AnnuAl RepoR t 2010
thiR ty yeARs stRong
(1980-2010)
About Us
Company Profile
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of
low-income families and individuals and to assist state agencies in their administration of the Medicaid program. Molina’s
licensed health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and
Wisconsin currently serve approximately 1.6 million members, and the Company’s subsidiary, Molina Medicaid Solutions,
provides business processing and information technology administrative services to Medicaid agencies in Idaho, Louisiana,
Maine, New Jersey, and West Virginia, as well as drug rebate administration services in Florida. More information about
Molina Healthcare can be obtained at www.MolinaHealthcare.com.
Historical Highlights
Membership
(thousands)
Premium Revenues
($ millions)
EBITDA
($ millions)
Diluted Earnings Per Share
1,613
1,455
1,256
1,149
$3,091
$2,462
$141
$126
$3,990
$3,660
$166
$2.15
$2.03
$1.98
$90
$1.19
‘07
‘08
‘09 ‘10
‘07
‘08
‘09 ‘10
‘07
‘08
‘09 ‘10
‘07
‘08
‘09 ‘10
Annual Meeting
The annual meeting of stockholders will be held on
Wednesday, April 27, 2011, at 10:00 a.m. local time, at:
Molina Healthcare, Inc.
One Golden Shore Drive
Huntington Conference Room
Long Beach, CA 90802
(562) 435-3666
Financial Highlights
(Dollars in thousands, except per share data)
2010
2009
Year Ended
December 31,
Revenue:
Premium revenue
Service revenue
Investment income
Total operating revenue
Expenses:
Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses (1)
Depreciation and amortization
Total expenses
Gain on purchase of convertible senior notes
Operating income
Interest expense
Income before income taxes
Income tax expense (1)
Net income
Net income per share:
Basic
Diluted
Weighted average number of common shares and
potential 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 (3)
Premium tax ratio (1), (2)
Effective tax rate
Members (4)
$ 3,989,909 $ 3,660,207
—
9,149
3,669,356
89,809
6,259
4,085,977
78,647
345,993
139,775
3,370,857 3,176,236
—
276,027
128,581
45,704 38,110
3,618,954
3,980,976
1,532
—
51,934
105,001
(13,777)
(15,509)
89,492
34,522
54,970 $
$
38,157
7,289
30,868
$
$
2.00 $
1.98 $
1.19
1.19
27,754,000
25,984,000
82.3% 84.8%
2.2 2.0
86.8%
7.5%
3.5%
19.1%
84.5%
8.5%
3.5%
38.6%`
1,613,000
1,455,000
(1)
Effective January 1, 2010, the Company has recorded the Michigan modified gross receipts tax (MGRT) as a premium tax and not as an income
tax. For the year ended December 31, 2009, premium tax expense and income tax expense have been reclassified to conform to this presentation.
(2) Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium taxes as a percentage
of premium revenue.
Computed as a percentage of total operating revenue.
(3)
(4) Number of members at end of period.
MolinA heAlthCARe
AnnuAl RepoRt 2010 A1
To Our Stockholders
Last year witnessed the 30 year anniversary of our company.
In many ways, that event reflects the continuation of a
journey begun by my father – the late Dr. C. David Molina.
And while many companies never live to see their 30th
birthday, here we are – strong, focused and growing.
I am pleased to report to you that in addition to this landmark
anniversary, Molina Healthcare enjoyed success on a broad
range of fronts in 2010. We experienced diversified revenue
growth thanks to increased enrollment in our health plans, an
acquisition that established us in a new state and our successful
entry into the Medicaid health information management
business. Meanwhile, stronger medical management and
disciplined cost control helped us realize improvements in
our medical margins. Many of these factors contributed to
our company’s strong financial performance in 2010.
For the year, our net income rose to $55.0 million, or $1.98
per diluted share, an increase of 78% over 2009. We earned
premium revenues of $4.0 billion, up 9% over the previous
year. Meanwhile, during a year when costs continued to rise
for the health care industry, we achieved a medical care ratio
of 84.5%, compared with a ratio of 86.8% for 2009.
Diversifying Strategically through
Health Information Management
For most of our history, we have described ourselves as
a Medicaid managed care organization. But particularly
in the past year, we have broadened the way we view our
business. Molina Healthcare has evolved into a company that
serves clients at a wide variety of points along the Medicaid
continuum. While we continue to grow the core of our
business – our health plan operations – we also made a major
entry into the complementary, IT-driven fiscal intermediary
business. We believe that the demonstrated strengths that
have made us successful in managed care settings will enable
us to move seamlessly into fee-for-service settings, so that
we can help bring down costs for states that currently do
not have capitated health plans for Medicaid beneficiaries.
In addition, we expanded our operation of primary care
clinics – the business area where Molina began 30 years
ago – so we can better serve the needs of our patients while
better serving the states that pay for their health care. The
diversification of our revenues, which accelerated last year,
is a natural extension of our traditional business. We believe
it is also a prudent strategy for our future.
We took a major step in bringing this strategy to fruition as we
invested in our future by entering the Medicaid information
or fiscal agent business through our acquisition of Unisys’
health information management business. We now operate
that business under the name, Molina Medicaid Solutions.
Through this segment, we process Medicaid transactions and
deliver related IT services to states, which customarily outsource
such services to a company that can serve as their fiscal agent
for the Medicaid program. In acquiring this business for $131.3
million, we also acquired the company’s contracts with five
states to provide Medicaid management information services,
along with a contract to provide drug rebate administration
services for Florida’s Medicaid program. After the acquisition
was finalized, we worked to integrate approximately 1,000
employees of the health information management business,
along with its various business operations, into Molina. By
year’s end, we had nearly completed the integration.
The acquisition is financially and strategically important
to us for a number of reasons. First, it increased our
company’s footprint in the Medicaid business, giving us a
presence in five new states and nearly tripling the number
of beneficiaries we reach. With a more diversified product
offering, we are now able to pursue opportunities in states
that lack Medicaid managed care programs, a segment of the
market in which we had not participated previously.
