be recovered through billings over the life of the contracts. These contracts involve the construction of
new computer systems and communications networks and the development and deployment of complex technol-
ogies. Substantial performance risk exists under each contract. Some or all elements of service delivery under these
contracts are dependent upon successful completion of the design, development, construction, and implementation
phases. Any increased or unexpected costs or unanticipated delays in connection with the performance of these
contracts, including delays caused by factors outside our control, could make these contracts less profitable or
unprofitable, which could have an adverse effect on our overall business, financial conditions, cash flows, or results
of operations.

If we fail to comply with our state government contracts or government contracting regulations, our
business may be adversely affected.

The contracts of the HIM business with state government customers may include unique and specialized
performance requirements. In particular, contracts with state government customers are subject to various
procurement regulations, contract provisions, and other requirements relating to their formation, administration,
and performance. Any failure to comply with the specific provisions in our customer contracts or any violation of
government contracting regulations could result in the imposition of various civil and criminal penalties, which may
include termination of the contracts, forfeiture of profits, suspension of payments and the imposition of fines, and
suspension from future government contracting. Further, any negative publicity related to the HIM business’ state
government contracts or any proceedings surrounding them may damage our business by affecting our ability to
compete for new contracts. The termination of a state government contract, our suspension from government work,
or any negative impact on our ability to compete for new contracts, could have an adverse effect on our business,
financial conditions, cash flows, or results of operations.

System security risks and systems integration issues that disrupt our internal operations or information
technology services provided to customers could adversely affect our financial results or damage our
reputation.

Experienced computer programmers and hackers may be able to penetrate our network security and mis-
appropriate our confidential information or that of third parties, create system disruptions or cause shutdowns.
Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious
software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In
addition, sophisticated hardware and operating system software and applications that we produce or procure from
third parties may contain defects in design or manufacture, including “bugs” and other problems that could
unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems,
bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and the efforts
to address these problems could result in interruptions, delays, cessation of service, and loss of existing or potential
government customers.

The HIM business routinely processes, stores, and transmits large amounts of data for our clients, including
sensitive and personally identifiable information. Breaches of our security measures could expose us, our
customers, or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and
potential liability for us and damage to our brand and reputation. Accordingly, we could lose existing or potential
government customers for outsourcing services or other information technology solutions or incur significant
expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in our
products. In addition, the cost and operational consequences of implementing further data protection measures
could be significant.

Portions of our information technology infrastructure also may experience interruptions, delays, or cessations
of service or produce errors in connection with systems integration or migration work that takes place from time to

29

time. We may not be successful in implementing new systems and transitioning data, which could cause business
disruptions and be more expensive, time consuming, disruptive, and resource-intensive. Such disruptions could
adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins, or lost
government customers resulting from these disruptions could adversely affect our financial results, reputation, and
stock price.

Item 1B: Unresolved Staff Comments

There are no unresolved comments from the staff of the Securities and Exchange Commission which were

received more than 180 days before the end of our 2009 fiscal year.

Item 2: Properties

We lease a total of 51 facilities, including our corporate headquarters at 200 Oceangate in Long Beach,
California. We own a 32,000 square-foot office building in Long Beach, California, our 26,000 square-foot data
center in Albuquerque, New Mexico, and one of the community 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: Reserved

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

2009

High

Low

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.74
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.75
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.05
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.49

2008

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44.94
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42.61
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32.45

$16.22
$18.11
$19.36
$17.05

$23.46
$22.68
$24.08
$16.12

As of March 5, 2010, there were 116 holders of record of our common stock. We did not declare or pay any
dividends in 2009, 2008, or 2007. 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, 2009)

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)

650,739(1)

$30.25

3,801,382(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, 2010 increased the total number of shares reserved for
issuance under the 2002 Incentive Plan to 4,400,000 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 was reached on December 31, 2008, shares reserved for
issuance under the ESPP automatically increased by 1% of total outstanding capital stock.

31

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, 2004 to December 31, 2009. 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 5 YEAR CUMULATIVE TOTAL RETURN*
Among Molina Healthcare, Inc, The S&P 500 Index
And A Peer Group

$160

$140

$120

$100

$80

$60

$40

$20

$0

12/04

12/05

12/06

12/07

12/08

12/09

Molina Healthcare, Inc.

S&P 500

Peer Group

* $100 invested on 12/31/04 in stock or index,

including reinvestment of dividends. Fiscal year ending

December 31.

32

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, 2009 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.

2009

Year Ended December 31,
2007(1)(2)

2008(1)

2006(3)

2005

Statements of Income Data:
Revenue:
Premium revenue . . . . . . . . . . . . . . . . $ 3,660,207
9,149
Investment income . . . . . . . . . . . . . . .

$ 3,091,240
21,126

$ 2,462,369 $ 1,985,109 $ 1,639,884
10,174

19,886

30,085

Total revenue . . . . . . . . . . . . . . . . . . .
Expenses:
Medical care costs . . . . . . . . . . . . . . .
General and administrative expenses . .
Loss contract charge . . . . . . . . . . . . . .
Impairment charge on purchased

software(4) . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . .

3,669,356

3,112,366

2,492,454

2,004,995

1,650,058

3,176,236
399,149
—

2,621,312
344,761
—

2,080,083
285,295
—

1,678,652
229,057
—

1,424,872
163,342
939

—
38,110

—
33,688

782
27,967

—
21,475

—
15,125

Total expenses . . . . . . . . . . . . . . . . . .

3,613,495

2,999,761

2,394,127

1,929,184

1,604,278

Gain on purchase of convertible senior
notes. . . . . . . . . . . . . . . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . .
Provision for income taxes . . . . . . . . .

1,532

57,393
(13,777)

43,616
12,748

—

112,605
(13,231)

99,374
39,776

—

98,327
(5,605)

92,722
34,996

—

75,811
(2,353)

73,458
27,731

Net income . . . . . . . . . . . . . . . . . . . . . $

30,868

$

59,598 $

57,726 $

45,727 $

—

45,780
(1,929)

43,851
16,255

27,596

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . $

Diluted . . . . . . . . . . . . . . . . . . . . . . $

1.19 $

1.19 $

2.15 $

2.15 $

2.04 $

2.03 $

1.64 $

1.62 $

1.00

0.98

Weighted average number of common
shares outstanding . . . . . . . . . . . . . .

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) . . . . . . . . . . . . . . . . . . . .

25,843,000

27,676,000

28,275,000

27,966,000

27,711,000

25,984,000

27,772,000

28,419,000

28,164,000

28,023,000

86.8%

84.8%

84.5%

84.6%

86.9%

10.9%

11.1%

11.5%

11.4%

7.5%

8.0%

8.2%

8.4%

9.9%

7.1%

1,455,000

1,256,000

1,149,000

1,077,000

893,000

33

2009

2008(1)

2007(1),(2)

2006(3)

2005

As of December 31,

Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (including current

maturities) . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . .

$ 469,501
1,245,235

$ 387,162
1,148,068

$ 459,064
1,170,016

$403,650
864,475

$249,203
659,927

158,900
702,497
542,738

164,873
616,306
531,762

160,166
655,640
514,376

45,000
444,309
420,166

—
297,077
362,850

(1) The consolidated balance sheet and operating results have been recast to reflect the adoption of FASB ASC
Subtopic 470-20, Debt with Conversion and Other Options. The cumulative adjustments to reduce retained
earnings were $3.4 million as of January 1, 2009, and $604,000 as of January 1, 2008. Additionally, interest
expense increased $4.5 million for the year ended December 31, 2008, and $1.0 million for the year ended
December 31, 2007.

(2) The balance sheet and operating results of the Mercy CarePlus acquisition, relating to our Missouri health plan,

have been included since November 1, 2007, the effective date of the acquisition.

(3) The balance sheet and operating results of the Cape Health Plan acquisition, relating to our Michigan health

plan, have been included since May 15, 2006, 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.

34

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.

Adoption of Convertible Debt Accounting

Our 2008 and 2007 consolidated financial statements have been recast to reflect the adoption of FASB
Accounting Standards Codification (ASC) 470-20, Debt with Conversion and Other Options. This resulted in
additional interest expense of $4.5 million ($0.10 per diluted share) for the year ended December 31, 2008, and
$1.0 million ($0.02 per diluted share) for the year ended December 31, 2007.

Overview

Molina Healthcare, Inc. is 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 individuals. We conduct our business primarily through licensed health plans in the states of California,
Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. Effective December 31, 2009, we
terminated operations at our small Medicare health plan in Nevada. The health plans are locally operated by our
respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organi-
zation, or HMO.

On January 18, 2010, we entered into a definitive agreement to acquire the Health Information Management,
or HIM, business of Unisys Corporation. The HIM business provides design, development, implementation, and
business process outsourcing solutions to state governments for their Medicaid Management Information Systems,
or MMIS, a core tool used to support the administration of state Medicaid and other health care entitlement
programs. The HIM business currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New
Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida
Medicaid program. The acquisition is expected to close in the first half of 2010. We intend to operate the HIM
business under the name, Molina Medicaid Solutions.

Our financial performance for 2009, 2008, and 2007 is briefly summarized below (dollars in thousands, except

per-share data):

Year Ended December 31,
2008

2007

2009

1.19
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . $
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,660,207
57,393
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
30,868
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Medical care ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G&A expenses as a percentage of total revenue . . . . . . . .
Total ending membership . . . . . . . . . . . . . . . . . . . . . . . . .

1,455,000

86.8%
10.9%

2.15
$
$3,091,240
$ 112,605
59,598
$

2.03
$
$2,462,369
98,327
$
57,726
$

84.8%
11.1%

84.5%
11.5%

1,256,000

1,149,000

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, 2009, 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 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 CHIP members of the are generally among our lowest, with rates as low as

35

approximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the
TANF Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums
range between approximately $100 in California to over $240 in Ohio. Among our Medicaid ABD membership,
PMPM premiums range from approximately $320 in Utah to over $1,000 in Ohio. Contributing to the variability in
Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care
contract (most often pharmacy and catastrophic case benefits) and retain responsibility for those benefits at the state
level. Medicare premiums are almost $1,200 PMPM, with Medicare revenue totaling $135.9 million, $95.1 million,
and $49.3 million, for the years ended December 31, 2009, 2008, and 2007, respectively.

For the year ended December 31, 2009, we 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 California
(effective October 1, 2009), Michigan, Missouri, Ohio, Texas, Utah (effective September 1, 2009), and Washington.
Such payments are recognized as revenue in the month the birth occurs. Approximately 2.5% of our premium
revenue for the year ended December 31, 2009 was realized under a Medicaid cost-plus reimbursement agreement
with the state of Utah that ended effective August 31, 2009. Effective September 1, 2009, the Utah health plan’s
contract with the state of Utah became a prepaid capitation contract, under which the plan is now paid a fixed
PMPM amount, as in the other states in which we operate.

Certain components of premium revenue are subject to accounting estimates. Chief among these are:

• Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health. A portion of premium revenue
paid to our Florida health plan by the state of Florida may be refunded to the state if certain minimum amounts
are not spent on defined behavioral health care costs. At December 31, 2009, we had not recorded any liability
under the terms of this contract provision. If the state of Florida disagrees with our interpretation of the existing
contract terms, an adjustment to the amounts owed may be required. Any changes to the terms of this provision,
including revisions to the definitions of premium revenue or behavioral health care costs, the period of time
over which performance is measured or the manner of its measurement, or the percentages used in the
calculations, may affect the profitability of our Florida health plan.

• New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit Ceilings
(Maximums): A portion of premium revenue paid to our New Mexico health plan by the state of
New Mexico may be refunded to the state if certain minimum amounts are not spent on defined medical
care costs, or if administrative costs or profit (as defined) exceed certain amounts. 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. 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: (a) expend on administrative
costs; and (b) retain as profit. At December 31, 2009, we had not recorded any liability under the terms of
these contract provisions. If the state of New Mexico disagrees with our interpretation of the existing
contract terms, an adjustment to the amounts owed may be required. 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 affect the profitability of our New Mexico health plan.

• New Mexico Health Plan At-Risk Premium Revenue: Under our contract with the state of New Mexico, up
to 1% of our New Mexico health plan’s revenue may be refundable to the state if certain performance
measures are not met. These performance measures are generally linked to various quality of care and
administrative measures dictated by the state. Through December 31, 2009, our New Mexico health plan had
received $3.6 million in at-risk revenue for state fiscal year 2009 and the first half of state fiscal year 2010
combined. We have recognized $2.2 million of that amount as revenue through December 31, 2009, and
recorded a liability of approximately $1.4 million for the remainder.

• Ohio Health Plan At-Risk Premium Revenue: 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. These
performance measures are generally linked to various quality of care measures dictated by the state. Through
December 31, 2009, our Ohio health plan had received $8.8 million in at-risk revenue for state fiscal year 2009

36

and the first half of state fiscal year 2010 combined. We have recognized $7.5 million of that amount as revenue
through December 31, 2009 and recorded a liability of approximately $1.3 million for the remainder.

• Utah Health Plan Premium Revenue: Our Utah health plan may be entitled to receive additional premium
revenue from the state of Utah as an incentive payment for saving the state of Utah money in relation to
fee-for-service Medicaid. 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 assert its claim to the amounts believed to be due under the savings share agreement. When
additional information is known, or resolution 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. No receivables for
saving sharing revenue have been established at December 31, 2009 and 2008.

• Texas Health Plan Premium Revenue: The contract entered into between our Texas health plan and the
state of Texas includes a profit-sharing agreement, where we pay a rebate to the state of Texas if our Texas
health plan generates pretax income above a certain specified percentage, as determined in accordance with
a tiered rebate schedule. We are limited in the amount of administrative costs that we may deduct in
calculating the rebate, if any. As of December 31, 2009, we had an aggregate liability of approximately
$2.0 million accrued pursuant to our profit-sharing agreement with the state of Texas for the 2009 and 2010
contract years (ending August 31 of each year). During 2009, we paid the state of Texas $4.9 million relating
to the 2008 and 2009 contract years, and the 2008 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.

• Texas Health Plan At-Risk Premium Revenue: Under our contract with the state of Texas, up to 1% of our
Texas health plan’s revenue may be refundable to the state if certain performance measures are not met.
These performance measures are generally linked to various quality of care measures dictated by the state.
Through December 31, 2009, our Texas health plan had received $1.7 million in at-risk revenue for state
fiscal year 2009 and the first half of state fiscal year 2010 combined. We have recognized $1.2 million of that
amount as revenue through December 31, 2009, and recorded a liability of approximately $0.5 million for
the remainder.

• Medicare Premium Revenue: Based on member encounter data that we submit to CMS, our Medicare
revenue is subject to retroactive adjustment for both member risk scores and member pharmacy cost
experience for up to two years after the original year of service. This adjustment takes into account the
acuity of each member’s medical needs relative to what was anticipated when premiums were originally set for
that member. In the event that a member requires less acute medical care than was anticipated by the original
premium amount, CMS may recover premium from us. In the event that a member requires more acute medical
care than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A
similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. 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. Based upon our knowledge of
member health care utilization patterns we have recorded a liability of approximately $0.6 million related to
the potential recoupment of Medicare premium revenue at December 31, 2009.

37

Historically, membership growth has been the primary reason for our increasing annual premium revenues,
although more recently our revenues have also grown due to the more care-intensive benefits and related higher
premiums 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of December 31,
2008

2007

2009

351,000
50,000
223,000
78,000
94,000
216,000
40,000
69,000
334,000

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

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,000

1,256,000

1,149,000

Total Ending Membership by State for our Medicare

Advantage Special Needs Plans:

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,100
3,300
400
500
4,000
1,300

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,600

Total Ending Membership by State for our Aged, Blind or

Disabled (“ABD”) Population:

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,900
8,800
32,200
5,700
22,600
17,600
7,500
3,200

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111,500

1,500
1,700
300
400
2,400
1,000

7,300

12,700
—
30,300
6,300
19,000
16,200
7,300
3,000

94,800

1,100
1,100
—
—
1,900
500

4,600

11,800
—
31,400
6,800
14,900
16,000
6,800
2,800

90,500

(1) The Florida health plan began enrolling members in December 2008.