Second, we believe Molina Medicaid Solutions gives us
an immediate competitive advantage. For the first time
within a single company, our state partners can access all
the tools needed to run their Medicaid programs, from full-
risk managed care health plans to fee-based information
technology solutions. No one else in this industry offers this
single-source capability.
Third, the acquisition enabled us to enter the non-risk,
fee-for-service side of the Medicaid business. In managing
the care of Medicaid beneficiaries on a capitated basis,
we assume an element of risk that can be affected by
factors beyond our control, such as an unusually severe flu
season. By providing fee-based IT services through Molina
Medicaid Solutions, we reduced the overall risk profile of
our organization, with an eye toward reducing the potential
for volatility in our earnings.
Fourth, we can leverage the IT capabilities of Molina Medicaid
Solutions to bring greater efficiencies to our company’s
health plan business. For example, we can apply analytics to
improving the functionality of care management processes
and clinical responses used by Molina in interactions with
patients. We believe that we can help strengthen these tools in
ways that translate into both better care and cost containment.
A2
MolinA heAlthCARe
AnnuAl RepoRt 2010
Finally, we believe the acquisition puts us in a much stronger
position for growth in an industry that we believe will
experience significant consolidation. Over the next three
years, the federal government expects that health plans and
fiscal agents will be able to handle a new generation of coding
requirements that will accompany the new International
Classification of Disease system (ICD-10). For many smaller
health plans with less than one million members, the costs of
making the necessary systems upgrades will be substantial.
For companies like Molina, we believe the benefits of scale in
this environment will be significant. We will be positioned to
reduce the cost per member for compliance with ICD-10 and
our company will have a strategic advantage in considering
opportunities for consolidation. At the same time, the new
requirements will create IT revenue opportunities for our
Molina Medicaid Solutions unit.
Filling a Gap with Primary Care Clinics
Last year, we also became more diversified and more efficient
by expanding our involvement in the direct delivery of
primary care. It’s a move that reflects our roots, as a company
that began by serving patients in clinics, and it is a business
we know how to operate effectively. The clinic model
offers an integrated approach that helps us improve both
the quality and cost-effectiveness of the care our members
receive. For example, last year we opened two clinics in
Everett, Washington, so that we could serve our members’
needs for primary and behavioral health services in one
place. We also expanded the capacity of our existing clinics
in California, in anticipation of increases in the numbers of
aged, blind or disabled members in our plans. The existing
shortage in primary care physicians is expected to become
MolinA heAlthCARe
AnnuAl RepoRt 2010 A3
even more acute in the near and intermediate term. While
we have no plans to become an organization that fully
integrates primary care delivery with our health plans, by
leveraging this capability selectively, we can improve access
for our plan members in areas that are most underserved
by primary care providers. In this way, our clinics are not
simply a Molina legacy but a strategic advantage that will
serve our company well in the years ahead.
Expanding Our Traditional Business
Meanwhile, we continued last year to pursue expansions to our
Medicaid health plan business. In September, we completed a
$15.5 million acquisition of Abri Health Plan of Milwaukee,
which served approximately 36,000 Medicaid beneficiaries in 23
Wisconsin counties as of December 31, 2010. More significantly
for us, the acquisition enables Molina to gain a strategic
foothold in a new state with excellent growth opportunities.
We also expanded our growing presence in Texas, where we
already served patients in the Houston, San Antonio and
Laredo areas. In May, we were awarded a contract to serve
Medicaid managed care patients in the seven-county Dallas
service area. In September, we won an additional contract to
administer the CHIP program (including the CHIP Perinatal
program) in 174 predominately rural counties across the
state. As of December 31, we served approximately 63,000
children and pregnant women under this contract. The new
contracts not only provide increased scale for leveraging our
resources in Texas, but they also make Molina an increasingly
important player in a state where we estimate the potential
revenue opportunity will grow to almost $10 billion by 2014
as new Medicaid beneficiaries qualify for coverage.
A4
MolinA heAlthCARe
AnnuAl RepoRt 2010
In addition to the expansion at our Medicaid health plans,
we remain committed to growing our Medicare line of
business and continue to build on our expertise in arranging
for Medicare healthcare services. Our Medicare enrollment
in 2010 grew to 24,500, an increase of 111% or 12,900
members from 2009. This represented one of the largest
enrollment gains since we began offering Medicare health
plans back in 2007.
Currently there are nearly nine million Medicaid beneficiaries
in the United States who also qualify for Medicare. These
beneficiaries are called dual-eligibles and they make up 75%
of our Medicare enrollment. We look forward to continuing
to serve this population with special needs that shares many
demographic characteristics with Medicaid beneficiaries,
further confirming that serving this population is a natural
extension of our business.
For Us, Quality Is Personal
As quality continues to be one of our company’s key pillars,
Molina Healthcare remains one of the leaders in National
Committee for Quality Assurance (NCQA) accreditations
for Medicaid Plans. As a result, eight of our ten health plans
have earned formal NCQA accreditation, which is regarded
as the gold standard among accreditation agencies for quality
of care. We believe this creates an important competitive
advantage that helps our company win new contracts,
retain existing contracts, and deliver consistent excellence
to our plan members, to physicians and to our state clients.
Last year, our Florida plan became the latest to reach this
milestone. Our Missouri and Wisconsin health plans will
also be undergoing accreditation in the near future.
At the same time, we’re taking the next step in measuring
what we do. While NCQA accreditation is a critical
benchmark, it is not the only one we seek to use. We also
want to measure quality in terms of the value we deliver. We
serve a diverse group of constituencies, and we understand
that quality and value mean different things to different
people. To physicians, quality means timely payments from
us with minimal problems and red tape. For patients, it
means ease of access and excellent care. For our state clients,
quality means solid management of costs and a good track
record on health outcomes for its Medicaid beneficiaries. For
us, quality is a strategic imperative. But it is also something
more. Because Molina Healthcare began as a direct provider
of care, we think of our plan members not as cases to
manage, but as people to serve. That personal connection
means that we strive to do our very best every day, and that
we focus not just on daily processes but results long term.
Strengthening Our Position through
a Public Stock Offering
In August, we completed an underwritten public offering of
4,350,000 shares of our company’s common stock at a price
of $25.55 per share, net of the issuance costs. We used the net
proceeds to reduce our borrowings under our $150 million
senior secured credit facility, which had an outstanding
balance of $105 million at the time of the announcement.
We believe this successful offering placed our company in
a stronger financial position to move forward in a field of
growing opportunities.
Making the Most of Emerging Opportunities
We believe that the government health care sector in which
we compete is an attractive growth industry. We expect that
by 2019, the expansion of Medicaid will bring an estimated
16 million more individuals into the program. But the
growth is also happening in the here and now. State budgets
are increasingly stressed today, and many are feeling the
pinch even more sharply now that they have absorbed the
temporary cushion provided by federal stimulus dollars.
The growing need for cost control will lead more states to
shift their Medicaid and dual-eligible patients from fee-
for-service models to managed care, where we are better
positioned than ever to capitalize on new opportunities.
We have diversified our business in a way that gives us an
important competitive advantage as the only player in the
field that can offer states a comprehensive solution in the
management of their Medicaid managed care patients. We
have improved our management of medical costs and added
what we believe will be a stable new revenue stream through
IT services provided by Molina Medicaid Solutions, an area
where we see more than $1 billion in new opportunities
between now and 2016. And we have continued to grow
and strengthen our traditional business while improving the
quality of care we deliver. After an outstanding year in 2010,
we look forward to even better things for our company in
the years ahead. It is an exciting time for our industry and
for Molina Healthcare. As always, we are grateful for your
support and your investment.
J. Mario Molina, M.D.
President and Chief Executive Officer
MolinA heAlthCARe
AnnuAl RepoRt 2010 A5
Officers & Key Executives
J. Mario Molina, MD
Chairman of the Board, President and
Chief Executive Officer
John C. Molina, JD
Chief Financial Officer
Terry P. Bayer, JD, MPH
Chief Operating Officer
Board of Directors
Joseph W. White, CPA, MBA
Vice President, Chief Accounting Officer
Juan José Orellana, MBA
Vice President, Investor Relations
Jeff Barlow, JD, MPH
General Counsel and Corporate Secretary
Richard A. Hopfer, Jr.
Chief Information 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 (phone)
(213) 977-3568 (fax)
www.ey.com
Transfer Agent
American Stock Transfer
& Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
(800) 937-5449
www.amstock.com
Common Stock
The common stock of Molina Healthcare, Inc.
is traded on the New York Stock Exchange
(NYSE) under the symbol, MOH.
NYSE Disclosures
The certifications of our Chief Executive
Officer and Chief Financial Officer required
under the Sarbanes-Oxley Act are filed as
exhibits to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2010.
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.
A6
MolinA heAlthCARe
AnnuAl RepoRt 2010
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, 2010
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
¥ No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. n Yes
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
Accelerated filer ¥
Non-accelerated filer n
Smaller reporting company n
Indicate by check mark whether
¥ No
Act). n Yes
(Do not check if a smaller reporting company)
the registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2010, the last business day of our
most recently completed second fiscal quarter, was approximately $324 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, 2010).
As of March 2, 2011, approximately 30,523,000 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 April 27, 2011, are
incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
MOLINA HEALTHCARE, INC.
Table of Contents
Form 10-K
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
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
32
32
32
32
33
36
38
66
67
114
114
114
116
116
116
117
117
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
119
PART IV
Item 1: Business
Overview
PART I
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs
of low-income families and individuals, and to assist state agencies in their administration of the Medicaid program. Our
business focuses exclusively on government-sponsored health care programs, and includes our Health Plans segment,
our Molina Medicaid SolutionsSM segment, and our smaller direct delivery line of business. Our Health Plans segment
consists of licensed health maintenance organizations serving Medicaid populations in ten states. Our Molina Medicaid
Solutions segment provides design, development, implementation, and business process outsourcing solutions to
Medicaid agencies in an additional five states. Our direct delivery line of business consists of 16 primary care
community clinics in California and two primary care community clinics in Washington, and we also manage three
county-owned primary care community clinics under a contract with Fairfax County, Virginia. Dr. C. David Molina
founded our company in 1980 as a provider organization serving the Medicaid population in Southern California. Today
we remain a provider-focused company led by his son, Dr. J. Mario Molina.
Our Health Plans segment operates Medicaid managed care plans in the states of California, Florida,
Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin that serve a total of approx-
imately 1.6 million members. The health plans are operated by our respective wholly owned subsidiaries in those
states, each of which is licensed as a health maintenance organization, or HMO. Our Health Plans segment derives
its revenue principally in the form of premiums paid under Medicaid contracts with the states in which our health
plans operate. While the health plans receive fixed per-member per-month, or PMPM, premium payments from the
states, the health plans are at risk for the medical costs associated with their members’ health care. Our Health Plans
segment operates in a highly regulated environment, with stringent minimum capitalization requirements which
limit the ability of our health plan subsidiaries to pay dividends to us.
Our Molina Medicaid Solutions segment provides design, development, implementation, and business process
outsourcing solutions to state governments for their Medicaid Management Information Systems, or MMIS, a core
information technology tool used to support the administration of state Medicaid and other health care entitlement
programs. Our Molina Medicaid Solutions segment 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. We added the Molina Medicaid Solutions segment to our business in May 2010 to expand our
product offerings to include support of state Medicaid agency administrative needs; to reduce the variability in our
earnings resulting from fluctuations in medical care costs; to improve our operating profit margin percentages; and to
improve our cash flow by adding a business for which there are no restrictions on dividend payments.
From a strategic perspective, we believe our two business segments and our direct delivery business line allow
us to participate in an expanding sector of the economy and continue our mission of serving low-income families
and individuals eligible for government-sponsored health care programs. Operationally, our two business segments
share a common systems platform, which allows for economies of scale and common experience in meeting the
needs of state Medicaid programs. We also believe that we have opportunities to market to state Medicaid agencies
various cost containment and quality practices used by our health plans, such as care management and care
coordination, for incorporation into their own fee-for-service Medicaid programs.