38

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, 2009, 2008, and 2007:

Total Member Months by Health Plan:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2008

2007

4,135,000
386,000
2,523,000
927,000
1,042,000
2,411,000
402,000
793,000
3,847,000

3,721,000
—
2,526,000
910,000
970,000
1,998,000
348,000
659,000
3,514,000

3,500,000
—
2,597,000
136,000
803,000
1,567,000
335,000
593,000
3,419,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,466,000

14,646,000

12,950,000

(1) The Florida health plan began enrolling members in December 2008.

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 the providers. We pay hospitals on a fee-for-service basis in a variety of
ways, including by per diem amounts, by diagnostic-related groups, or DRGs, as a percentage of billed
charges, and by 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
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 costs, 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

39

substantial portion of these expenses. For the years ended December 31, 2009, 2008 and 2007, medically
related administrative costs were approximately $74.6 million, $75.9 million and $65.4 million,
respectively.

The following table provides the details of our consolidated medical care costs for the periods indicated

(dollars in thousands except PMPM amounts):

2009

Year Ended December 31,
2008

2007

Amount

PMPM

% of
Total

Amount

PMPM

% of
Total

Amount

PMPM

Fee-for-service . . $2,077,489 $126.14
33.91
Capitation . . . . . .
25.18
Pharmacy . . . . . .
7.62
Other . . . . . . . . .

558,538
414,785
125,424

65.4% $1,709,806 $116.69
30.74
450,440
17.6
24.31
356,184
13.1
7.16
104,882
3.9

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

% of
Total

64.6%
18.0
13.0
4.4

Total . . . . . . . . $3,176,236 $192.85 100.0% $2,621,312 $178.90 100.0% $2,080,083 $160.62 100.0%

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):

December 31,

2009

2008

Fee-for-service claims incurred but not paid (IBNP) . . . . . . . . . . . . . . . . . . . $246,508
39,995
Capitation payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,609
Pharmacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,404
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$236,492
28,111
18,837
9,002

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $316,516

$292,442

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, Florida, 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,
2009
2007
2008

Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99.8% 99.3% 98.8%
0.7

0.2

1.2

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%

Medical care ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

86.8% 84.8% 84.5%

General and administrative expense ratio, excluding premium taxes . . . . . .
Premium taxes included in general and administrative expenses . . . . . . . . .

7.5%
3.4

8.0% 8.2%
3.1

3.3

Total general and administrative expense ratio . . . . . . . . . . . . . . . . . . . . . .

10.9% 11.1% 11.5%

Depreciation and amortization expense ratio . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.0%
1.1% 1.1%
29.2% 40.0% 37.7%
3.6% 3.9%
1.6%
2.3%
1.9%
0.8%

Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008

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, 2009
Medical Care Costs
Total

PMPM

Medical
Care Ratio

Premium Tax
Expense

California . . . . . . . . . $ 481,717
102,232
Florida(1) . . . . . . . . .
557,421
Michigan . . . . . . . . .
230,222
Missouri . . . . . . . . . .
404,026
New Mexico(2) . . . . .
803,521
Ohio . . . . . . . . . . . . .
134,860
Texas . . . . . . . . . . . .
207,297
Utah . . . . . . . . . . . . .
726,137
Washington . . . . . . . .
12,774
Other(3),(4) . . . . . . . .

$116.49
264.94
220.94
248.25
387.67
333.33
335.69
261.43
188.77
—

$ 443,892
95,936
454,431
191,585
346,044
691,402
110,794
190,319
613,876
37,957

$107.34
248.62
180.12
206.59
332.03
286.82
275.78
240.02
159.58
—

$3,660,207

$222.24

$3,176,236

$192.85

92.2%
93.8
81.5
83.2
85.7
86.1
82.2
91.8
84.5
—

86.8%

$ 16,446
16
31,023
—
11,043
47,849
2,513
—
14,175
57

$123,122

41

Premium Revenue
Total

PMPM

Year Ended December 31, 2008
Medical Care Costs
Total

PMPM

Medical
Care Ratio

Premium Tax
Expense

California . . . . . . . . . $ 417,027
—
Florida(1) . . . . . . . . .
509,782
Michigan . . . . . . . . .
225,280
Missouri . . . . . . . . . .
348,576
New Mexico(2) . . . . .
602,826
Ohio . . . . . . . . . . . . .
110,178
Texas . . . . . . . . . . . .
155,991
Utah . . . . . . . . . . . . .
709,943
Washington . . . . . . . .
11,637
Other(3),(4) . . . . . . . .

$112.06
—
201.86
247.62
359.45
301.76
316.32
236.75
202.02
—

$ 363,776
—
405,683
184,298
286,004
549,182
84,324
139,011
575,085
33,949

$ 97.75
—
160.64
202.58
294.92
274.91
242.09
210.98
163.64
—

$3,091,240

$210.97

$2,621,312

$178.90

87.2%
—
79.6
81.8
82.1
91.1
76.5
89.1
81.0
—

84.8%

$12,503
—
26,710
—
11,713
30,505
1,995
—
11,668
21

$95,115

(1) The Florida health plan began enrolling members in December 2008.
(2) The medical care ratio of the New Mexico health plan was 85.7% for the year ended December 31, 2009, up
from 82.1% for the same period in 2008. During 2008, the New Mexico health plan had recognized
$12.9 million of premium revenue due to the reversal of amounts previously recorded as payable to the state
of New Mexico. Absent this revenue adjustment, the New Mexico health plan’s medical care ratio would have
been 85.2% for the year ended December 31, 2008.

(3) As of December 31, 2009, our Nevada health plan no longer served members. Premium revenue and medical

care costs for the Nevada health plan have been included in “Other.”

(4) “Other” medical care costs also include medically related administrative costs at the parent company.

Note: Estimates of utilization and unit costs may not match changes in reported costs due to the impact of
shifts in case mix between the periods presented, prior period development, the existence of pass-through contracts
in which third parties assume medical risk, and other factors. Additionally, estimates of utilization for the year
ended December 31, 2009, exclude the month of December 2009 due to the substantial incompleteness of claims
payment data for that month.

Operating results for the year ended December 31, 2009, were most significantly impacted by the following:

• Higher utilization due to widespread influenza-related illness across the Company’s health plans.

• Margin compression related to state budget shortfalls.

• Enrollment growth and the higher costs associated with new members.

• Higher emergency room costs.

Net Income

For the year ended December 31, 2009, net income decreased to $30.9 million, or $1.19 per diluted share, from

$59.6 million, or $2.15 per diluted share, for the year ended December 31, 2008.

Premium Revenue

Premium revenue grew approximately 18% in the year ended December 31, 2009 compared with the same
period in 2008. During 2009, membership grew 16% overall, with Florida, California, Washington, and Ohio
gaining the most members. Consolidated premium revenue increased 5.3% on a PMPM basis. Increased mem-
bership contributed 71% of the growth in premium revenue, and increases in PMPM revenue, as a result of both rate
changes and shifts in member mix, contributed the remaining 29%.

We received PMPM premium reductions in 2009 that were in many cases correlated with reductions in the
Medicaid fee schedule that also reduced our medical costs. However, PMPM premium reductions in Washington
and Missouri in 2009 were not fully commensurate with changes in the Medicaid fee schedule in those states, and

42

thus decreases in premiums were not matched by lower medical costs. In Washington, premium reductions not
linked to decreases in the Medicaid fee schedule lowered our medical margin by approximately $13 million in 2009.
In Missouri, the retention of the pharmacy benefit by the state effective October 1, 2009 reduced our medical margin
by approximately $1.2 million in 2009.

Investment income

Investment income for 2009 decreased $12.0 million to $9.1 million, from $21.1 million earned in 2008. This

decline was due to lower interest rates in 2009.

Medical care costs

Medical care costs, in the aggregate, increased 8% on a PMPM basis for the year ended December 31, 2009
compared with the same period in 2008. The medical care ratio was 86.8% for the year ended December 31, 2009,
compared with 84.8% for the same period in 2008. Increased expenses were generally the result of higher utilization
rather than higher unit costs (except in the case of outpatient costs, where both utilization and unit costs increased)
and were most pronounced in connection with physician and outpatient emergency room facility services.
Influenza-related illnesses and the costs associated with more recently enrolled members were key factors in
the higher utilization. We estimate that the incremental costs associated with influenza-related illnesses were
approximately $35 million, or $0.83 per diluted share, in the year ended December 31, 2009 compared with the year
ended December 31, 2008.

Physician and outpatient costs exhibited the most significant unfavorable cost trend in the year ended
December 31, 2009. Together, these costs increased approximately 13% on a PMPM basis compared with the same
period in 2008. Consistent with our experience throughout 2009, emergency room utilization (up approximately
9%) and cost per visit (up approximately 8%) were the primary drivers of increased cost in the year ended
December 31, 2009.

Hospitals have billed us for more intensive levels of care than in the same period in 2008 for outpatient
emergency room facility services. The billing codes for emergency room level of care — with Level 1 reflecting the
least intensive care and Level 5 reflecting the most intensive care — changed significantly in the year ended
December 31, 2009, compared with the same period in 2008. Level 1 and Level 2 visits decreased by 9% and 6%,
respectively, while Level 3, Level 4, and Level 5 visits increased by 20%, 18%, and 20%, respectively.

Inpatient costs were flat on a PMPM basis year-over-year despite increased utilization.

Pharmacy costs (including the benefit of rebates) increased 6% on a PMPM basis year-over-year, excluding the
Missouri health plan, where the pharmacy benefit was retained by the state of Missouri effective October 1, 2009.
Pharmacy utilization increased approximately 6% year-over-year, while unit costs (excluding rebates) were flat.

Capitated costs increased approximately 10% PMPM year-over-year, primarily as a result of rate increases
received for members capitated on a percentage of premium basis at the New Mexico health plan, and the transition
of members into capitated arrangements in California.

General and administrative expenses

General and administrative expenses were $399.1 million, or 10.9% of total revenue, for 2009 compared with
$344.8 million, or 11.1% of total revenue, for 2008. Included in G&A expenses were premium taxes totaling
$123.1 million in 2009 and $95.1 million in 2008. Premium taxes increased in 2009 due to increased revenues in the
states where premium taxes are assessed.

43

Core G&A expenses, which we define as G&A expenses less premium taxes, were 7.5% of revenue in the year
ended December 31, 2009, compared with 8.0% in the same period in 2008. Year-over-year, premium revenue grew
faster than administrative costs, causing administrative costs, as a percentage of revenue, to decrease. On a PMPM
basis, core G&A decreased to $16.76 for the year ended December 31, 2009, from $17.04 for the same period in
2008.

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,

2009

2008

Amount

% of Total
Revenue

Amount

% of Total
Revenue

(In thousands)

$ 18,857

0.5%

$ 18,451

0.6%

205,396
—
51,774

5.6
—
1.4

190,932
2,495
37,768

6.1
0.1
1.2

Core G&A expenses . . . . . . . . . . . . . . . . . . . . . . .

$276,027

7.5%

$249,646

8.0%

Depreciation and Amortization

Depreciation and amortization expense increased $4.4 million for the year ended December 31, 2009
compared with 2008, primarily due to depreciation expense associated with investments in infrastructure. The
following table presents the components of depreciation and amortization expense (in thousands):

Year Ended
December 31,

2009

2008

Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,172
12,938
Amortization expense on intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$20,718
12,970

Total depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$38,110

$33,688

Interest Expense

Interest expense for 2009 and 2008 includes non-cash interest expense relating to our convertible senior notes,
as a result of the adoption of ASC Subtopic 470-20. The amounts recorded for this non-cash interest expense totaled
$4.8 million for the year ended December 31, 2009, and $4.7 million for the same period in 2008.

Income Taxes

Income taxes were recorded at an effective rate of 29.2% for the year ended December 31, 2009 compared with
40.0% for the same period in 2008. The decrease in the effective tax rate was primarily due to discrete tax benefits
recognized during the year relating to settling tax examinations, and higher than previously estimated California
enterprise zone tax credits.

44

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

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 $59.6 million, or $2.15 per diluted share, from

$57.7 million, or $2.03 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.

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.

45

Medical care costs

Medical care costs as a percentage of premium revenue, or 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.

• 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 percentage of premium revenue. The medical care ratio of the
Ohio health plan, by line of business, was as follows:

Year Ended
December 31,
2008
2007

Covered Families and Children (CFC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.7% 88.6%
Aged, Blind or Disabled (ABD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.

Core G&A expenses 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.

46

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):

Year Ended
December 31,

2008

2007

Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,718
12,970
Amortization expense on intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,118
10,849

Total depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$33,688

$27,967

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 $13.2 million in 2008 from $5.6 million in 2007 primarily due to the issuance of
our convertible senior notes in the fourth quarter of 2007. Interest expense for 2008 and 2007 includes non-cash
interest expense relating to the convertible senior notes, as a result of the adoption of ASC Subtopic 470-20. The
amounts recorded for this non-cash interest expense totaled $4.7 million and $1.0 million for the years ended
December 31, 2008, and 2007, respectively.

Income Taxes

Income taxes were recorded at an effective rate of 40.0% for the year ended December 31, 2008, compared
with 37.7% 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%.

Acquisitions

HIM Business of Unisys. On January 19, 2010, we entered into a definitive agreement to acquire the Health
Information Management business of Unisys Corporation. The purchase price is expected to be approximately
$135 million, subject to a standard working capital adjustment, to be paid in cash at closing using our credit facility.
The acquisition, which is expected to close in the first half of 2010, is subject to customary regulatory approvals and
closing conditions, including receipt of customer consents.

47

The HIM business provides design, development, implementation, and business process outsourcing solutions
to state governments for their Medicaid Management Information Systems. MMIS is a core tool used to support the
administration of state Medicaid and other health care entitlement programs. The HIM business currently holds
MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to
provide drug rebate administration services for the Florida Medicaid program. Annual revenues of the HIM
business are currently approximately $110 million. We expect the approximately 900 employees of the HIM
business to become our employees upon closing of the transaction, and following the closing Unisys has agreed to
provide us certain transitional and technology support services for up to one year.

Florida Health Plan. On December 31, 2009 (the acquisition date), we acquired 100% of the voting equity
interests in Florida NetPASS, LLC, or NetPASS. This acquisition included the purchase of the NetPASS limited
liability company and its membership interests. We initially announced our intention to purchase NetPASS in
August 2008. NetPASS was a provider of care management and administrative services at that time to approx-
imately 58,000 Florida MediPass members in South and Central Florida (Florida MediPASS is the state of Florida’s
Medicaid program).

Our wholly owned subsidiary, Molina Healthcare of Florida, Inc., was awarded a Medicaid managed care
contract by the state of Florida in October 2008. Subsequently, NetPASS members have been notified of our
intention to acquire NetPASS and, beginning in December 2008, offered membership with our Florida health plan
on a county-by-county basis. Once transitioned, these members become full-risk members of the Florida health
plan. The Florida health plan receives fixed PMPM payments from the state of Florida for the care of these
members, and the Florida health plan is at risk for the cost of the members’ medical care.

As of December 31, 2009, we have transitioned approximately 48,000 NetPASS members to our Florida health
plan, and have recorded $28.7 million of goodwill and intangible assets relating to these members. Of this amount,
we have paid the sellers $23.4 million, with the balance accrued to accounts payable and accrued liabilities. The
$5.3 million current liability includes a 10% indemnification hold back totaling $2.9 million, as provided in the
purchase agreement, and a $2.4 million payable to the sellers for membership transitioned to date as of
December 31, 2009. Because the final membership reconciliation will take place early in the second quarter of
2010, the provisional measurements of goodwill and intangible assets are subject to change.

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, 2009, 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. 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,
2009, 2008, and 2007 were approximately 1.2%, 3.0%, and 5.2%, respectively.

48

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, 2009, was $155 million compared with

$40 million for 2008, an increase of $115 million.

Significant components of cash provided by operating activities during 2009 included the following items:

• Net income, which decreased $29 million between 2008 and 2009.

• Deferred revenue, which contributed $114 million to the increase in cash provided by operating activities
between 2008 and 2009. Deferred revenue increased substantially at the Ohio health plan between the years
ended 2008 and 2009.

• Medical claims and benefits payable, which contributed $43 million to the increase in cash provided by

operating activities between 2008 and 2009.

Cash used in investing activities was $37.7 million for the year ended December 31, 2009, compared with

$64.5 million for 2008.