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, Corporate Governance and Nominating Committee, and Compliance
Committee Charters, are also available on our website. Such information is also available in print upon the request
1
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 June 2, 2010, 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.
Molina Healthcare, the Molina Healthcare logo, Molina Medicaid SolutionsSM, motherhood matters!SM, breathe
with ease!SM, and Healthy Living with DiabetesSM are registered servicemarks of Molina Healthcare, Inc.
Our Industry
The Medicaid and CHIP Programs. The Medicaid program is a federal entitlement program administered by
the states. Medicaid provides health care and long-term care services and support to low-income Americans.
Subject to federal rules, states have significant flexibility to structure their own programs in terms of eligibility,
benefits, delivery of services, and provider payments. Medicaid is funded jointly by the states and the federal
government. The federal government guarantees matching funds to states for qualifying Medicaid expenditures
based on each state’s federal medical assistance percentage, or FMAP. A state’s FMAP is calculated annually and
varies inversely with average personal income in the state. The average FMAP across all states prior to FY 2009 was
57 percent, but ranged from a federally established FMAP floor at 50 percent to as high as 76 percent. With the
passage of the American Recovery and Reinvestment Act, or ARRA, stimulus package in 2009, FMAP rates for all
states increased by a minimum of 6.2 percentage points between October 1, 2009 and December 31, 2010, plus an
additional increase adjusted quarterly based on the state’s unemployment rate. Congress has extended through June
2011 the increased FMAP, but at a reduced rate from the previous ARRA enhancement.
The most common state-administered Medicaid program is the Temporary Assistance for Needy Families
program, or TANF (often pronounced “TAN-if”). Another common state-administered Medicaid program is for the
aged, blind or disabled, or ABD, Medicaid members. In addition, the Children’s Health Insurance Program, or
CHIP, is a joint federal and state matching program that provides health care coverage to children whose families
earn too much to qualify for Medicaid coverage. States have the option of administering CHIP through their
Medicaid programs.
As a result of recently enacted health care reform legislation, the Patient Protection and Affordable Care Act,
the Medicaid and CHIP population is expected to grow from approximately 60 million people today to approx-
imately 82 million people by 2019. Over that same period, total Medicaid and CHIP expenditures are expected to
grow from approximately $427 billion to approximately $896 billion.
Each state establishes its own eligibility standards, benefit packages, payment rates, and program administration
within broad federal statutory and regulatory guidelines. Every state Medicaid program must balance many potentially
competing demands, including the need for quality care, adequate provider access, and cost-effectiveness. In an effort to
improve quality and provide more uniform and more cost-effective care, many states have implemented Medicaid
managed care programs. These programs seek to improve access to coordinated health care services, including
preventive care, and to control health care costs. Under Medicaid managed care programs, a health plan receives
capitation payments from the state. The health plan, in turn, arranges for the provision of health care services by
contracting with a network of medical providers. The health plan implements care management and care coordination
programs that seek to improve both care access and care quality, while controlling costs more effectively.
While many states have embraced Medicaid managed care programs, others continue to operate traditional
fee-for-service programs to serve all or part of their Medicaid populations. Under fee-for-service Medicaid
programs, health care services are made available to beneficiaries as they seek that care, without the benefit of a
coordinated effort to maintain and improve their health. As a consequence, treatment is often postponed until
medical conditions become more severe, leading to higher costs and more unfavorable outcomes. Additionally,
providers paid on a fee-for-service basis are compensated based upon services they perform, rather than health
outcomes, and therefore lack incentives to coordinate preventive care, monitor utilization, and control costs.
Because Medicaid is a state-administered program, every state must have mechanisms, policies, and proce-
dures in place to perform a large number of crucial functions, including the determination of eligibility and the
reimbursement of medical providers for services provided. This requirement exists regardless of whether a state has
adopted a fee-for-service or a managed care delivery model. MMIS are used by states to support these admin-
istrative activities. The federal government typically reimburses the states for 90% of the costs incurred in the
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design, development, and implementation of an MMIS and for 50% of the costs incurred in operating an MMIS.
Although a small number of states build and operate their own MMIS, a far more typical practice is for states to
sub-contract the design, development, implementation, and operation of their MMIS to private parties. Through our
Molina Medicaid Solutions segment, we now actively participate in this market.
In certain instances, states have elected to provide medical benefits to individuals and families who are not
served by Medicaid. In New Mexico and Washington, our health plan segment participates in programs that are
administered in a manner similar to Medicaid and CHIP, but without federal matching funds.
Medicare Advantage Plans. During 2010, each of our health plans in California, Florida, 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, 2010 was approximately 24,500 members. Our 2010 premium revenues from Medicare across all
health plans represented approximately 6.6% of our total premium revenues.
Overall, approximately 82% of our members are TANF, 9% are CHIP, 8% are ABD, and 1% are Medicare.
Our Strengths
We focus on serving low-income families and individuals who receive health care benefits through govern-
ment-sponsored programs within a managed care model. Additionally, we support state Medicaid agencies by
providing them with comprehensive solutions to their MMIS development and operating needs. Our approach to our
business is based on the following strengths:
Comprehensive Medicaid Services. We offer a complete suite of Medicaid services, ranging from quality
care, disease management, and cost management through our Health Plans segment, to state-level MMIS admin-
istration through our Molina Medicaid Solutions segment, to the direct delivery of health care services at our clinics.
We have the ability to draw upon our experience and expertise in each of these areas to enhance the quality of the
services we offer in the others.
Flexible Service Delivery Systems. Our health plan care delivery systems are diverse and readily adaptable to
different markets and changing conditions. We arrange health care services with a variety of providers, including
independent physicians and medical groups, hospitals, ancillary providers, and our own clinics. Our systems
support multiple types of contract models. Our provider networks are well-suited, based on medical specialty,
member proximity, and cultural sensitivity, to provide services to our members. Our Molina Medicaid Solutions
platform is based upon commercial off-the-shelf technology, or COTS. As a result, we believe that our Molina
Medicaid Solutions platform has the flexibility to meet a wide variety of state Medicaid administrative needs in a
timely and cost-effective manner.
Proven Expansion and Acquisition Capability. We have successfully replicated the business model of our
health plan segment through the acquisition of health plans, the start-up development of new operations, and the
transition of members from other health plans. The successful acquisition of our New Mexico, Missouri, and
Wisconsin health plans demonstrated our ability to expand into new states. The establishment of our health plans in
Utah, Ohio, Texas, and Florida 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.
Administrative Efficiency. We have centralized and standardized various functions and practices 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.
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Recognition for Quality of Care. The National Committee for Quality Assurance, or NCQA, has accredited
eight of our ten Medicaid managed care plans. Our Missouri health plan is currently seeking NCQA accreditation,
and our recently acquired Wisconsin plan will be seeking NCQA accreditation in the future. We believe that these
objective measures of the quality of the services that we provide will become increasingly important to state
Medicaid agencies.
Experience and Expertise. Since the founding of our Company in 1980 to serve the Medicaid population in
Southern California through a small network of primary care clinics, we have increased our membership to
1.6 million members, expanded our Health Plans segment to ten states, and added our Molina Medicaid Solutions
segment. Our experience over the last 30 years has allowed us to develop strong relationships with the constituents
we serve, establish significant expertise as a government contractor, and develop sophisticated disease manage-
ment, care coordination and health education programs that address the particular health care needs of our members.
We also benefit from a thorough understanding of the cultural and linguistic needs of Medicaid populations.
Our Strategy
Our objective is to provide a comprehensive suite of Medicaid-related services to meet the health care needs of
low-income families and individuals and the state Medicaid agencies that serve them. To achieve our objective, we
intend to:
Continue to expand within existing markets. We plan to continue our growth in existing markets by
expanding our service areas and provider networks, increasing awareness of the Molina brand name, extending
our services to new populations (including the aged, blind, or disabled), maintaining positive provider relationships,
and integrating members from other health plans.
Continue to enter new strategic markets. We plan to continue to enter new markets through both acquisitions
and by building our own start-up operations. For example, on September 1, 2010, we acquired for approximately
$15.5 million Abri Health Plan, a provider of Medicaid managed care services in Wisconsin. We intend to focus our
expansion in markets with competitive provider communities, supportive regulatory environments, significant size
and, where practicable, mandated Medicaid managed care enrollment.
Continue to provide quality cost-effective care. We plan to use our strong provider networks and the
knowledge gained through the operation of our clinics to further develop and utilize effective medical management
and other coordinated programs that address the distinct needs of our members and improve the quality and cost-
effectiveness of their care.
Leverage operational efficiencies. We intend to leverage the operational efficiencies created by our cen-
tralized administrative infrastructure and flexible information systems to earn higher margins on future revenues.
We believe our administrative infrastructure has significant expansion capacity, allowing us to integrate new
members from expansion within existing markets and enter new markets at lower incremental cost.
Deliver administrative value to state Medicaid agencies. As Medicaid expenditures increase, we believe that
an increasing number of states will demand comprehensive solutions that
improve both quality and
cost-effectiveness. We intend to use our MMIS solution to provide state Medicaid agencies with a flexible and
robust solution to their administrative needs. For example, we can apply analytics to improve the functionality of
care management processes. We believe that we can help strengthen these tools in ways that translate into both
better care and cost containment. We believe that our MMIS platform, together with our extensive experience in
health care management and health plan operations, enables us to offer state Medicaid agencies a comprehensive
suite of Medicaid-related solutions that meets their needs for quality and for the cost-effective operation of their
Medicaid programs.
Open additional primary care clinics. During 2010, we became more diversified and more efficient by
expanding our involvement in the direct delivery of primary care. The community clinic model offers an integrated
approach that helps us improve both the quality and cost-effectiveness of the care our members receive. In 2010 we
opened two clinics in Washington so that we can serve our members’ needs for primary and behavioral health
services in one place. We also expanded the capacity of our existing clinics in California in anticipation of increases
in the numbers of ABD members in our plans. Approximately 20% of our California health plan’s membership is
now being served by the health plan’s 16 primary care clinics. The growth and aging of the population of the United
States foreshadows an increasing shortage of physicians over the next 15 years. Health care reform is expected to
4
worsen this shortage. We believe the shortage will be felt most acutely among already underserved populations,
such as the low income families and individuals we serve. We therefore intend to expand on the direct delivery
component of our business by developing additional community care clinics at certain of our health plans during
2011. While we have no plans to become an organization that fully integrates primary care delivery with our health
plans, by leveraging this capability selectively we can improve access for our plan members in areas that are most
underserved by primary care providers.
Pursue opportunities presented by ICD-10 conversion requirements. Over the next three years, health
insurance plans are required to upgrade their systems for diagnosis, medical procedure coding, and claims
processing under the tenth revisions of the International Statistical Classification of Diseases, or ICD-10. The
United States Department of Health and Human Services will require payers and providers to transition to ICD-10
by October 2013. For many smaller health plans with less than one million members, the costs of making the
necessary systems upgrades will be substantial. For companies like ours, the benefits of scale in this environment
will be significant. We believe we will be positioned to reduce the cost per member for compliance with ICD-10. At
the same time, the new requirements will create revenue opportunities for Molina Medicaid Solutions.
Prepare for health care reform.
In preparation for the large scale changes associated with federal health care
reform, we have organized a dedicated business unit to address issues of strategy, policy, reform readiness, and
implementation. Health care reform opportunities include an estimated 16 million more members eligible for
Medicaid by 2019, 30 million more individuals covered by health insurance exchanges, and increasing demand for
long-term care and behavioral health services. In the next three years, we anticipate that many states will be offering
new Medicaid RFP expansions in order to avoid disruptions in 2014 in connection with the full implementation of
health care reform. For instance, several states are currently evaluating transitioning their ABD populations into
managed care. Pursuant to a Section 1115 waiver expansion in California, we will be enrolling new ABD members
in California by year end 2011.