Cash used in financing activities totaled $35.3 million for the year ended December 31, 2009, compared with
$47.8 million for 2008. The primary use of cash in both 2009 and 2008 was under our securities purchase programs,
where we purchased $27.7 million and $49.9 million of our common stock in 2009, and 2008, respectively. In 2009,
we additionally purchased, as described further below, convertible senior notes totaling $9.7 million ($9.8 million
with accrued interest).

EBITDA(1)

Year Ended
December 31,

2009

2008

(In thousands)

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,393
Add back:

$112,605

Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,110

33,688

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,503

$146,293

(1) We calculate EBITDA by adding back depreciation and amortization expense to operating income. Operating
income included interest income of $8.0 million and $21.1 million for the years ended December 31, 2009, and
2008, 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.

Securities Purchase Program. Under the $25 million securities purchase program announced in January
2009, we purchased and retired $13.0 million face amount of our convertible senior notes during the first quarter of
2009. We purchased the notes at an average price of $74.25 per $100 principal amount, for a total of $9.8 million,
including accrued interest. The gain recognized during the quarter on the purchase of the notes was $1.5 million, or
approximately $0.04 per diluted share. Also during the first quarter of 2009, we purchased approximately
808,000 shares of our common stock for $15 million (average cost of approximately $18.53 per share).

In March 2009, our board of directors authorized the purchase of up to an additional $25 million in aggregate
of either our common stock or our convertible senior notes. The purchase program was funded with working capital.

49

Under the purchase program, we purchased approximately 544,000 shares of common stock for $12.7 million
(average cost of approximately $23.41 per share) in the second quarter of 2009. We did not purchase any shares in
the third or fourth quarters of 2009. This purchase program terminated December 31, 2009.

Capital Resources

At December 31, 2009, the parent company — Molina Healthcare, Inc. — held cash and investments of
approximately $45.6 million, including $16.5 million in non-current auction rate securities, compared with
$68.9 million of cash and investments at December 31, 2008. On a consolidated basis, at December 31, 2009,
we had working capital of $321.2 million compared with $345.2 million at December 31, 2008. At December 31,
2009 and December 31, 2008, cash and cash equivalents were $469.5 million and $387.2 million, respectively. At
December 31, 2009, investments were $234.5 million, including $59.7 million in non-current auction rate
securities, and at December 31, 2008, investments were $248.0 million, including $58.2 million in non-current
auction rate securities.

We intend to use a draw on our credit facility, which currently has no outstanding balance, to fund all or a
substantial portion of the $135 million purchase price of the HIM business. Subject to the following discussion
regarding our Credit Facility and its use to acquire the HIM business of Unisys Corporation, 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.

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 general corporate purposes.

Pending the closing of the acquisition of the HIM business as discussed below, 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, 2009, 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,
2009, we were in compliance with all financial covenants in the Credit Facility.

Subject to the closing of the HIM acquisition as described above under the heading, “Acquisitions,” in
November 2009 we agreed to enter into a fourth amendment to the Credit Facility. The fourth amendment will
become effective upon the closing of the acquisition of the HIM business. The fourth amendment is required
because the $135 million purchase price for the HIM business exceeds the currently applicable deal size threshold
under the terms of the Credit Facility. Pursuant to the fourth amendment, the lenders have consented to our
acquisition of the HIM business.

Upon its effectiveness at the closing, the fourth amendment would increase the commitment fee on the total
unused commitments of the lenders under the facility to 50 basis points on all levels of the pricing grid, with the
pricing grid referring to our ratio of consolidated funded debt to consolidated EBITDA. The pricing for LIBOR

50

loans and base rate loans would be raised by 200 basis points at every level of the pricing grid. The applicable
margins would thus range between 2.75% and 3.75% for LIBOR loans, and between 1.75% and 2.75% for base rate
loans. Until the delivery of a compliance certificate with respect to our financial statements for the quarter ending
after the HIM business acquisition closes, the applicable margin shall be fixed at 3.5% for LIBOR loans and 2.5%
for base rate loans. In connection with the lenders’ approval of the fourth amendment, a consent fee of 10 basis
points was paid on the amount of each consenting lender’s commitment. In addition, the fourth amendment would
carve out from our indebtedness and restricted payment covenants under the Credit Facility the $187.0 million
current principal amount of the Notes (although the $187.0 million indebtedness would still be included in the
calculation of our consolidated leverage ratio); increase the amount of surety bond obligations we may incur;
increase our allowable capital expenditures; and reduce the fixed charge coverage ratio from 3.50x to 2.75x (on a
pro forma basis) at December 31, 2009, and 3.00x thereafter.

On March 15, 2010, we agreed to enter into a fifth amendment to the Credit Facility. The fifth amendment will
also become effective upon the closing of the acquisition of the HIM business. The fifth amendment is required
because, after giving effect to the acquisition of the HIM business on a pro forma basis, and inclusive of the
Company’s fourth quarter 2009 EBITDA of only $5.9 million, the Company’s consolidated leverage ratio for the
preceding four fiscal quarters would exceed the currently applicable ratio of 2.75 to 1.0. The fifth amendment will
increase the maximum consolidated leverage ratio under the Credit Facility to 3.25 to 1.0 for the fourth quarter of
2009 (on a pro forma basis), and to 3.50 to 1.0 for the first, second, and third quarters of 2010, excluding the single
date of September 30, 2010. On September 30, 2010, the maximum consolidated leverage ratio shall revert back to
2.75 to 1.0. However, if the Company has actually reduced its consolidated leverage ratio to no more than 2.75 to 1.0
on or before August 15, 2010, the consolidated leverage ratio under the Credit Facility will revert back to 2.75 to 1.0
on August 15, 2010. On the date that the consolidated leverage ratio reverts to 2.75 to 1.0 — whether August 15,
2010 or September 30, 2010 — the aggregate commitments of the lenders under the Credit Facility shall be reduced
on a pro rata basis from $200 million to $150 million. In connection with the lenders’ approval of the fifth
amendment, we will pay an amendment fee of 25 basis points on the amount of each consenting lender’s
commitment. We will also pay an incremental commitment fee of 12.5 basis points based on each lender’s unfunded
commitment during the period from the effective date of the fifth amendment through the date that the maximum
consolidated leverage ratio is reduced to 2.75 to 1.0, plus a potential duration fee of 50 basis points payable on
August 15, 2010 in the event that the consolidated leverage ratio has not been reduced to 2.75 to 1.0 by August 15,
2010.

Shelf Registration Statement

In December 2008, we filed a shelf registration statement on Form S-3 with the SEC 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 as a selling
stockholder. We may publicly offer securities from time to time at prices and terms to be determined at the time of
the offering.

Long-Term Debt

Convertible Senior Notes

In October 2007, we sold $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due
2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million. During 2009, we
purchased and retired $13.0 million face amount of the Notes, for a remaining aggregate principal amount of
$187.0 million as of December 31, 2009. 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, 2007, 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

51

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 $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, or 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.

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our health plan subsidiaries operating in California, Florida,
Michigan, Missouri, 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 $368.7 million at December 31, 2009, and $355.0 million at December 31, 2008.

The National Association of Insurance Commissioners, or NAIC, adopted rules effective December 31, 1998,
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 Michigan, Missouri, New Mexico, Ohio,
Texas, Utah, and Washington. California and Florida have not adopted RBC rules and have not given notice of any
intention to do so. The RBC rules, if adopted by California and Florida, may increase the minimum capital required
by those states.

At December 31, 2009, our health plans had aggregate statutory capital and surplus of approximately
$377.7 million, compared to the required minimum aggregate statutory capital and surplus of approximately
$257.1 million. All of our health plans were in compliance with the minimum capital requirements at December 31,
2009. 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
2010.

Critical Accounting Policies

When we prepare our consolidated financial statements, we use estimates and assumptions that may affect
reported amounts and disclosures. Actual results could differ from these estimates. Principal areas requiring the use
of estimates include those areas listed below. The most significant of these estimates is the determination of medical
claims and benefits payable, which is discussed in further detail below:

• The determination of medical claims and benefits payable;

52

• The determination of the amount of revenue to be recognized under certain contracts that place revenue at
risk dependent upon either the achievement of certain quality or administrative measurements, or the
expenditure of certain percentages of revenue on defined expenses;

• The determination of allowances for uncollectible accounts;

• The valuation of certain investments;

• Settlements under risk or savings sharing programs;

• The impairment of long-lived and intangible assets;

• The determination of professional and general liability claims, and reserves for potential absorption of

claims unpaid by insolvent providers;

• The determination of reserves for the outcome of litigation;

• The determination of valuation allowances for deferred tax assets; and

• The determination of unrecognized tax benefits.

Medical Claims and Benefits Payable

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 to 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
$246.5 million of our total medical claims and benefits payable of $316.5 million as of December 31, 2009.
Excluding amounts related to the run out of our cost-plus Medicaid contract in Utah (which contract was replaced
with a prepaid capitation contract effective September 1, 2009) 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, 2009 was $235.0 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
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 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, 2009 that would
have resulted had we changed our completion factors for the fifth through the twelfth months preceding

53

December 31, 2009, by the percentages indicated. A reduction in the completion factor results in an increase in
medical claims liabilities. 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% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 72,782
48,521
24,261
(24,261)
(48,521)
(72,782)

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 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, 2009 that would have resulted had we altered our trend factors by the percentages
indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar amounts are in
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% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(41,722)
(27,815)
(13,907)
13,907
27,815
41,722

The following per-share amounts are based on a combined federal and state statutory tax rate of 38%, and
26 million diluted shares outstanding for the year ended December 31, 2009. Assuming a hypothetical 1% change in
completion factors from those used in our calculation of IBNP at December 31, 2009, net income for the year ended
December 31, 2009 would increase or decrease by approximately $7.5 million, or $0.29 per diluted share.
Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at
December 31, 2009, net income for the year ended December 31, 2009 would increase or decrease by approx-
imately $4.3 million, or $0.17 per diluted share. The corresponding figures for a 5% change in completion factors
and PMPM cost estimates would be $37.6 million, or $1.45 per diluted share, net of tax, and $21.6 million, or $0.83
per diluted share, respectively.

It is important to note that any change in the estimate of either completion factors or trended PMPM costs would
usually be accompanied by a change in the estimate of the other component, and that a change in one component would
almost always compound rather than offset the resulting distortion to net income. When completion factors are
overestimated, trended PMPM costs tend to be underestimated. Both circumstances will create an overstatement of net
income. Likewise, when completion factors are underestimated, trended PMPM costs tend to be overestimated, creating
an understatement of net income. In other words, errors in estimates involving both completion factors and trended
PMPM costs will usually act to drive estimates of claims liabilities and medical care costs in the same direction. For
example, if completion factors were overestimated by 1%, resulting in an overstatement of net income by approximately
$7.5 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, also using 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

54

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 which 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 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.
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 accurately estimated, we would expect that amounts ultimately paid
would 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%
range, as shown by our results in 2009 and 2008 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 18% and 20%, respectively.

As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities in fiscal years
2009 and 2008 were less than what we had expected when we had established our reserves. While the specific
reasons for the overestimation of our liabilities were different in each of the two years, in general the overes-
timations were tied to our assessment of specific circumstances at our individual health plans which were unique to
those reporting periods.

For the year ended December 31, 2009, we recognized a benefit from prior period claims development in the
amount of $51.6 million (see table below). This was primarily caused by the overestimation of our liability for
claims and medical benefits payable at December 31, 2008. The overestimation of claims liability at December 31,
2008 was the result of the following factors:

• In Michigan, we underestimated the impact of a steep drop in claims inventory during December 2008,

thereby overestimating our liability at December 31, 2008.

• In New Mexico, we overestimated the ultimate amounts we would need to pay to resolve certain high dollar

provider claims, thereby overestimating our liability at December 31, 2008.

• In Ohio, we underestimated the degree to which certain operational initiatives had reduced our medical costs

in the last few months of 2008, thereby overestimating our liability at December 31, 2008.

55

• In Washington, we overestimated the impact that certain adverse utilization trends would have on our

liability at December 31, 2008, thereby overestimating our liability at December 31, 2008.

• In California, we underestimated utilization trends at the end of 2008, leading to an underestimation of our
liability at December 31, 2008. Additionally, we underestimated the impact that certain delays in the receipt
of paper claims (as opposed to electronically submitted claims) would have on our liability, leading to a
further underestimation of our liability at December 31, 2008.

For the year ended December 31, 2008, we recognized a benefit from prior period claims development in the
amount of $62.1 million (see table below). This was primarily caused by the overestimation of our liability for
claims and medical benefits payable at December 31, 2007. The overestimation of claims liability at December 31,
2007 was the result of the following factors:

• In Michigan, we had 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 had 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 estimating our claims liability at December 31, 2009, we adjusted our base calculation to take account of the

following factors which we believe are reasonably likely to change our final claims liability amount:

• The rapid growth of membership across nearly all of our health plans in fiscal year 2009, particularly the
growth in membership at our Florida health plan and the growth in ABD membership during the fourth
quarter of 2009 at our Ohio health plan.

• A decrease in claims inventory at our California, Ohio, and Utah health plans through the fourth quarter of

2009.

• The impact of the 2009 H1N1 flu through the fourth quarter of 2009.

• The degree of change in the utilization of medical services and the cost per unit of those services during

2009.

• The impact of reductions to the state Medicaid fee schedules in Washington and Michigan effective July 1,

2009, and in New Mexico effective December 1, 2009.

• Potential provider settlements across all states, particularly in Missouri, New Mexico, Ohio, and

Washington.

The use of a consistent methodology in estimating our liability for claims and medical benefits payable
minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect
consolidated results of operations in subsequent periods. Facts and circumstances unique to the estimation process
at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent
periods. Any absence of adverse claims development (as well as the expensing through general and administrative
expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior
period claims development in the period subsequent to the date of the original estimate. 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. In 2009 and 2008 the absence of adverse development of the liability for
claims and medical benefits payable at the close of the previous period resulted in the recognition of substantial
favorable prior period development. In both years, however, the recognition of a benefit from prior period claims
development did not have a material impact on our consolidated results of operations because the amount of benefit
recognized in each year was roughly consistent with that recognized in the previous year.

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.

56

The following table presents the components of the change in our medical claims and benefits payable for the
years ended December 31, 2009 and 2008. 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.

Year Ended December 31,

2009

2008

Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Components of medical care costs related to:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Dollars in thousands, except
per-member amounts)
292,442

311,606

$

3,227,794
(51,558)

2,683,399
(62,087)

Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,176,236

2,621,312

Payments for medical care costs related to:

Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,919,240
232,922

2,413,128
227,348

Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,152,162

2,640,476

Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

316,516

$

292,442

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:

17.6%
1.4%
1.6%
37
1,455,000

19.9%
2.0%
2.4%
41
1,256,000

93,100
Number of claims in inventory at end of period . . . . . . . . . . . . . . . .
131,400
Billed charges of claims in inventory at end of period . . . . . . . . . . . $
0.06
Claims in inventory per member at end of period . . . . . . . . . . . . . .
90.31
Billed charges of claims in inventory per member at end of period. . $
Number of claims received during the period. . . . . . . . . . . . . . . . . .
12,930,100
Billed charges of claims received during the period . . . . . . . . . . . . . $ 9,769,000

$

87,300
115,400
0.07
91.88
$
11,095,100
$ 7,794,900

Commitments and Contingencies

We lease office space and equipment under various operating leases. As of December 31, 2009, our lease
obligations for the next five years and thereafter were as follows: $21.3 million in 2010, $20.8 million in 2011,
$18.6 million in 2012, $15.2 million in 2013, $13.5 million in 2014, and an aggregate of $39.6 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 18 to the accompanying
audited consolidated financial statements for the year ended December 31, 2009.

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2009. 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.

57

Total

2010

2011-2012

2013-2014

2015 and Beyond

Medical claims and benefits

payable . . . . . . . . . . . . . . . . . . $316,516
187,000
128,980
33,309
23,472

Long-term debt(1) . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . .
Interest on long-term debt(1) . . . .
Purchase commitments . . . . . . . .

$316,516
—
21,334
7,012
8,201

$ — $
—
39,365
14,025
11,955

—
187,000
28,705
12,272
3,316

Total contractual obligations . . . . $689,277

$353,063

$65,345

$231,293

$ —
—
39,576
—
—

$39,576

(1) Amounts relate to our 3.75% Convertible Senior Notes due 2014.