Medicaid Contracts
With the exception of our Missouri health plan, which does not serve ABD or Medicare members, and our
Wisconsin health plan, which does not serve Medicare members, all of our health plans serve TANF, CHIP, ABD,
and Medicare members. For its Medicare members, each health plan enters into a one-year annually renewable
contract with the Centers for Medicare and Medicaid Services, or CMS. For its other members, each health plan
enters into a contract with the state’s Medicaid agency. The contractual relationship with the state is generally for a
period of one- to two-years and renewable on an annual or biannual basis at the discretion of the state. In general,
either the state Medicaid agency or the health plan may terminate the state contract with or without cause upon
30 days to nine months prior written notice. Most of these contracts contain renewal options that are exercisable by
the state. Our health plan subsidiaries have generally been successful in obtaining the renewal of their contracts in
each state prior to the actual expiration of their contracts. Our state contracts are generally at greatest risk of loss
when a state issues a new request for proposals, or RFP, subject to competitive bidding by other health plans. If one
of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.
Our contracts with the state determine the type and scope of health care services that we arrange for our
members. Generally, our contracts require us to arrange for preventive care, office visits, inpatient and outpatient
hospital and medical services, and pharmacy benefits. The contracts also detail the requirements for operating in the
Medicaid sector, including provisions relating to: eligibility; enrollment and disenrollment processes; covered
benefits; eligible providers; subcontractors; record-keeping and record retention; periodic financial and informa-
tional reporting; quality assurance; marketing; financial standards; timeliness of claims payments; health education,
wellness and prevention programs; safeguarding of member information; fraud and abuse detection and reporting;
grievance procedures; and organization and administrative systems. A health plan’s compliance with these
requirements is subject to monitoring by state regulators. A health plan is subject to periodic comprehensive
quality assurance evaluation by a third-party reviewing organization and generally by the insurance department of
the jurisdiction that licenses the health plan. 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.
We are usually paid a negotiated PMPM amount, 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
5
paid an additional amount for each newborn delivery from the Medicaid programs in all of our state health plans,
except with respect to our New Mexico health plan.
Provider Networks
We arrange health care services for our members through contracts with providers that include independent
physicians and groups, hospitals, ancillary providers, and our own clinics. Our network of providers includes
primary care physicians, specialists and hospitals. Our strategy is to contract with providers in those geographic
areas and medical specialties necessary to meet the needs of our members. We also strive to ensure that our
providers have the appropriate cultural and linguistic experience and skills.
Physicians. We contract with both primary care physicians and specialists, many of whom are organized into
medical groups or independent practice associations, 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 16 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 operates two Company-owned primary care clinics.
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
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
6
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 regard-
ing 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.
• 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, encom-
passing traditional medical management and the improvement of our internal operations. We have staff assigned
full-time to the development and implementation of a uniform, efficient, and quality-based medical care delivery
model for our health plans. These employees coordinate and implement Company-wide programs and strategic
initiatives such as preparation of the Healthcare Effectiveness Data and Information Set, or HEDIS, and accred-
itation 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. Eight of our ten health plans are
accredited by the NCQA.
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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 newly acquired Wisconsin plan which we expect will be migrated
to the Molina standard platform in January 2012.
Centralized Management Services. We provide certain centralized medical and administrative services to
our health plans pursuant to administrative services agreements, including medical affairs and quality management,
health education, credentialing, management, financial, legal, information systems, and human resources services.
Fees for such services are based on the fair market value of services rendered and are recorded as operating revenue.
Payment is subordinated to the health plan’s ability to comply with minimum capital and other restrictive financial
requirements of the states in which they operate.
Compliance. Our health plans have established high standards of ethical conduct. Our compliance programs
are modeled after the compliance guidance statements published by the Office of the Inspector General of the
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. Potential members typically choose a health plan based on a specific provider being a part
of the network, the quality of care and services available, accessibility of services, and reputation or name
recognition of the health plan. We believe factors that providers consider in deciding whether to contract with a
health plan include potential member volume, payment methods, timeliness and accuracy of claims payment, and
administrative service capabilities.
Molina Medicaid Solutions competes with large MMIS vendors, such as HP Enterprise Services (formerly
known as EDS), ACS (owned by Xerox Corporation), Computer Services Corporation, or CSC, and CNSI.
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
8
rules. Such agencies have become increasingly active in recent years in their review and scrutiny of health insurers and
managed care organization, including those operating in the Medicaid and Medicare programs.
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, Washington, and Wisconsin. 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.
Our health plans are required to file quarterly and annual reports of their operating results with the appropriate
state regulatory agencies. These reports are accessible for public viewing. Each health plan undergoes periodic
examinations and reviews by the state in which it operates. The health plans generally must obtain approval from the
state before declaring dividends in excess of certain thresholds. Each health plan must maintain its net worth at an
amount determined by statute or regulation. The minimum statutory net worth requirements differ by state, and are
generally based on statutory minimum risk-based capital, 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, Washington, and Wisconsin 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 in 1965 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 award contracts to any applicant demon-
strating that it meets the state’s requirements. Other states engage in a competitive bidding process. In all cases, we
must demonstrate to the satisfaction of the state Medicaid program that we are able to meet the state’s operational
and financial requirements. These requirements are in addition to those required for a license and are targeted to the
specific needs of the Medicaid population. For example:
• 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;
9
• 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.
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 the Centers for Medicare and Medicaid Services, or 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 premium payment 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 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 the Health Insurance Portability and Accountability Act, or HIPAA. All
health plans are subject to HIPAA, including ours. HIPAA generally requires health plans to:
• Establish the capability to receive and transmit electronically certain administrative health care transactions,
like claims payments, in a standardized format,
• Afford privacy to patient health information, and
• Protect the privacy of patient health information through physical and electronic security measures.