As of December 31, 2009, we have recorded approximately $4.1 million of unrecognized tax benefits. The
above table does not contain this amount because we cannot reasonably estimate when or if such amount may be
settled. See Note 13 to the accompanying audited consolidated financial statements for the year ended December 31,
2009 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 — 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 health
plan 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.

58

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

60
61
62
63
64
66

59

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, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Molina Healthcare, Inc. at December 31, 2009 and 2008, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, during 2009 the Company changed its method

of accounting for convertible debt instruments.

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, 2009, 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, 2010 expressed an unqualified opinion
thereon.

Los Angeles, California
March 16, 2010

/s/ ERNST & YOUNG LLP

60

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

December 31,

2008(1)
2009
(Amounts in thousands,
except per-share data)

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469,501
174,844
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136,654
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,067
Income tax refundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,757
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,583
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
811,406
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,171
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,846
Intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133,408
Goodwill and indefinite-lived intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,687
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,274
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,455
Receivable for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,988
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,245,235

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316,516
71,732
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,985
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
490,233
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158,900
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
25,455
Liability for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,506
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,403
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
702,497
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding:

$ 387,162
189,870
128,562
4,019
9,071
14,766
733,450
65,058
79,133
113,466
58,169
38,202
27,367
33,223
$1,148,068

$ 292,442
81,981
13,804
388,227
164,873
27,367
12,911
22,928
616,306

25,607 shares at December 31, 2009 and 26,725 shares at December 31, 2008 . .

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

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 1,201 shares at December 31, 2008 . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

27

—
129,902
(1,812)
414,622
—
542,738
$1,245,235

—
170,681
(2,310)
383,754
(20,390)
531,762
$1,148,068

(1) The Company’s consolidated financial position as of December 31, 2008, has been recast to reflect the adoption
of FASB Accounting Standards Codification (ASC) Subtopic 470-20, Debt with Conversion and Other Options
(see Note 1).

See accompanying notes.

61

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
2008(1)
2009
(In thousands, except per share data)

2007(1)

Revenue:

Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,660,207
9,149
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,091,240
21,126

$2,462,369
30,085

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,669,356

3,112,366

2,492,454

Expenses:

Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge on purchased software . . . . . . . . . . . . . . . . . .

3,176,236
399,149
38,110
—

2,621,312
344,761
33,688
—

2,080,083
285,295
27,967
782

Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,613,495

2,999,761

2,394,127

Gain on purchase of convertible senior notes . . . . . . . . . . . . . . . . . .

1,532

—

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57,393
(13,777)

43,616
12,748

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

30,868

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Diluted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Weighted average shares outstanding:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.19

1.19

25,843

25,984

112,605
(13,231)

99,374
39,776

59,598

2.15

2.15

27,676

27,772

$

$

$

$

$

$

—

98,327
(5,605)

92,722
34,996

57,726

2.04

2.03

28,275

28,419

(1) The Company’s consolidated statements of income for the years ended December 31, 2008 and 2007 have been
recast to reflect the adoption of FASB ASC Subtopic 470-20, Debt with Conversion and Other Options
(see Note 1).

(2) 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, 2009, 2008, and 2007.

See accompanying notes.

62

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

28,119

$28

$173,990

$ (337)

$266,875 $(20,390) $420,166

Balance at January 1, 2007 . . . . . . . . .
Comprehensive income:
Net income(1) . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Unrealized gain on investments . . . . . .
Total comprehensive income . . . . . . . .
Adjustment to adopt ASC Subtopic

470-20(1) . . . . . . . . . . . . . . . . . . . .

Adjustment to adopt ASC Subtopic

740-10 Accounting for Uncertainty in
Income Taxes . . . . . . . . . . . . . . . . .

Stock options exercised, employee

stock grants and employee stock plan
purchases . . . . . . . . . . . . . . . . . . . .

Tax benefit from employee stock

compensation . . . . . . . . . . . . . . . . .
Balance at December 31, 2007 . . . . . . .
Comprehensive income:
Net income(1) . . . . . . . . . . . . . . . . . .
Other comprehensive income, 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 plan
purchases . . . . . . . . . . . . . . . . . . . .

Tax deficiency from employee stock

compensation . . . . . . . . . . . . . . . . .
Balance at December 31, 2008 . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Unrealized gain on investments . . . . . .
Total comprehensive income . . . . . . . .
Purchase of treasury stock . . . . . . . . . .
Retirement of treasury stock . . . . . . . .
Retirement of convertible debt . . . . . . .
Employee stock grants and employee

stock plan purchases . . . . . . . . . . . .

Tax deficiency from employee stock

compensation . . . . . . . . . . . . . . . . .
Balance at December 31, 2009 . . . . . . .

—

—
—

—

—

325

—
28,444

—

—

—
—
—
(1,943)

48

176

—
26,725

—

—
—
—
(1,352)
—

234

—
25,607

—

—
—

—

—

—

—
28

—

—

—
—
—
(1)

—

—

—
27

—

—
—
—
(1)
—

—

—

—
—

24,502

—

10,965

853
210,310

—

—

—
—
—
(49,939)

1,262

9,340

—

609
609

—

—

—

—
272

—

(7,025)

4,443
(2,582)
—
—

—

—

57,726

—
57,726

— 57,726

—
609
— 58,335

—

— 24,502

(445)

—

(445)

—

— 10,965

—
324,156

—

853
(20,390) 514,376

59,598

— 59,598

—

— (7,025)

—
59,598

—
4,443
— 57,016
(49,940)
—

— (49,940)
— 49,940

—

—

—

—

1,262

9,340

(292)
170,681

—
(2,310)

—
383,754

—

(292)
(20,390) 531,762

—

—
—
—
(48,101)
(476)

8,516

—

498
498
—
—
—

—

—
$26

(718)
$129,902

—
$(1,812)

30,868

—
30,868

— 30,868

—
498
— 31,366
(27,712)
—
(476)

— (27,712)
— 48,102
—
—

—

—

$414,622 $

—

8,516

(718)
—
— $542,738

(1) The Company’s consolidated statements of stockholders’ equity for the years ended December 31, 2008 and
2007 have been recast to reflect the adoption of FASB ASC Subtopic 470-20, Debt with Conversion and Other
Options (see Note 1).

See accompanying notes.

63

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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 (gain) loss on trading securities. . . . . . . . . . . . . . . . . . . .
Loss (gain) on rights agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash interest on convertible senior notes . . . . . . . . . . . . . . . . . .
Gain on purchase of convertible senior notes . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . .
Tax deficiency from employee stock compensation . . . . . . . . . . . . . .
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 in business purchase transactions . . . . . . . . . . . . . . . . . .
Decrease (increase) in restricted investments . . . . . . . . . . . . . . . . . . . .
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other long-term liabilities . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and retirement of convertible senior notes . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock plan

purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .

2009

Year Ended December 31,
2008(1)
(In thousands)

2007(1)

$ 30,868

$ 59,598

$ 57,726

38,110
—
(3,394)
3,100
(1)
7,485
4,782
(1,532)
1,872
(749)
—

(8,092)
(817)
24,074
(26,467)
88,181
(2,049)
155,371

(35,870)
(186,764)
204,365
(11,294)
1,928
(2,553)
(7,525)
(37,713)

(27,712)
(9,653)
—
—
—
—
31

33,688
7,166
399
(6,907)
(3,404)
7,811
4,707
—
1,435
(335)
142

(17,025)
(2,245)
(19,164)
10,830
(26,300)
(9,965)
40,431

(34,690)
(263,229)
246,524
(1,000)
(9,183)
(8,973)
6,031
(64,520)

(49,940)
—
—
—
—
—
43

27,967
—
—
—
(9,427)
7,188
1,012
—
1,004
—
—

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)
853

2,015
(35,319)
82,339
387,162
$ 469,501

2,084
(47,813)
(71,902)
459,064
$ 387,162

4,257
153,061
55,414
403,650
$ 459,064

64

9,419

977
(368)
609

(480)

672

—

782

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

Supplemental cash flow information
Cash paid during the year for:

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 27,100

$ 50,130

$ 27,734

2009

Year Ended December 31,
2008(1)
(In thousands)

2007(1)

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Schedule of non-cash investing and financing activities:
Unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . .

Retirement of common stock used for stock-based compensation . . . . .

Accrued purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

$

8,205

$

7,797

699
(201)
498

(984)

935

$ (3,956)
1,374
(2,582)

$

$

$

(555)

65

Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 48,102

$ 49,940

$

$

$

$

$

$

Impairment of purchased software . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cumulative effect of adoption of FASB ASC Subtopic 740-10,

Accounting for Uncertainty in Income Taxes. . . . . . . . . . . . . . . . . . .

$

$

Details of business purchase transactions:

— $

— $

— $

— $

445

Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Release of escrow and other deposits . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less payable to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid in business purchase transactions . . . . . . . . . . . . . . . .

$ (34,594)
18,000
—
—
5,300
—
$ (11,294)

$

$

(2,262)
—
1,262
—
—
—
(1,000)

$(106,233)
—
—
10,843
—
25,218
$ (70,172)

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

(1) The Company’s consolidated statements of cash flows for the years ended December 31, 2008 and 2007 have
been recast to reflect the adoption of FASB ASC Subtopic 470-20, Debt with Conversion and Other Options
(see Note 1).

See accompanying notes.

65

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 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 individuals. We conduct our business primarily through licensed health plans in the states of California,
Florida, Michigan, Missouri, 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. Effective January 1, 2010 we terminated operations at our small Medicare
health plan in Nevada.

Our results of operations include the results of recent acquisitions, including the acquisition of Florida
NetPASS, under which we began transitioning members in late December 2008. Additionally, we acquired Mercy
CarePlus, a Medicaid managed care organization based in St. Louis, Missouri, effective November 1, 2007.

Consolidation and Presentation

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.

Evaluation of Subsequent Events

We have evaluated subsequent events through the date of issuance of our financial statements in this Annual

Report on Form 10-K.

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:

• The determination of medical claims and benefits payable;

• The determination of the amount of revenue to be recognized under certain contracts that place revenue at
risk dependent upon either the achievement of certain quality or administrative measurements, or the
expenditure of certain percentages of revenue on defined expenses;

• The determination of allowances for uncollectible accounts;

• The valuation of certain investments;

• Settlements under risk or savings sharing programs;

• The impairment of long-lived and intangible assets;

• The determination of professional and general liability claims, and reserves for potential absorption of

claims unpaid by insolvent providers;

• The determination of reserves for the outcome of litigation;

• The determination of valuation allowances for deferred tax assets; and

• The determination of unrecognized tax benefits.

Reclassification

We have reclassified certain prior year balance sheet amounts to conform to the 2009 presentation.

66

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recast of Prior Periods

In May 2008, the FASB issued a new standard relating to convertible debt instruments. This standard requires
the proceeds from the issuance of applicable 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. We adopted this new standard effective as of
January 1, 2009. For further information regarding our convertible senior notes, see Note 12, “Long-Term Debt.”

The following tables illustrate the impact of adopting this accounting standard on our consolidated statements

of income.

Year Ended December 31, 2009

Excluding the
Effect of the
Accounting
Standard

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$58,786
(9,344)

Effect of the
Accounting
Standard
(In thousands)
$(1,393)
(4,433)

Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . .

49,442
14,961

(5,826)
(2,213)

Including the
Effect of the
Accounting
Standard

$ 57,393
(13,777)

43,616
12,748

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$34,481

$(3,613)

$ 30,868

Net income per share:

Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.33

$ (0.14)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.33

$ (0.14)

$

$

1.19

1.19

Year Ended December 31, 2008

Excluding the
Effect of the
Accounting
Standard

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$112,605
(8,714)

Effect of the
Accounting
Standard
(In thousands)
$ —
(4,517)

Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . .

103,891
41,493

(4,517)
(1,717)

Including the
Effect of the
Accounting
Standard

$112,605
(13,231)

99,374
39,776

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,398

$(2,800)

$ 59,598

Net income per share:

Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

2.25

2.25

$ (0.10)

$ (0.10)

$

$

2.15

2.15

67

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31, 2007

Excluding the
Effect of the
Accounting
Standard

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$98,327
(4,631)

Effect of the
Accounting
Standard
(In thousands)
$ —
(974)

Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . .

93,696
35,366

(974)
(370)

Including the
Effect of the
Accounting
Standard

$98,327
(5,605)

92,722
34,996

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$58,330

$ (604)

$57,726

Net income per share:

Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2.06

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2.05

$(0.02)

$(0.02)

$

$

2.04

2.03

The following tables illustrate the impact of adopting this standard on our consolidated balance sheets.

Excluding the
Effect of the
Accounting
Standard

December 31, 2009

Effect of the
Accounting
Standard
(In thousands)

Including the
Effect of the
Accounting
Standard

Noncurrent assets:

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 20,651

$

(663)

$ 19,988

Noncurrent liabilities:

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . .

187,000
3,352

Stockholders’ equity:

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,603
421,639

(28,100)
9,154

25,299
(7,017)

158,900
12,506

129,902
414,622

Excluding the
Effect of the
Accounting
Standard

December 31, 2008

Effect of the
Accounting
Standard
(In thousands)

Including the
Effect of the
Accounting
Standard

Noncurrent assets:

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . .

$ 34,321
20

$ (1,098)
(20)

$ 33,223
—

Noncurrent liabilities:

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .

200,000
—

146,179
387,158

(35,127)
12,911

24,502
(3,404)

164,873
12,911

170,681
383,754

There was no impact resulting from this accounting change on our cash flows from operating activities,

investing activities, or financing activities as reflected in the consolidated statements of cash flows.

68

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2009, 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.

The following table summarizes premium revenue by health plan for the periods indicated:

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 481,717
102,232
Florida(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,421
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
230,222
Missouri(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
404,026
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
803,521
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,860
Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207,297
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
726,137
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,774
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2007

Year Ended December 31,
2008
(In thousands)
$ 417,027
—
509,782
225,280
348,576
602,826
110,178
155,991
709,943
11,637

$ 378,934
—
487,032
30,730
268,115
436,238
88,453
116,907
652,970
2,990

$3,660,207

$3,091,240

$2,462,369

(1) The Florida health plan began enrolling members in December 2008.

(2) We acquired the Missouri health plan in late 2007.

For the year ended December 31, 2009, we 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 California
(effective October 1, 2009), Michigan, Missouri, Ohio, Texas, Utah ( effective September 1, 2009) and Washington.
Such payments are recognized as revenue in the month the birth occurs. Approximately 2.5% of our premium
revenue for the year ended December 31, 2009 was realized under a Medicaid cost-plus reimbursement agreement
that our Utah health plan had with that state until August 31, 2009. Effective September 1, 2009, the Utah health
plan’s contract with the state of Utah became a prepaid capitation contract, under which the plan is paid a fixed
PMPM amount.

Certain components of premium revenue are subject to accounting estimates. Chief among these are:

• Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health. A portion of premium
revenue paid to our Florida health plan by the state of Florida may be refunded to the state if certain
minimum amounts are not expended on defined behavioral health care costs. At December 31, 2009, we had
not recorded any liability under the terms of this contract provision. If the state of Florida disagrees with our
interpretation of the existing contract terms, an adjustment to the amounts owed may be required. Any
changes to the terms of this provision, including revisions to the definitions of premium revenue or
behavioral health care costs, the period of time over which performance is measured or the manner of its
measurement, or the percentages used in the calculations, may affect the profitability of our Florida health
plan.

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• New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit Ceilings
(Maximums): A portion of premium revenue paid to our New Mexico health plan by the state of
New Mexico 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. 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. 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: (a) expend on
administrative costs; and (b) retain as profit. At December 31, 2009, we had not recorded any liability under
the terms of these contract provisions. If the state of New Mexico disagrees with our interpretation of the
existing contract terms, an adjustment to the amounts owed may be required. Any changes to the terms of
these provisions, including revisions to the definitions of premium revenue, medical care costs, adminis-
trative 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 affect the profitability of our New Mexico
health plan.

• New Mexico Health Plan At-Risk Premium Revenue: Under our contract with the state of New Mexico, up
to 1% of our New Mexico health plan’s revenue may be refundable to the state if certain performance
measures are not met. These performance measures are generally linked to various quality of care and
administrative measures dictated by the state. Through December 31, 2009, our New Mexico health plan had
received $3.6 million in at-risk revenue for state fiscal year 2009 and the first half of state fiscal year 2010
combined. We have recognized $2.2 million of that amount as revenue through December 31, 2009, and
recorded a liability of approximately $1.4 million for the remainder.

• Ohio Health Plan At-Risk Premium Revenue: 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. These
performance measures are generally linked to various quality of care measures dictated by the state. Through
December 31, 2009 our Ohio health plan had received $8.8 million in at-risk revenue for state fiscal year
2009 and the first half of state fiscal year 2010 combined. We have recognized $7.5 million of that amount as
revenue through December 31, 2009 and recorded a liability of approximately $1.3 million for the
remainder.

• Utah Health Plan Premium Revenue: Our Utah health plan may be entitled to receive additional premium
revenue from the state of Utah as an incentive payment for saving the state of Utah money in relation to
fee-for-service Medicaid. 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 assert its claim to the amounts believed to be due under the savings share agreement. When
additional information is known, or resolution 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. No receivables for
saving sharing revenue have been established at December 31, 2009 and 2008.

• Texas Health Plan Premium Revenue: The contract entered into between our Texas health plan and the
state of Texas includes a profit-sharing agreement, where we pay a rebate to the state of Texas if our Texas
health plan generates pretax income above a certain specified percentage, as determined in accordance with
a tiered rebate schedule. We are limited in the amount of administrative costs that we may deduct in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

calculating the rebate, if any. As of December 31, 2009, we had an aggregate liability of approximately
$2.0 million accrued pursuant to our profit-sharing agreement with the state of Texas for the 2009 and 2010
contract years (ending August 31 of each year). During 2009, we paid the state of Texas $4.9 million relating
to the 2008 and 2009 contract years, and the 2008 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.

• Texas Health Plan At-Risk Premium Revenue: Under our contract with the state of Texas, up to 1% of our
Texas health plan’s revenue may be refundable to the state if certain performance measures are not met.
These performance measures are generally linked to various quality of care measures dictated by the state.
Through December 31, 2009, our Texas health plan had received $1.7 million in at-risk revenue for state
fiscal year 2009 and the first half of state fiscal year 2010 combined. We have recognized $1.2 million of that
amount as revenue through December 31, 2009, and recorded a liability of approximately $0.5 million for
the remainder.

• Medicare Premium Revenue: Based on member encounter data that we submit to CMS, our Medicare
revenue is subject to retroactive adjustment for both member risk scores and member pharmacy cost
experience for up to two years after the original year of service. This adjustment takes into account the acuity
of each member’s medical needs relative to what was anticipated when premiums were originally set for that
member. In the event that a member requires less acute medical care than was anticipated by the original
premium amount, CMS may recover premium from us. In the event that a member requires more acute
medical care than was anticipated by the original premium amount, CMS may pay us additional retroactive
premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy
utilization. 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.
Based upon our knowledge of member health care utilization patterns we have recorded a liability of
approximately $0.6 million related to the potential recoupment of Medicare premium revenue at
December 31, 2009.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2009, 2008, and 2007, medically
related administrative costs were approximately $74.6 million, $75.9 million, and $65.4 million,
respectively.

The following table provides the details of our consolidated medical care costs for the periods indicated

(dollars in thousands, except PMPM amounts):

2009

Year Ended December 31,
2008

2007

Amount

PMPM

% of
Total

Amount

PMPM

% of
Total

Amount

PMPM

Fee-for- service . . $2,077,489 $126.14
33.91
Capitation . . . . . .
25.18
Pharmacy . . . . . .
7.62
Other . . . . . . . . .

558,538
414,785
125,424

65.4% $1,709,806 $116.69
30.74
450,440
17.6
24.31
356,184
13.1
7.16
104,882
3.9

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

% of
Total

64.6%
18.0
13.0
4.4

Total . . . . . . . . $3,176,236 $192.85 100.0% $2,621,312 $178.90 100.0% $2,080,083 $160.62 100.0%

Our medical care costs include amounts that have been paid by us through the reporting date, as well as
estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. Such medical care
cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed providers,
unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid.
We use judgment to determine the appropriate assumptions for determining the required estimates.

The most important element in estimating our medical care costs is our estimate for fee-for-service claims
which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been
paid at the reporting date are collectively referred to as medical costs that are “Incurred But Not Paid,” 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.

The factors we consider when estimating our IBNP include, without limitation, claims receipt and payment
experience (and variations in that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit
changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes,
changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our assessment of these
factors is then translated into an estimate of our IBNP liability at the relevant measuring point through the
calculation of a base estimate of IBNP, a further 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 PMPM cost estimates. See Note 11,
“Medical Claims and Benefits Payable.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 because the cost is not significant and the
likelihood that coverage will apply is low.

Taxes Based on Premiums

Our California, Florida, 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 $123.1 million, $95.1 million, and $81.0 million in 2009, 2008, and 2007,
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
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, 2009, or 2008.

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, 2009, or 2008.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily

convertible into known amounts of cash and have a maturity of three months or less on the date of purchase.

Investments

Our investments are principally held in debt securities, which are grouped into three separate categories for
accounting and reporting purposes: available-for-sale securities, held-to-maturity securities, and trading securities.
Available-for-sale securities are recorded at fair value and unrealized gains and losses, if any, are recorded in
stockholders’ equity as other comprehensive income, net of applicable income taxes. Held-to-maturity securities
are recorded at amortized cost, which approximates fair value, and unrealized holding gains or losses are not
generally recognized. Realized gains and losses and unrealized losses judged to be other than temporary with
respect to available-for-sale and held-to-maturity securities are included in the determination of net income.
Trading securities are recorded at fair value, and holding gains and losses are recognized in net income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Except for restricted investments and certain student loan portfolios (the “auction rate securities”), our debt
securities are designated as available-for-sale and are carried at fair value. 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 5, “Fair Value Measurements,” and Note 6, “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 nearly all receivables are readily determinable
and our creditors are primarily state governments, our allowance for doubtful accounts is immaterial. Any amounts
determined to be uncollectible are charged to expense when such determination is made. See Note 7, “Receivables.”

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.
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 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 8, “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 9, “Goodwill and
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. We used a discounted cash flow methodology to assess the fair
values of our reporting units at December 31, 2009 and 2008. If the carrying 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, 2009, 2008, and 2007.

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.

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Other than this 2007 charge, we have determined that no long-lived assets were impaired in the years ended
December 31, 2009, 2008, and 2007.

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 10,
“Restricted Investments.”

Receivable/Liability for Ceded Life and Annuity Contracts

We report a 100% ceded reinsurance arrangement for life insurance policies written and held by our wholly
owned insurance subsidiary, Molina Healthcare Insurance Company, by recording a non-current receivable from the
reinsurer with a corresponding non-current liability for ceded life and annuity contracts.

Other Assets

Significant items included in other assets include deferred financing costs associated with our convertible
senior notes and with our credit facility, certain investments held in connection with our employee deferred
compensation program, and an investment in a vision services provider (see Note 17, “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 and the five year term of the credit facility. As of December 31, 2009, other assets decreased compared
with December 31, 2008 primarily due to the reclassification, to goodwill and intangible assets, of the $9.0 million
initial purchase deposit of the Florida NetPASS acquisition (see Note 4, “Business Purchase Transactions”).
Additionally, as of December 31, 2009, the fair value of the non-current asset relating to a rights agreement
decreased $3.1 million (see Note 5, “Fair Value Measurements”) compared with the balance as of December 31,
2008.

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. We record accruals for uncertain tax
positions by applying a two-step process. First, we 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.
For further discussion and disclosure, see Note 13, “Income Taxes.”

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and
cash equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash in
the PFM 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. As of December 31, 2009, and
2008, our investments with PFM totaled $296.0 million and $253.8 million, respectively. 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 receivable is limited due to payors
consisting principally of the governments of each state in which our health plan subsidiaries operate.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Risks and Uncertainties

Our profitability depends in large part on our ability to accurately predict and effectively manage medical care
costs. We continually review our medical costs in light of our underlying claims experience and revised actuarial
data. However, several factors could adversely affect medical care costs. These factors, which include changes in
health care practices, inflation, new technologies, major epidemics, natural disasters, and malpractice litigation, are
beyond our control and may have an adverse effect on our ability to accurately predict and effectively control
medical care costs. Costs in excess of those anticipated could have a material adverse effect on our financial
condition, results of operations, or cash flows.

At December 31, 2009, we operated in nine states (not including Nevada, where we no longer served members
effective January 1, 2010), 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, CHIP and Medicare members in return for compensation from state and Federal 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 2009, the FASB issued the FASB Accounting Standards Codification (the “Codification”) for financial
statements issued for interim and annual periods ending after September 15, 2009. The Codification became the
single authoritative source for GAAP. Accordingly, previous references to GAAP accounting standards are no
longer used in our disclosures, including these Notes to the Consolidated Financial Statements. The Codification
does not impact our consolidated financial position, results of operations or cash flows.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition
standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related.
The new standards permit entities to initially use management’s best estimate of selling price to value individual
deliverables when those deliverables do not have vendor specific objective evidence, or VSOE, of fair value or when
third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction
consideration is allocated across the separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15,
2010, however early adoption is permitted. We are currently evaluating the impact of adopting these new standards
on our consolidated financial position, results of operations and cash flows.

In October 2009, the FASB issued an update that offers guidance on how to use a net asset value per share to
estimate the fair value of investments in various types of funds including hedge funds, private equity funds, real
estate funds, venture capital funds, and offshore fund vehicles. We adopted the update in the fourth quarter of 2009,
and because we do not invest in such funds, it did not impact our consolidated financial position, results of
operations or cash flows.

In August 2009, the FASB issued an update that provides additional guidance clarifying the measurement of
liabilities at fair value. Because we do not measure any of our liabilities at fair value, the adoption of the new
standards did not impact our consolidated financial position, results of operations or cash flows.

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In June 2009, the FASB issued an amended standard for determining whether to consolidate a variable interest
entity. This new standard amends the evaluation criteria to identify the primary beneficiary of a variable interest
entity and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest
entity. We adopted the standards in the fourth quarter of 2009, and the standard did not impact our consolidated
financial position, results of operations or cash flows.

In May 2009, the FASB issued a new standard for subsequent events, which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. We adopted the new standard during the second quarter of 2009 and, because the
pronouncement only requires additional disclosure, the adoption did not impact our consolidated financial position,
results of operations or cash flows. The required disclosure is included in Note 1, “Basis of Presentation.”

In April 2009, the FASB issued a new standard for the recognition and measurement of other-than-temporary
impairments for debt securities which replaced the pre-existing “intent and ability” indicator. This new standard
specifies that if the fair value of a debt security is less than its amortized cost basis, an other-than-temporary
impairment is triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely
than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the
entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists).
Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in
earnings and amounts related to all other factors which are recognized in other comprehensive income (loss). We
adopted this standard in the second quarter of 2009 and it did not have a material effect on our consolidated financial
position, results of operations or cash flows.

In April 2009, the FASB issued a new standard that provides guidance on how to determine the fair value of
assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased. This
new standard also provides guidance on identifying circumstances that indicate a transaction is not orderly. In
addition, we are required to disclose in interim as well as annual reporting periods the inputs and valuation
techniques used to measure fair value and discussion of changes in valuation techniques. We adopted this standard
in the second quarter of 2009 and it did not have a material effect on our consolidated financial position, results of
operations or cash flows.

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. 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 . . . . . . . . . . . . . . . . . . 26,725
(988)
Weighted-average number of shares repurchased . . . . . . . . . . . . . . . . .
106
Weighted-average number of shares issued. . . . . . . . . . . . . . . . . . . . . .

2009

2007

Year Ended December 31,
2008
(In thousands)
28,444
(871)
103

28,119
—
156

Denominator for basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . 25,843
141
Dilutive effect of employee stock options and stock grants(1) . . . . . . . .

27,676
96

28,275
144

Denominator for diluted earnings per share(2) . . . . . . . . . . . . . . . . . . . 25,984

27,772

28,419

(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. For the
years ended December 31, 2009, 2008 and 2007, there were approximately 620,000, 532,000, and 136,000 anti-
dilutive weighted options, respectively. Restricted shares are included in the calculation of diluted earnings per

77

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

share when their grant date fair values are below the average fair value of the common shares for each of the
periods presented. For the years ended December 31, 2009, 2008 and 2007, there were approximately 21,000,
39,000, and 4,000 anti-dilutive weighted restricted shares, respectively.

(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, 2009, 2008 and 2007.

4. Business Purchase Transactions

On January 1, 2009, we adopted the FASB’s revised standard for accounting for business combinations. The
transaction described below under “Florida health plan,” was accounted for under the new standard. The adoption
of the standard did not have a material effect on our consolidated financial position, results of operations or cash
flows.

Florida health plan. On December 31, 2009 (the acquisition date), we acquired 100% of the voting equity
interests in Florida NetPASS, LLC (“NetPASS”). This acquisition included the purchase of the NetPASS limited
liability company and its membership interests. We initially announced our intention to purchase NetPASS in
August 2008. NetPASS was a provider of care management and administrative services at that time to approx-
imately 58,000 Florida MediPass members in South and Central Florida (Florida MediPASS is the state of Florida’s
Medicaid program). As a result of the acquisition, we have expanded our health plan operations to the southeastern
United States.

Our wholly owned subsidiary, Molina Healthcare of Florida, Inc., was awarded a Medicaid managed care
contract by the state of Florida in October 2008. Subsequently, NetPASS members have been notified of our
intention to acquire NetPASS and, beginning in December 2008, offered membership with our Florida health plan
on a county-by-county basis. Once transitioned, these members become full-risk members of the Florida health
plan. That is, the Florida health plan receives fixed per member per month payments from the state of Florida for the
care of these members, and the Florida health plan is at risk for the cost of the members’ medical care. As of
December 31, 2008, we had transitioned fewer than 50 NetPASS members to our Florida health plan.

As of December 31, 2009, we have transitioned approximately 48,000 NetPASS members to our Florida health
plan, and have recorded $28.7 million to goodwill and intangible assets relating to these members. Of this amount,
we have paid the sellers $23.4 million, with the balance accrued to accounts payable and accrued liabilities. The
$5.3 million current liability includes a 10% indemnification hold back totaling $2.9 million, as provided in the
purchase agreement, and a $2.4 million payable to the sellers for membership transitioned to date as of Decem-
ber 31, 2009. Because the final membership reconciliation will take place in the second quarter of 2010, the
provisional measurements of goodwill and intangible assets recorded as of December 31, 2009, are subject to
change. The final purchase price of the acquisition will be based on the final membership transitioned to our Florida
health plan under the terms of the purchase agreement. As of December 31, 2009, we do not expect adjustments
relating to the final membership reconciliation to be significant. The following table summarizes the estimated fair
values of the assets acquired as of December 31, 2009:

Goodwill (indefinite life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract rights and licenses (five-year useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provider networks (10-year useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands)
$17,048
8,576
3,076

$28,700

The entire amount recorded for goodwill is deductible for income tax purposes. The amount recorded for
goodwill as of December 31, 2009, represents intangible assets that do not qualify for separate recognition as
identifiable intangible assets.

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have received a series of demand letters from the sellers of NetPASS related to the enrollment of members
and the applicable purchase price. We believe the sellers’ demands are without merit, and in the event arbitration or
litigation is commenced by the sellers, we intend to vigorously contest the sellers’ claims.

Missouri health plan. 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 certain post-closing adjustments. During the third quarter of 2009, we paid the sellers $2.5 million to
settle all outstanding issues relating to the post-closing adjustments. We recorded this amount to goodwill in the
accompanying consolidated balance sheets. Additionally during the post-acquisition period in 2008, we reduced
goodwill 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.

Other.

In June 2008, we paid $1.0 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 is used internally to improve operational efficiency.

See Note 21, “Subsequent Events,” for further information regarding a business purchase transaction we

announced in January 2010.

5. Fair Value Measurements

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents,
investments, receivables, trade accounts payable, medical claims and benefits payable, long-term debt and other
liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and
current liabilities to approximate their fair value because of the relatively short period of time between the
origination of these instruments and their expected realization or payment. For a comprehensive discussion of fair
value measurements with regard to our current and non-current investments, see below.

Based on quoted market prices, the fair value of our convertible senior notes issued in October 2007 was
approximately $160.8 million, and $115.5 million as of December 31, 2009, and 2008, respectively. The carrying
amount of the convertible senior notes was $158.9 million, and $164.9 million as of December 31, 2009, and 2008,
respectively.