The Patient Protection and Affordable Care Act of 2010, or ACA, created additional tools for fraud prevention,
including increased oversight of providers and suppliers participating or enrolling in Medicaid, CHIP, and
Medicare. Those enhancements included mandatory licensure for all providers, and site visits, fingerprinting,
and criminal background checks for higher risk providers. On September 23, 2010, CMS issued proposed
regulations designed to implement these requirements. It is not clear at this time the degree to which managed
care providers would have to comply with these new requirements, many of which resemble procedures that we
already have in place.
The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), a part of the
ARRA, modified certain provisions of HIPAA by, among other things, extending the privacy and security
provisions to business associates, mandating new regulations around electronic medical records, expanding
enforcement mechanisms, allowing the state Attorneys General to bring enforcement actions, and increasing
penalties for violations. The U.S. Department of Health and Human Services, as required by the HITECH Act, has
issued interim final rules that set forth the breach notification obligations applicable to covered entities and their
business associates (the “HHS Breach Notification Rule”). The various requirements of the HITECH Act and the
HHS Breach Notification Rule have different compliance dates, some of which have passed and some of which will
occur in the future. With respect to those requirements whose compliance dates have passed, we believe that we are
10
in compliance with these provisions. With respect to those requirements whose compliance dates are in the future,
we are reviewing our current practices and identifying those which may be impacted by upcoming regulations. It is
our intention to implement these new requirements on or before the applicable compliance dates.
Fraud and Abuse Laws. Our operations are subject to various state and federal health care laws commonly referred
to as “fraud and abuse” laws. Fraud and abuse prohibitions encompass a wide range of activities, including kickbacks for
referral of members, billing for unnecessary medical services, improper marketing, and violations of patient privacy
rights. These fraud and abuse laws include the federal False Claims Act which prohibits the knowing filing of a false
claim or the knowing use of false statements to obtain payment from the federal government. Many states have false claim
act statutes that closely resemble the federal False Claims Act. If an entity is determined to have violated the federal False
Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties up to
fifty thousand dollars for each separate false claim. Suits filed under the Federal False Claims Act, known as “qui tam”
actions, can be brought by any individual on behalf of the government and such individuals (known as “relators” or, more
commonly, as “whistleblowers”) may share in any amounts paid by the entity to the government in fines or settlement.
Qui tam actions have increased significantly in recent years, causing greater numbers of health care companies to have to
defend a false claim action, pay fines or be excluded from the Medicaid, Medicare or other state or Federal health care
programs as a result of an investigation arising out of such action. In addition, the Deficit Reduction Action of 2005
(“DRA”) encourages states to enact state-versions of the federal False Claims Act that establish liability to the state for
false and fraudulent Medicaid claims and that provide for, among other things, claims to be filed by qui tam relators.
Companies involved in public health care programs such as Medicaid are often the subject of fraud and abuse
investigations. The regulations and contractual requirements applicable to participants in these public sector
programs are complex and subject to change. Violations of certain fraud and abuse laws applicable to us could result
in civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicaid,
Medicare, other federal health care programs and federally funded state health programs.
Federal and state governments have made investigating and prosecuting health care fraud and abuse a priority.
Although we believe that our compliance efforts are adequate, we will continue to devote significant resources to
support our compliance efforts.
Employees
As of December 31, 2010, we had approximately 4,200 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.
Executive Officers of the Registrant
J. Mario Molina, M.D., 52, 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., 46, 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 was recently named to the
Los Angeles branch of the Federal Reserve Bank of San Francisco’s board of directors. 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.
Terry P. Bayer, 60, 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
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
11
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.
Joseph W. White, 52, has served as our Chief Accounting Officer since 2003. In his role as Chief Accounting
Officer, Mr. White is responsible for oversight of the Company’s accounting, reporting, forecasting, budgeting,
actuarial, procurement, treasury and facilities functions. Mr. White has 25 years of financial management
experience in the health care industry. Prior to joining the Company in 2003, Mr. White worked for Maxicare
Health Plans, Inc. from 1987 through 2002. Mr. White holds a Master’s degree in Business Administration and a
Bachelor’s degree in Commerce from the University of Virginia. Mr. White is a Certified Public Accountant.
James W. Howatt, 64, served as our Chief Medical Officer from May 2007 to February 2011. Effective
February 17, 2011, Dr. Howatt was reassigned to the position of medical director of MMS. As medical director of
MMS, Dr. Howatt will serve as the clinical leader for existing and future MMS product offerings, and will direct
efforts to incorporate care coordination solutions into the government health care programs served by MMS. Prior
to joining Molina Healthcare in February 2006, Dr. Howatt was Western Regional Medical Director for Humana.
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.
12
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. No assurance can be given that we will actually achieve the results contemplated or
disclosed in our forward-looking statements. Such statements may turn out to be wrong due to the inherent
uncertainties associated with future events. Accordingly, you should not place undue reliance on our forward-
looking statements, which reflect management’s analyses, judgments, beliefs, or expectations only as of the date
they are made.
If any of the events described in the following risk factors actually occur, our business, results of operations,
financial condition, cash flows, or prospects could be materially adversely affected. The risks and uncertainties
described below are those that we currently believe may materially affect us. Additional risks and uncertainties not
currently known to us or that we currently deem immaterial may also affect our business and operations. As such,
you should not consider this list to be a complete statement of all potential risks or uncertainties. Except to the
extent otherwise required by federal securities laws, we do not undertake to address or update forward-looking
statements in future filings or communications regarding our business or operating results, and do not undertake to
address how any of these factors may have caused results to differ from discussions or information contained in
previous filings or communications.
Risks Related to Our Health Plans Business
State and federal budget deficits may result in Medicaid, CHIP, or Medicare funding cuts which could
reduce our revenues and profit margins.
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP
programs. Due to high unemployment levels, Medicaid enrollment levels and Medicaid costs are continuing to
increase at the same time that state budgets are suffering from unprecedented deficits. In June 2010, 50.3 million
members were enrolled in the Medicaid program throughout the nation, over three million more than in June 2009.