To prioritize the inputs we use in measuring fair value, we apply a three-tier fair value hierarchy. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions.

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2009, we held certain assets that are required to be measured at fair value on a recurring

basis. These included investments and restricted investments as follows:

Balance Sheet Classification

Description

Current assets:
Investments

Non-current assets:
Investments

Restricted investments

Other assets

Investment grade debt securities; designated as available-for-sale; reported at fair value
based on market prices that are readily available (Level 1). See Note 6, “Investments,”
for further information regarding fair value.

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).
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). See Note 10, “Restricted Investments,” for further information regarding fair
value.
Other assets include auction rate securities rights; reported at fair value based on
discounted cash flow analysis or other type of valuation model (Level 3).

As of December 31, 2009, $67.8 million par value (fair value of $59.7 million) of our investments consisted of
auction rate securities, all of which were collateralized by student loan portfolios guaranteed by the U.S. govern-
ment. We continued to earn interest on substantially all of these auction rate securities as of December 31, 2009.
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, and continued to be unavailable as of December 31, 2009. To estimate the fair value of these securities, we
used pricing models that 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 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, 2009. For our investments in auction rate securities, we do not intend to sell, nor is it more likely than
not that we will be required to sell, these investments before recovery of their cost.

As of December 31, 2009, we held $40.9 million par value (fair value of $36.7 million) auction rate securities
(designated as trading securities) with a certain investment securities firm. In the fourth quarter of 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 account for the Rights as a freestanding financial instrument, and record the value of the Rights at fair
value, which totaled $3.8 million, and $6.9 million at December 31, 2009, and 2008, respectively. To determine the
fair value estimate of the Rights, we use a discounted cash-flow model 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.

For the year ended December 31, 2009, we recorded a pretax gain on the change in the fair value of the auction
rate securities underlying the Rights totaling $3.4 million, which was offset by a pretax loss on the Rights totaling
$3.1 million. In 2008, simultaneous to the recognition of the $6.9 million rights agreement described above, we

80

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. We expect that the future changes in the fair value of the Rights will
continue to be substantially offset by the fair value movements in the underlying auction rate securities.

As of December 31, 2009, the remainder of our auction rate securities (designated as available-for-sale
securities) amounted to $26.9 million par value (fair value of $23.0 million). As a result of the increase in fair value
of auction rate securities designated as available-for-sale, we recorded unrealized gains of $0.8 million
($0.5 million, net of tax) to accumulated other comprehensive income for the year ended December 31, 2009.
We recorded unrealized losses of $7.6 million ($4.7 million, net of tax) to other comprehensive loss for the year
ended December 31, 2008. We have deemed these unrealized gains and 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. If we determine that any future
valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.

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. Our assets measured at fair value on a recurring basis at December 31, 2009, were as
follows:

Fair Value Measurements at Reporting Date Using
Level 3

Level 1

Level 2

Total

Investments (not including auction rate securities) . . . .
Auction rate securities (available-for-sale) . . . . . . . . . .
Auction rate securities (trading) . . . . . . . . . . . . . . . . . .
Auction rate securities rights . . . . . . . . . . . . . . . . . . . .
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . .

$174,844
22,957
36,730
3,807
36,274

$174,844
—
—
—
36,274

Total assets measured at fair value . . . . . . . . . . . . . . . .

$274,612

$211,118

$—
—
—
—
—

$—

$ —
22,957
36,730
3,807
—

$63,494

(In thousands)

The following table presents our assets measured at fair value on a recurring basis using significant

unobservable inputs (Level 3):

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains (realized or unrealized):

(Level 3)
(In thousands)
$65,076

Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

294
824
(2,700)

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$63,494

The amount of total gains for the period included in other comprehensive income
attributable to the change in unrealized gains relating to assets still held at
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

824

81

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.

Investments

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

Government-sponsored enterprise securities . . . . . . . . . .
Municipal securities (including auction rate securities). .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government-sponsored enterprise securities . . . . . . . . . .
Municipal securities (including auction rate securities). .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost or
Amortized
Cost

$ 89,451
82,009
28,052
3,258
32,543

December 31, 2009
Gross
Unrealized

Gains

Losses

(In thousands)

$ 504
3,120
92
—
206

$ 281
4,154
84
—
185

Estimated
Fair
Value

$ 89,674
80,975
28,060
3,258
32,564

$235,313

$3,922

$4,704

$234,531

Cost or
Amortized
Cost

$ 93,994
85,973
8,604
13,494
50,315

December 31, 2008
Gross
Unrealized

Gains

Losses

(In thousands)

$1,309
23
295
—
155

$
79
5,313
—
—
731

Estimated
Fair
Value

$ 95,224
80,683
8,899
13,494
49,739

$252,380

$1,782

$6,123

$248,039

The contractual maturities of our investments as of December 31, 2009 are summarized below.

Amortized
Cost

Estimated
Fair
Value

(In thousands)

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,475
106,624
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,430
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,784
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 67,387
106,934
1,400
58,810

$235,313

$234,531

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 availa-
ble-for-sale securities were $60.3 million, $55.3 million, and $13.1 million for the years ended December 31, 2009,
2008 and 2007, respectively. Net realized investment gains (losses) for the years ended December 31, 2009, 2008
and 2007 were $267,000, $342,000 and $(78,000) 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, 2009 and 2008 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.

82

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our investment in municipal securities consists primarily of auction rate securities. As described in Note 5,
“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 do not intend to sell, nor is it more likely than not that we will be required to sell these investments before
recovery of their cost, we do not consider the auction rate securities that are designated as available-for-sale to be
other-than-temporarily impaired at December 31, 2009.

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, 2009 and 2008.

In a Continuous Loss
Position
for Less than 12 Months
as of December 31, 2009
Estimated
Fair
Value

Unrealized
Losses

In a Continuous Loss
Position
for 12 Months or More
as of December 31, 2009
Estimated
Fair
Value

Unrealized
Losses

(In thousands)

Total as of December 31, 2009
Estimated
Fair
Value

Unrealized
Losses

Municipal securities . . . . .
Government-sponsored

enterprise securities . . .
U.S. treasury notes . . . . . .
Corporate bonds . . . . . . . .

$10,427

$ 77

$24,031

$3,902

$34,458

$3,979

11,192
5,572
8,170

150
34
124

7,297
—
1,203

94
—
36

18,489
5,572
9,373

244
34
160

$35,361

$385

$32,531

$4,032

$67,892

$4,417

Municipal securities . . . . . . . .
Government-sponsored

enterprise securities . . . . . .
Corporate bonds . . . . . . . . . .

In a Continuous Loss
Position
for Less than 12 Months
as of December 31, 2008
Estimated
Fair
Value

Unrealized
Losses

$41,901

$4,914

In a Continuous Loss
Position
for 12 Months or More
as of December 31, 2008 Total as of December 31, 2008
Estimated
Fair
Value

Estimated
Fair
Value

Unrealized
Losses

Unrealized
Losses
(In thousands)
$—

$—

$41,901

$4,914

7,237
30,276

79
731

$79,414

$5,724

—
—

$—

—
—

7,237
30,276

79
731

$—

$79,414

$5,724

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Receivables

Accounts receivable by health plan operating subsidiary were as follows:

December 31,

2009

2008

(In thousands)

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,289
14,977
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,670
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,919
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,004
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,107
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,910
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,778
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 20,740
6,637
24,024
5,712
34,562
20,614
14,184
2,089

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136,654

$128,562

Accounts receivable as of December 31, 2009, increased compared with the prior year generally as a result of
increased membership across several of our health plans. These increases were partially offset by the decrease at our
Utah health plan, due to the termination of the plan’s cost-plus reimbursement contract with the state of Utah
effective September 1, 2009, as described further below.

Ohio. As of December 31, 2009, the receivable due our Ohio health plan included two significant
components. The first is approximately $5.1 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 $28.8 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
of such payments from future monthly capitation amounts owed to the provider group. Of the $28.8 million
receivable, approximately $19.3 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 2010. 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 $9.5 million as of
December 31, 2009. 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 $8.2 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 year ended
December 31, 2009, our average monthly capitation payment to this provider group was approximately $14 million.

Utah. Prior to September 1, 2009, our Utah health plan’s agreement with the state of Utah called for the
reimbursement of medical costs incurred in serving our members plus an administrative fee for a specified
percentage of that medical cost amount (which was formerly 9% and most recently 6.5%), plus a portion of any cost
savings realized as defined in the agreement. Our Utah health plan billed the state of Utah monthly for actual paid
health care claims plus administrative fees. Prior to September 1, 2009, our receivable balance from the state of
Utah included: (1) amounts billed to the state for actual paid health care claims plus administrative fees; and
(2) amounts estimated for incurred but not paid claims, which, along with the related administrative fees, are not
billable to the state of Utah until such claims are actually paid. Effective as of September 1, 2009, the Utah health
plan’s agreement with the state of Utah became a prepaid capitation contract, under which the plan is paid a fixed
per member per month amount.

84

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

California. Effective October 1, 2009, the state of California implemented a delivery payment as part of its
Medicaid managed care payment methodology. Accordingly, the California health plan only receives delivery
payments upon acceptance by the state of a delivery encounter. The substitution of this methodology for a portion of
the state payment that was previously paid as part of monthly capitation has, combined with the increase in
enrollment at the California health plan during 2009, increased that health plan’s accounts receivable at
December 31, 2009 when compared with December 31, 2008.

Michigan. Accounts receivable at our Michigan health plan increased at December 31, 2009 when compared
with December 31, 2008 as a result of: (1) the state’s notice that we would be receiving additional premium for the
months of October and November 2009 in connection with a rate increase we received effective October 1, 2009;
(2) the accrual of a performance bonus from the state of Michigan that was accrued at December 31, 2009 and
received in January 2010; and (3) state delays in processing new born premiums at December 31, 2009.

Missouri. Effective October 1, 2009, the state of Missouri carved out the Medicaid pharmacy benefit from
the payments made to Medicaid health plans contracted in that state and retained responsibility for administering
that benefit. As a result, monthly revenue (and the related receivable) recorded by the Missouri health plan have
decreased at December 31, 2009 when compared with December 31, 2008.

New Mexico Effective July 1, 2009, the New Mexico health plan began performing certain administrative
services for that state’s Medicaid program under a separate contract. Accounts receivable recorded in connection
with that contract represent the majority of the increase in accounts receivable at the New Mexico health plan
between December 31, 2008 and December 31, 2009.

Washington. More rapid collection of delivery payments due from the state has reduced the Washington

health plan’s accounts receivable at December 31, 2009 when compared with December 31, 2008.

8. Property and Equipment

A summary of property and equipment is as follows:

December 31,

2009

2008

(In thousands)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,524
41,476
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,898
Furniture, equipment and automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,526
Capitalized computer software costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,461
25,047
47,074
56,211

166,424

131,793

Less: accumulated depreciation and amortization on building and

improvements, furniture, equipment and automobiles . . . . . . . . . . . . . . . .
Less: accumulated amortization on capitalized computer software costs . . . .

(50,911)
(37,342)

(42,056)
(24,679)

(88,253)

(66,735)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,171

$ 65,058

The increase in property and equipment for the year ended December 31, 2009 was primarily due to the build
out and commencement of operations of our new information technology data center in Albuquerque, New Mexico.
Depreciation expense recognized for building and improvements, furniture, equipment and automobiles was
$11.0 million, $9.0 million, and $8.5 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Amortization expense recognized for capitalized computer software costs was $14.2 million, $11.7 million, and
$8.6 million for the years ended December 31, 2009, 2008, and 2007, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. 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 years, and for provider networks is
approximately 10 years. Amortization expense on intangible assets recognized for the years ended December 31,
2009, 2008, and 2007 was $12.9 million, $13.0 million, and $10.8 million, respectively. Based on the balances of
our identifiable intangible assets as of December 31, 2009, we estimate that our intangible asset amortization
expense will be $14.6 million in 2010, $13.4 million in 2011, $11.0 million in 2012, $7.8 million in 2013, and
$7.0 million in 2014. 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 . . . . . . . . . . . . . . . . . . . . . . . . . $119,101
17,146
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,246
4,155

$67,855
12,991

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . $136,247

$55,401

$80,846

Intangible assets:

Contract rights and licenses . . . . . . . . . . . . . . . . . . . . . . . . . $114,219
14,548
Provider networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$46,160
3,474

$68,059
11,074

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . $128,767

$49,634

$79,133

The changes in the carrying amount of goodwill and indefinite-lived intangible assets were as follows (in

thousands):

Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,466
17,048
Goodwill recorded for acquisition of Florida NetPASS . . . . . . . . . . . . . . . . . . . . . . . . . .
2,894
Goodwill adjustment related to acquisition of the Missouri health plan . . . . . . . . . . . . . . .

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,408

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.

10. 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

86

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

capitated providers. The following table presents the balances of restricted investments by health plan, and by our
insurance company:

December 31,

2009

2008

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(In thousands)
368
2,052
4,686
1,000
503
15,497
9,036
1,515
578
151
888

367
9,828
4,718
1,000
506
9,670
8,459
1,521
577
151
1,405

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,274

$38,202

As of December 31, 2009, the Florida health plan’s restricted investments decreased compared with the prior
year due to the release of escrow funds relating to a settlement agreement with the state of Florida that was a
component of the purchase price of NetPASS (see Note 4, “Business Purchase Transactions”). The increase in the
New Mexico health plan’s restricted investments over the same period was due primarily to an increase in premium
revenue at the plan, a percentage of which is used to determine the restricted investment balance required by the
state of New Mexico. Additionally, the state of New Mexico’s calculation methodology changed to use gross
premium revenue, rather than the net premiums after taxes and assessments, also resulting in an increase to the
required balance.

The contractual maturities of our held-to-maturity restricted investments as of December 31, 2009 are

summarized below.

Amortized
Cost

Estimated
Fair Value

(In thousands)

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$35,408
724
142

$35,425
721
155

$36,274

$36,301

11. 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, 2009 and 2008. The negative amounts displayed for “Components of medical care costs
related to: Prior periods” represent the amount by which our original estimate of claims and benefits payable at the

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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.

Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of medical care costs related to:
Current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2009
2008
(Dollars in thousands)

$ 292,442

$ 311,606

3,227,794
(51,558)

2,683,399
(62,087)

Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,176,236

2,621,312

Payments for medical care costs related to:
Current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,919,240
232,922

2,413,128
227,348

Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,152,162

2,640,476

Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 316,516

$ 292,442

Benefit from prior period as a percentage of:

Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17.6%
1.4%
1.6%

19.9%
2.0%
2.4%

The overestimation of our liability for claims and medical benefits payable at December 31, 2008 led to the
recognition of a benefit from prior period claims development for the year ended December 31, 2009 totaling
$51.6 million. The overestimation of the claims liability at our Michigan, New Mexico, Ohio, and Washington
health plans was principally the cause of the recognition of a benefit from prior period claims development. This
was partially offset by the underestimation of our claims liability at December 31, 2008 at our California health
plan. The details were as follows:

• In Michigan, we underestimated the impact of a steep drop in claims inventory during December 2008,

thereby overestimating our liability at December 31, 2008.

• In New Mexico, we overestimated at December 31, 2008 the ultimate amounts we would need to pay to
resolve certain high dollar provider claims, thereby overestimating our liability at December 31, 2008.

• In Ohio, we underestimated the degree to which certain operational initiatives had reduced our medical costs

in the last few months of 2008, thereby overestimating our liability at December 31, 2008.

• In Washington, we overestimated the impact that certain adverse utilization trends would have on our

liability at December 31, 2008, thereby overestimating our liability at December 31, 2008.

• In California, we underestimated utilization trends at the end of 2008, leading to an underestimation of our
liability at December 31, 2008. Additionally, we underestimated the impact that certain delays in the receipt
of paper claims (as opposed to electronically submitted claims) would have on our liability, leading to a
further underestimation of our liability at December 31, 2008.

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 totaling $62.1 million,
as follows:

• 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

• 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.

The use of a consistent methodology in estimating our liability for claims and medical benefits payable
minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect
consolidated results of operations in subsequent periods. Facts and circumstances unique to the estimation process
at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent
periods Any absence of adverse claims development (as well as the expensing through general and administrative
expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior
period claims development in the period subsequent to the date of the original estimate. 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. In 2009 and 2008 the absence of adverse development of the liability for
claims and medical benefits payable at the close of the previous period resulted in the recognition of substantial
favorable prior period development. In both years, however, the recognition of a benefit from prior period claims
development did not have a material impact on our consolidated results of operations as the amount of benefit
recognized in each your was roughly consistent with that recognized in the previous year.

12. Long-Term Debt

Convertible Senior Notes

In October 2007, we sold $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due
2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million. During 2009, we
purchased and retired $13.0 million face amount of the Notes, so the remaining aggregate principal amount totaled
$187.0 million as of December 31, 2009 (see further discussion below regarding the purchase program). 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, 2007, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

In May 2008, the FASB issued new standards relating to certain convertible debt instruments, which we
adopted effective January 1, 2009 (see Note 1, “Basis of Presentation”). These standards require the proceeds from
the issuance of such convertible debt instruments to be allocated between a liability component and an equity
component, which we have done with respect to the Notes. We have determined that the effective interest rate of the
Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance date, plus
an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected
to be outstanding, as additional non-cash interest expense. As of December 31, 2009, we expect the Notes to be
outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 57 months. The Notes’
if-converted value did not exceed their principal amount as of December 31, 2009. We allocated $24.5 million, net
of the impact of deferred taxes, to the equity component of the Notes, which amount continued to be the carrying
amount of the equity component as of December 31, 2008. At December 31, 2009, the equity component of the
Notes, net of the impact of deferred taxes, was $24.0 million. The slight reduction in the amount of the equity
component was due to amounts recorded as a result of our purchase of $13.0 million face amount of the Notes
during the first quarter of 2009 (described further below). The following table provides the details of the liability
amounts recorded:

Details of the liability component:

Principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$187,000
(28,100)

$200,000
(35,127)

Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$158,900

$164,873

As of
December 30,
2009

As of
December 31,
2008

(In thousands)

2009

Years Ended December 31,
2008
(In thousands)

2007

Interest cost recognized for the period relating to the:

Contractual interest coupon rate of 3.75%. . . . . . . . . . . . . . . . . . .
Amortization of the discount on the liability component . . . . . . . .

$ 7,076
4,782

$ 7,500
4,707

$1,688
1,012

Total interest cost recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,858

$12,207

$2,700

Securities Purchase Program. Under

the $25 million securities purchase program announced in
January 2009, we purchased and retired $13.0 million face amount of the Notes during the first quarter of
2009. We purchased the Notes at an average price of $74.25 per $100 principal amount, for a total of $9.8 million,
including accrued interest. The gain recognized during the quarter ended March 31, 2009 on the purchase of the
Notes was $1.5 million, or approximately $0.04 per diluted share.

In March 2009, our board of directors authorized the purchase of up to an additional $25 million in aggregate
of either our common stock or the Notes. The purchase program was funded with working capital, and common
stock purchases were made from time to time on the open market or through privately negotiated transactions during

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2009. The purchase program extended through December 31, 2009. See the details regarding the common stock
purchases at Note 14, “Stockholders’ Equity.”

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 general corporate purposes.

Pending the closing of the acquisition of the HIM business and the effectiveness of the fourth amendment,
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, 2009 and 2008, 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,
2009, we were in compliance with all financial covenants in the Credit Facility. See Note 21, “Subsequent Events,”
for further discussion of our fourth amendment and fifth amendment of the Credit Facility, relating to a business
purchase transaction announced in January 2010.

13.

Income Taxes

The provision for income taxes consisted of the following:

2009

Year Ended December 31,
2008
(In thousands)

2007

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,421
3,901

$32,972
6,916

$36,171
3,073

Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,322

39,888

39,244

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,924
(2,498)

Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(574)

Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

378
(490)

(112)

—

(3,955)
(338)

(4,293)

45

Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,748

$39,776

$34,996

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 . . . . . . . . . . . . . . . . . . . .
(Benefit) liability for unrecognized tax benefits . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2007

2009

Year Ended December 31,
2008
(In thousands)
$34,782
4,176
450
368

$15,266
912
(3,315)
(115)

$32,453
1,925
85
533

Reported income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,748

$39,776

$34,996

Our effective tax rate is based on expected income, statutory tax rates, and tax planning opportunities available
to us in the various jurisdictions in which we operate. Significant management estimates and judgments are required
in determining our 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 2009, 2008, and 2007,

tax-related benefits (deficiencies) on share-based compensation were
$(718,000), $(292,000), and $853,000, respectively. Such amounts were recorded as adjustments to income taxes
payable with a corresponding increase (decrease) to additional paid-in capital.

92

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2009
and 2008 were as follows:

December 31,

2009

2008

(In thousands)

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,494
285
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,151
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,628
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(408)
Unrealized (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,554
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,894)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(80)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,785
1,046
172
1,724
27
1,274
2,063
(3,979)
(41)

Deferred tax asset, net of valuation allowance — current . . . . . . . . . . . . . . . .

8,757

9,071

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(281)
2,501
—
(866)
237
1,480
(264)
(10,415)
6,817
(11,555)
(160)
—

—
1,684
1,830
108
971
199
—
(10,698)
5,876
(12,931)
745
(695)

Deferred tax liability, net of valuation allowance — long term . . . . . . . . . . . .

(12,506)

(12,911)

Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,749)

$ (3,840)

At December 31, 2009, we had federal and state net operating loss carryforwards of $344,000 and $3.8 million,
respectively. The federal net operating loss begins expiring in 2011, and state net operating losses begin expiring in
2028. The utilization of the net operating losses is subject to certain limitations under federal and state law.

At December 31, 2009, we had California enterprise zone tax credit carryovers of $2.1 million which do not

expire.

We have determined that as of December 31, 2008, $695,000 of deferred tax assets did not satisfy the
recognition criteria. Accordingly, we recorded a valuation allowance of $695,000 as of December 31, 2008. The
valuation allowance primarily related to the uncertainty of realizing certain Indiana state net operating loss
carryforwards. We determined in 2009 that we would no longer file an Indiana state tax return, thus, rendering the
state net operating loss carryover worthless. As such, we recorded a write-off of the deferred tax asset and
corresponding valuation allowance relating to the Indiana state net operating loss carryover.

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.

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MOLINA HEALTHCARE, INC.

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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.

We recognize tax benefits only if the tax position is more likely than not to be sustained. We are subject to
income taxes in the 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:

Gross unrecognized tax benefits at beginning of period . . . . . . . . $(11,676)
(3,748)
Increases in tax positions for prior years . . . . . . . . . . . . . . . . . . .
6,804
Decreases in tax positions for prior years . . . . . . . . . . . . . . . . . .
—
Increases in tax positions for current year . . . . . . . . . . . . . . . . . .
—
Decreases in tax positions for current year . . . . . . . . . . . . . . . . .
4,355
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137
Lapse in statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . .

2009

2007

Year Ended December 31,
2008
(In thousands)
$(10,278)
(3,310)
2,682
(2,061)
892
—
399

$ (4,355)
(3,197)
1,527
(4,935)
—
202
480

Gross unrecognized tax benefits at end of period. . . . . . . . . . . . . $ (4,128)

$(11,676)

$(10,278)

As of December 31, 2009, we had $4.1 million of unrecognized tax benefits of which $3.4 million, if fully
recognized, would affect our effective tax rate. We anticipate a decrease of $408,000 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, 2009, December 31, 2008, and December 31, 2007, we had accrued $75,000,
$1.4 million and $638,000, respectively, for the payment of interest and penalties.

We may be subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2006 through
2009. 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 2009. Our subsidiary,
HCLB, entered into a closing agreement with the IRS in December 2009 that successfully concluded with certainty
the IRS examination of HCLB for the year ended May 2006.

14. Stockholders’ Equity

Under the purchase program described in Note 12, “Long-Term Debt,” we have purchased approximately
1.4 million shares of our common stock for $27.7 million (average cost of approximately $20.49 per share) during
2009. These purchases have increased diluted earnings per share for the year ended December 31, 2009 by $0.04.
We have retired the $27.7 million of treasury shares purchased in 2009, and we have also retired $20.4 million of
treasury shares that were purchased prior to 2009 ($48.1 million in aggregate). This resulted in the reduction of
additional paid-in capital as of December 31, 2009, compared with December 31, 2008. Also in 2009, the treasury
stock balance decreased as a result of the retirement of the $20.4 million of treasury shares purchased prior to 2009.

In April 2008, our board of directors authorized the purchase of up to $30 million of our common stock on the
open market or through privately negotiated transactions, and then subsequently in July 2008, authorized the
purchase of up to an additional one million shares of our common stock. We used working capital to fund the

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

purchases under these programs. The timing and amount of purchases were primarily made pursuant to a
Rule 10b5-1 trading plans. Under these programs, we purchased approximately 1.9 million shares for an aggregate
purchase price of $49.9 million (average cost of approximately $25.70 per share). 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.

15. 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
recognized in connection with our contributions to the 401(k) plan totaled $4.7 million, $3.9 million and
$3.6 million in the years ended December 31, 2009, 2008, and 2007, 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.

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 initially 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 4.0 million shares reserved for issuance under the
2002 Plan as of January 1, 2009.

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 four 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.

Under our 2002 Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase common shares
at 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-
month offering period. Each participant is limited to a maximum purchase of $25,000 (as measured by the fair value of
the stock acquired) per year through payroll deductions. Under the ESPP, we issued 120,300 and 86,400 shares of our
common stock during the years ended December 31, 2009 and 2008, respectively. Beginning January 1, 2004, and
each year until the 2.2 million maximum aggregate number of shares reserved for issuance was reached on
December 31, 2008, shares available for issuance under the ESPP automatically increased by 1% of total outstanding
capital stock. The aggregate number of unissued common shares available for future grants under the 2002 Plan and
the ESPP combined was 3.8 million as of December 31, 2009, and 3.9 million as of December 31, 2008.

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the components of our stock-based compensation expense that are reported in

general and administrative expenses in the consolidated statements of income:

Restricted stock awards . . . . . . .
Stock options (including expense
relating to our ESPP) . . . . . . .

2009

Year Ended December 31,
2008

2007

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

Pretax
Charges

Net-of-Tax
Amount

$5,789

$3,589

$5,171

$3,206

$3,751

$2,335

1,696

1,052

2,640

1,637

3,437

2,139

Total . . . . . . . . . . . . . . . . . . . . .

$7,485

$4,641

$7,811

$4,843

$7,188

$4,474

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, 2009, there was $12.2 million of unrecognized compensation cost
related to unvested restricted stock awards, which we expect to recognize over a weighted-average period of
2.6 years. This unrecognized compensation cost assumes an estimated forfeiture rate of 6% as of December 31,
2009. Also as of December 31, 2009, there was $0.9 million of unrecognized compensation expense related to
unvested stock options, which we expect to recognize over a weighted-average period of 1.3 years.

The total fair value of restricted shares vested during the years ended December 31, 2009, 2008, and 2007 was
$3.2 million, $2.5 million, and $2.6 million, respectively. Unvested restricted stock activity for the year ended
December 31, 2009 was as follows:

Unvested balance as of December 31, 2008. . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

470,955
425,000
(163,700)
(44,625)

Unvested balance as of December 31, 2009. . . . . . . . . . . . . . . . . . . .

687,630

$31.95
$18.93
$30.52
$25.82

$24.64

Weighted-
Average Grant Date
Fair Value

No stock options were exercised during the year ended December 31, 2009; the total intrinsic value of stock
options exercised during the year ended December 31, 2008 was nominal. The total intrinsic value of stock options
exercised during the year ended December 31, 2007 amounted to $4.3 million. Stock option activity for the year
ended December 31, 2009 was as follows:

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value
(000s)

Number
of Options

Outstanding at December 31, 2008 . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

665,339
(14,600)

$30.29
$31.96

Outstanding at December 31, 2009 . . . . . . . . . . . . . . .

650,739

$30.25

Exercisable and expected to vest at December 31,

2009(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

640,478

$30.22

Exercisable at December 31, 2009 . . . . . . . . . . . . . . .

542,905

$29.92

5.8

5.8

5.5

$288

$288

$288

(a) Stock options exercisable and expected to vest at December 31, 2009 information is based on an estimated

forfeiture rate of 13%.

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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,

2009:

Range of Exercise Prices

$4.50 - $27.49. . . . . . . . . . . . . . .
$28.66 - $28.66 . . . . . . . . . . . . . .
$29.17 - $30.05 . . . . . . . . . . . . . .
$31.32 - $44.29 . . . . . . . . . . . . . .

Options Outstanding

Options Exercisable

Number
Outstanding
at
December 31,
2009

Weighted-
Average
Remaining
Contractual
Life (Years)

164,170
173,744
9,350
303,475

650,739

4.0
6.1
5.9
6.7

5.8

Weighted-
Average
Exercise
Price

$23.11
$28.66
$29.86
$35.03

$30.25

Number
Exercisable
at
December 31,
2009

162,670
173,744
9,350
197,141

542,905

Weighted-
Average
Exercise
Price

$23.10
$28.66
$29.86
$36.66

$29.92

The Black-Scholes valuation model was used to estimate the fair value of stock options at grant date (for
options awarded in 2008 and 2007; no options were awarded in 2009) 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,

2008

2007

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected option life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant date weighted-average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.80

2.5%
45.3%
4
0%

4.5%
47.1%
6
0%

$16.37

17. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our
members. We account for this investment under the equity method of accounting because we have an ownership
interest in the investee that confers significant influence over operating and financial policies of the investee. As of
December 31, 2009 and 2008, our carrying amount for this investment totaled $4.1 million and $3.6 million,
respectively. During 2008, we advanced this provider $1.3 million, all of which was collected during 2009. For the
years ended December 31, 2009, 2008, and 2007, we paid $21.8 million, $15.4 million, and $10.9 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, the sister of Dr. J. Mario Molina, our Chief Executive Officer, and John Molina, our Chief
Financial Officer. Amounts paid to Pacific Hospital under the terms of this fee-for-service agreement were
$745,000, $242,000, and $157,000 for the years ended December 31, 2009, 2008, and 2007, respectively. We also
had a capitation arrangement with Pacific Hospital, where we paid Pacific Hospital a fixed monthly fee per member.
This contract was terminated by the parties effective August 31, 2009. Amounts paid to Pacific Hospital for
capitated services totaled approximately $1.1 million, $3.8 million, and $4.8 million for the years ended

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2009, 2008, and 2007, respectively. We believe that both arrangements with Pacific Hospital are
based on prevailing market rates for similar services.

18. 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 consist of the following approximate amounts:

Year ending December 31,

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands)
$ 21,334
20,761
18,604
15,183
13,522
39,576

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$128,980

Rental expense related to these leases totaled $20.8 million, $17.5 million, and $18.1 million for the years

ended December 31, 2009, 2008, and 2007, respectively.

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 termination bonus, as defined, in addition to full vesting of 401(k) employer contributions and
stock-based awards, and a cash sum equal in value to health and welfare benefits provided for 18 months. 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 termination bonus, in addition to full vesting of 401(k) employer contributions and
stock-based awards, and a cash sum equal in value to health and welfare benefits provided for three years.

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 termination bonus.

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.

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MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2009, 2008, and 2007. We also carry claims-made managed
care errors and omissions professional liability insurance for our health plan operations. This insurance is subject to
a coverage limit of $15.0 million per occurrence and $15.0 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.

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our health plan subsidiaries operating in California, Florida,
Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. 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 $368.7 million at
December 31, 2009, and $355.0 million at December 31, 2008. The National Association of Insurance Commis-
sioners, 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, Missouri, New Mexico,
Ohio, Texas, Washington, and Utah have adopted these rules, which may vary from state to state. California and
Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of
their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital
required for those states.

As of December 31, 2009, our health plans had aggregate statutory capital and surplus of approximately
$377.7 million compared with the required minimum aggregate statutory capital and surplus of approximately
$257.1 million. All of our HMOs were in compliance with the minimum capital requirements at December 31,
2009. 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.

19. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended December 31, 2009 and

2008.

99

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Premium revenue . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share(1),(2):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .

Premium revenue . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Income before income taxes(3) . . . . . . . . . . .
Net income(3) . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1),(3):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .

For The Quarter Ended

March 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009

(In thousands)

$857,484
24,115
20,700
12,211

$925,507
20,726
17,503
14,565

$914,805
16,274
12,995
8,564

$

$

0.46

0.46

$

$

0.56

0.56

$

$

0.34

0.33

$962,411
(3,722)
(7,582)
(4,472)

$

$

(0.18)

(0.18)

For The Quarter Ended

March 31,
2008(1)

June 30,
2008(1)

September 30,
2008(1)

December 31,
2008(1)

(In thousands)

$729,638
24,451
21,083
12,475

$761,153
30,258
26,833
15,823

$791,554
30,429
27,309
16,480

$

$

0.44

0.44

$

$

0.57

0.56

$

$

0.60

0.60

$808,895
27,467
24,149
14,820

$

$

0.55

0.55

(1) 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, 2009 and 2008.

(2) For the quarter ended December 31, 2009, no potentially dilutive options or nonvested stock were included in
the computation of our diluted loss per share because to do so would have been anti-dilutive for that period.
(3) The Company’s consolidated statement of income for the year ended December 31, 2008 has been recast to
reflect the adoption of ASC Subtopic 470-20, Debt with Conversion and Other Options (see Note 1).

100

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

20. Condensed Financial Information of Registrant

Following are our parent company only condensed balance sheets as of December 31, 2009 and 2008, and our
condensed statements of income and condensed statements of cash flows for each of the three years in the period
ended December 31, 2009.

Condensed Balance Sheets

December 31,

2009

2008(1)

(In thousands except per-
share data)

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,040
3,002
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
19,121
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,435
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances to related parties and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,598
65,067
45,943
16,516
545,731
16,742

$ 42,776
9,745
3,119
6,230
13,247
10,228

85,345
53,471
3,721
16,364
568,224
19,379

$749,597

$746,504

Current liabilities:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,577
158,900
10,769
12,613

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 24,595
164,873
12,530
12,744

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

206,859

214,742

Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized, outstanding 25,607 shares
at December 31, 2009 and 26,725 shares at December 31, 2008 . . . . . . . . . . . . . . .

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

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 1,201 shares at December 31, 2008. . . . . . . . . . . . . . . . . . . . .

26

27

—
129,902
(1,812)
414,622
—

—
170,681
(2,310)
383,754
(20,390)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

542,738

531,762

$749,597

$746,504

(1) The Registrant’s condensed statement of financial position as of December 31, 2008, has been recast to reflect
the adoption of FASB Accounting Standards Codification (ASC) Subtopic 470-20, Debt with Conversion and
Other Options (see Note 1).

101

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Statements of Income

2009

Year Ended December 31,
2008(1)
(In thousands)

2007(1)

Revenue:
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,571
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
340
1,540
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$190,361
177
2,733

$154,071
186
2,915

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220,451

193,271

157,172

26,865
160,792
25,223

21,759
143,709
18,980

22,042
114,616
15,101

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

212,880

184,448

151,759

Gain on purchase of convertible senior notes . . . . . . . . . . . . . . . . . . . . . .

1,532

—

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,103
(13,770)

Loss before income taxes and equity in net income of subsidiaries . . . . . .
Income tax (benefit) expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net loss before equity in net income of subsidiaries . . . . . . . . . . . . . . . . .
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,667)
(3,755)

(912)
31,780

8,823
(13,167)

(4,344)
(456)

(3,888)
63,486

—

5,413
(5,459)

(46)
1,963

(2,009)
59,735

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,868

$ 59,598

$ 57,726

(1) The Registrant’s condensed statements of income for the years ended December 31, 2008 and 2007 have been
recast to reflect the adoption of FASB ASC Subtopic 470-20, Debt with Conversion and Other Options
(see Note 1).

102

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Statements of Cash Flows

2009

Year Ended December 31,
2008
(In thousands)

2007

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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

$ 40,551

$ 17,532

$ 23,500

21,960
(3,844)
12,669
(2,894)
(32,245)
(17,074)
(540)
(21,968)

(27,712)
(9,653)
—
—
—
—
31

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,015

2,084

4,257

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . .

(35,319)

(47,813)

153,061

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . .

(16,736)
42,776

6,490
36,286

18,888
17,398

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . .

$ 26,040

$ 42,776

$ 36,286

103

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 health plan 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 2009, 2008, and 2007 for these services totaled $218.6 million, $190.4 million, and
$154.1 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 2009, 2008, and 2007, the Registrant received dividends from its subsidiaries totaling $76.7 million,
$91.5 million, and $39.0 million, respectively. Such amounts have been recorded as a reduction to the investments
in the respective subsidiaries.

During 2009, 2008, and 2007, the Registrant made capital contributions to certain subsidiaries totaling
$54.7 million, $48.6 million, and $55.9 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 the
Registrant has an ownership interest in the investee that confers significant influence over operating and financial
policies of the investee. As of December 31, 2009 and 2008, the Registrant’s carrying amount for this investment
totaled $4.1 million and $3.6 million, respectively. During 2008, the Registrant advanced this provider $1.3 million,
all of which was collected during 2009. For the years ended December 31, 2009, 2008 and 2007, the Registrant paid
$21.8 million, $15.4 million, and $10.9 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
property by the husband of Dr. Martha Bernadett, the sister of Dr. J. Mario Molina, our Chief Executive Officer, and
John Molina, our Chief Financial Officer. Amounts paid to Pacific Hospital under the terms of this fee-for-service
agreement were $745,000, $242,000, and $157,000 for the years ended December 31, 2009, 2008, and 2007,
respectively. The Registrant also had a capitation arrangement with Pacific Hospital, where the Registrant paid

104

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pacific Hospital a fixed monthly fee per member. This contract was terminated by the parties effective August 31,
2009. Amounts paid to Pacific Hospital for capitated services totaled approximately $1.1 million, $3.8 million, and
$4.8 million for the years ended December 31, 2009, 2008, and 2007, respectively. The Registrant believes that both
arrangements with Pacific Hospital are based on prevailing market rates for similar services.

Note 21. Subsequent Events

Acquisition of HIM

On January 18, 2010, we entered into a definitive agreement to acquire the Health Information Management,
or HIM, business of Unisys Corporation. The purchase price is expected to be approximately $135 million, subject
to a standard working capital adjustment, to be paid in cash at closing using our credit facility. The acquisition,
which is expected to close in the first half of 2010, is subject to customary regulatory approvals and closing
conditions, including receipt of customer consents.

The HIM business provides design, development, implementation, and business process outsourcing solutions
to state governments for their Medicaid Management Information Systems, or MMIS. MMIS is a core tool used to
support the administration of state Medicaid and other health care entitlement programs. The HIM business
currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well
as a contract to provide drug rebate administration services for the Florida Medicaid program. Annual revenues of
the HIM business are currently approximately $110 million. We expect the approximately 900 employees of the
HIM business to become our employees upon closing of the transaction, and following the closing Unisys has
agreed to provide certain transitional and technology support services to us for up to one year.

Subject to the closing of the HIM acquisition, in November 2009 we agreed to enter into a fourth amendment to
the Credit Facility. The fourth amendment will become effective upon the closing of the acquisition of the HIM
business. The fourth amendment is required because the $135 million purchase price for the HIM business exceeds
the currently applicable deal size threshold under the terms of the Credit Facility. Pursuant to the fourth amendment,
the lenders have consented to our acquisition of the HIM business.

Upon its effectiveness at the closing, the fourth amendment would increase the commitment fee on the total
unused commitments of the lenders under the Credit Facility to 50 basis points on all levels of the pricing grid, with
the pricing grid referring to our ratio of consolidated funded debt to consolidated EBITDA. The pricing for LIBOR
loans and base rate loans would be raised by 200 basis points at every level of the pricing grid. The applicable
margins would thus range between 2.75% and 3.75% for LIBOR loans, and between 1.75% and 2.75% for base rate
loans. Until the delivery of a compliance certificate with respect to our financial statements for the quarter ending
after the HIM business acquisition closes, the applicable margin shall be fixed at 3.5% for LIBOR loans and 2.5%
for base rate loans. In connection with the lenders’ approval of the fourth amendment, a consent fee of 10 basis
points was paid on the amount of each consenting lender’s commitment. In addition, the fourth amendment would
carve out from our indebtedness and restricted payment covenants under the Credit Facility the $187.0 million
current principal amount of the Notes (although the $187.0 million indebtedness would still be included in the
calculation of our Consolidated Leverage Ratio); increase the amount of surety bond obligations we may incur;
increase our allowable capital expenditures; and reduce the fixed charge coverage ratio from 3.50x to 2.75x (on a
pro forma basis) at December 31, 2009, and 3.00x thereafter.

On March 15, 2010, we agreed to enter into a fifth amendment to the Credit Facility. The fifth amendment will
also become effective upon the closing of the acquisition of the HIM business. The fifth amendment is required
because, after giving effect to the acquisition of the HIM business on a pro forma basis, and inclusive of the
Company’s fourth quarter 2009 EBITDA of only $5.9 million, the Company’s consolidated leverage ratio for the
preceding four fiscal quarters would exceed the currently applicable ratio of 2.75 to 1.0. The fifth amendment will
increase the maximum consolidated leverage ratio under the Credit Facility to 3.25 to 1.0 for the fourth quarter of
2009 (on a pro forma basis), and to 3.50 to 1.0 for the first, second, and third quarters of 2010, excluding the single
date of September 30, 2010. On September 30, 2010, the maximum consolidated leverage ratio shall revert back to
2.75 to 1.0. However, if the Company has actually reduced its consolidated leverage ratio to no more than 2.75 to 1.0

105

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

on or before August 15, 2010, the consolidated leverage ratio under the Credit Facility will revert back to 2.75 to 1.0
on August 15, 2010. On the date that the consolidated leverage ratio reverts to 2.75 to 1.0 — whether August 15,
2010 or September 30, 2010 — the aggregate commitments of the lenders under the Credit Facility shall be reduced
on a pro rata basis from $200 million to $150 million. In connection with the lenders’ approval of the fifth
amendment, we will pay an amendment fee of 25 basis points on the amount of each consenting lender’s
commitment. We will also pay an incremental commitment fee of 12.5 basis points based on each lender’s unfunded
commitment during the period from the effective date of the fifth amendment through the date that the maximum
consolidated leverage ratio is reduced to 2.75 to 1.0, plus a potential duration fee of 50 basis points payable on
August 15, 2010 in the event that the consolidated leverage ratio has not been reduced to 2.75 to 1.0 by August 15,
2010.

106

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, 2009 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, 2009. 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, 2009, 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 page 109 of this
Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009.

Item 9B. Other Information

On March 15, 2010, we agreed to enter into a fifth amendment to our Credit Facility. The fifth amendment will
become effective upon the closing of the acquisition of the HIM business. The fifth amendment is required because,
after giving effect to the acquisition of the HIM business on a pro forma basis, and inclusive of the Company’s fourth
quarter 2009 EBITDA of only $5.9 million, the Company’s consolidated leverage ratio for the preceding four fiscal
quarters would exceed the currently applicable ratio of 2.75 to 1.0. The fifth amendment will increase the maximum
consolidated leverage ratio under the Credit Facility to 3.25 to 1.0 for the fourth quarter of 2009 (on a pro forma

107

basis), and to 3.50 to 1.0 for the first, second, and third quarters of 2010, excluding the single date of September 30,
2010. On September 30, 2010, the maximum consolidated leverage ratio shall revert back to 2.75 to 1.0. However, if
the Company has actually reduced its consolidated leverage ratio to no more than 2.75 to 1.0 on or before August 15,
2010, the consolidated leverage ratio under the Credit Facility will revert back to 2.75 to 1.0 on August 15, 2010. On
the date that the consolidated leverage ratio reverts to 2.75 to 1.0 — whether August 15, 2010 or September 30,
2010 — the aggregate commitments of the lenders under the Credit Facility shall be reduced on a pro rata basis
from $200 million to $150 million. In connection with the lenders’ approval of the fifth amendment, we will pay an
amendment fee of 25 basis points on the amount of each consenting lender’s commitment. We will also pay an
incremental commitment fee of 12.5 basis points based on each lender’s unfunded commitment during the period
from the effective date of the fifth amendment through the date that the maximum consolidated leverage ratio is
reduced to 2.75 to 1.0, plus a potential duration fee of 50 basis points payable on August 15, 2010 in the event that
the consolidated leverage ratio has not been reduced to 2.75 to 1.0 by August 15, 2010.

The foregoing summary of the terms of the fifth amendment does not purport to be complete and is qualified in

its entirety by reference to the fifth amendment, which is filed as Exhibit 10.22 hereto.

108

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, 2009, 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, 2009, 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, 2009 and 2008, and
the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2009 and our report dated March 16, 2010 expressed an unqualified opinion thereon.

Los Angeles, California
March 16, 2010

/s/ ERNST & YOUNG LLP

109

Item 10. Directors, Executive Officers, and Corporate Governance

(a) Directors of the Registrant

PART III

Information concerning our directors will appear in our Proxy Statement for our 2010 Annual Meeting of
Stockholders under “Proposal No. 1 — Election of Three Class II 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 X of Part I of this Annual Report on Form 10-K
under the caption “Executive Officers of the Registrant,” and will also appear in our Proxy Statement for our 2010
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 2010
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 executive 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 2009, each of our executive officers, directors, and greater than ten percent
stockholders complied with all such filing requirements on a timely basis.

Item 11. Executive Compensation

The information which will appear in our Proxy Statement for our 2010 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.

The table below, which was inadvertently omitted from our 2009 Proxy Statement, shows the number of shares

of restricted stock held by our named executive officers which vested during fiscal year 2008.

Name

J. Mario Molina . . . . . .

John C. Molina . . . . . . .

Mark L. Andrews . . . . .

Terry Bayer . . . . . . . . .

James W. Howatt . . . . .

OPTION EXERCISES AND STOCK VESTED

Option Awards

Stock Awards

Number of Shares
Acquired On Exercise (#)

Value Realized on
Exercise ($)

Number of Shares
Acquired on Vesting (#)

Value Realized on
Vesting ($)

—

—

—
—

—

—
—
—

—

—

—
—

—

—
—
—

110

—

—

1,387
1,000

1,387

550
625
763

—

—

43,899(1)
24,680(2)

43,899(3)

18,431(4)
19,781(5)
21,707(6)

1. On March 1, 2008, 1,387 restricted shares vested in favor of Mr. Andrews at a closing market price of $31.65.
2. On July 1, 2008, 1,000 restricted shares vested in favor of Mr. Andrews at a closing market price of $24.68.
3. On March 1, 2008, 1,387 restricted shares vested in favor of Ms. Bayer at a closing market price of $31.65.
4. On February 9, 2008, 550 restricted shares vested in favor of Dr. Howatt at a closing market price of $33.51.
5. On March 1, 2008, 625 restricted shares vested in favor of Dr. Howatt at a closing market price of $31.65.
6. On May 29, 2008, 763 restricted shares vested in favor of Dr. Howatt at a closing market price of $28.45.

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 2010 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 2010 Annual Meeting of Stockholders under “Related Party Transactions.” Information concerning director
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 2010
Annual Meeting of Stockholders under “Disclosure of Auditor Fees.” This portion of our Proxy Statement is
incorporated herein by reference.

111

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 108 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, 2009 and 2008
Consolidated Statements of Operations — Years ended December 31, 2009, 2008, and 2007
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2009, 2008, and
2007
Consolidated Statements of Cash Flows — Years ended December 31, 2009, 2008, and 2007
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.

112

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, 2010.

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
Joseph M. Molina, M.D.

Chairman of the Board, Chief Executive
Officer, and President (Principal Executive
Officer)

March 16, 2010

John C. Molina
John C. Molina, J.D.

Director, Chief Financial Officer, and
Treasurer (Principal Financial Officer)

March 16, 2010

Joseph W. White
Joseph W. White, CPA, MBA

Charles Z. Fedak
Charles Z. Fedak, CPA, MBA

Frank E. Murray
Frank E. Murray, M.D.

Steven Orlando
Steven Orlando, CPA (inactive)

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, 2010

Director

March 16, 2010

Director

March 16, 2010

Director

March 16, 2010

Director

March 16, 2010

Director

March 16, 2010

Director

March 16, 2010

113

200 Oceangate, Suite 100
Long Beach, CA 90802

www.MolinaHealthcare.com

© 2010 Molina Healthcare, Inc. 
All rights reserved.