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. For fiscal year 2011, 46 states have reported budget gaps of a
total of $130 billion as of December 2010, and that gap could reach an estimated $160 billion. Resolving the budget
shortfalls is now particularly difficult since program reductions and one-time strategies to plug the gaps have
already been used in most states. Headed into fiscal year 2012, states do not expect revenue collections to recover to
a level sufficient to avoid additional budget cuts. 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. All of the states
in which we currently operate our health plans are currently facing significant budgetary pressures. The mandate of
health reform adding millions of individuals to Medicaid and CHIP will put further pressures on state Medicaid
programs.
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As part of 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. In August 2010, the
President signed a bill extending the ARRA enhanced FMAP on a phased-down basis for two additional quarters
through June 30, 2011. The unemployment adjustment remained in the extension, but the law phased down the
across-the-board base increase of 6.2 percentage points to 3.2 percentage points from January 1, 2011 to March 31,
2011, and to 1.2 percentage points from April 1, 2011 to June 30, 2011. Almost every state legislature had enacted
its 2011 budgets prior to enactment of the extension, and with the uncertainty about whether Congress would extend
the enhanced FMAP, each state was forced to make an assumption about whether the higher FMAP would continue
beyond December 2010. Even with fiscal relief provided by the extension of ARRA enhanced Medicaid matching
rates and the fact that economists pegged June 2009 as the official “end” of the recession, state budgets remain under
considerable stress in fiscal year 2011, and without exception state policy leaders expect the fiscal stress to extend
into fiscal year 2012. Unemployment remains high, and state revenues remain depressed.
Since the start of the recession, all states have implemented programmatic changes of some kind, including
provider rate cuts or freezes, benefit cuts and restrictions, provider taxes and assessments, utilization controls, fraud
and abuse reduction strategies and numerous administrative cuts (travel bans, hiring freezes, furloughs and layoffs)
to reduce Medicaid cost growth. 20 states reduced Medicaid benefits in fiscal year 2010, more than in any year in the
past decade, and 14 states planned to reduce benefits in fiscal year 2011. With the expiration of the ARRA funds on
June 30, 2011, states may have no choice but to further cut or revise health care programs, optional benefits,
eligibility criteria and thresholds, or health plan rates. Such actions could materially reduce the funding under one or
more of our state Medicaid contracts, thereby reducing our revenues and our health plan profit margins. We expect
to obtain rate increases during our fiscal year 2011 from the states of California and Ohio, and for the rates at our
other health plans (with the exception of our Wisconsin health plan where we expect an 11% rate cut) to remain
unchanged during the year. In the event this expectation is undermined by state budget pressures and the rates of any
of our health plans are reduced, our business, financial condition, cash flows, or results of operations could be
adversely affected. In addition, the timing of payments we receive may be impacted by state budget shortfalls.
Moreover, some federal deficit reduction proposals would fundamentally change the structure and financing of
the Medicaid program. Recently, various proposals have been advanced to reduce annual federal deficits and to slow
the increase in the national debt. A number of these proposals include both tax increases and spending reductions in
discretionary programs and mandatory programs, such as Social Security, Medicare, and Medicaid. Some of the
proposals relating to Medicaid would fundamentally change the structure and financing of the program, with major
implications for providers and beneficiaries. One such proposal would be to convert Medicaid into a block grant,
capping federal Medicaid payments to each state at a specified dollar amount, and limiting the growth in that dollar
amount each year. Based on analysis of previous proposals to cap Medicaid, these dollar caps and growth limits
would have to be set below the levels at which Medicaid is now expected to grow based on enrollment and health
care inflation to save money. In the event the Medicaid program is fundamentally restructured, our business could
be adversely affected.
The recently enacted health care reform law and the implementation of that law could have a material
adverse effect on our business, financial condition, cash flows, or results of operations.
In March 2010, President Obama signed both the Patient Protection and Affordable Care Act and the Health
Care and Education Affordability Reconciliation Act, commonly referred to together as the “ACA”. This legislation
enacts comprehensive changes to the U.S. health care system, components of which will be phased in at various
stages over the next eight years. Among other things, by January 1, 2014, the Medicaid program will be expanded to
provide eligibility to nearly all low-income people under age 65 with income below 133 percent of the federal
poverty line. As a result, millions of low-income adults without children who currently cannot qualify for coverage,
as well as many low-income parents and, in some instances, children now covered through CHIP, will be made
eligible for Medicaid. In total, the Congressional Budget Office estimates that Medicaid and CHIP will cover an
additional 16 million people by 2019. The legislation also imposes a franchise tax or premium excise tax of
$8 billion starting in 2014, with increasing annual amounts thereafter. Such assessment may not be deductible for
income tax purposes.
There are many parts of the legislation that will require further guidance in the form of regulations. Due to the
breadth and complexity of the health reform legislation, the lack of implementing regulations and interpretive
14
guidance, and the phased-in nature of the implementation, the overall impact of the health reform legislation on our
business over the coming years is difficult to predict and not yet fully known.
In addition, there have been a number of lawsuits filed that challenge all or part of the health care reform law.
On January 31, 2011, a Florida District Court ruled that the entire health care reform law is unconstitutional. Other
courts have ruled in favor of the law or have only struck down certain provisions of the law. These cases are under
appeal and others are in process. We cannot predict the ultimate outcome of any of the litigation. Further, various
Congressional leaders have indicated a desire to revisit some or all of the health care reform law during 2011. While
the U.S House of Representatives voted to repeal the whole health care reform law, the U.S. Senate voted against
such a repeal, and there have separately been a number of bills introduced that would repeal or change certain
provisions of the law. Because of these challenges, we cannot predict whether any or all of the legislation will be
implemented as enacted, overturned, repealed, or modified.
If we fail to effectively accommodate the growth in Medicaid enrollment anticipated under the health reform
legislation, our business may be materially adversely affected. In addition, if the new insurance industry assessment
is imposed as enacted, or if we are unable to obtain premium increases to offset the impact of the assessment or
otherwise adjust our business model to address the assessment, our business, financial condition, cash flows, or
results of operations could be materially adversely affected.
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 2010 of 84.5% had been one percentage point higher, or 85.5%, our
earnings for 2010 would have been approximately $1.14 per diluted share rather than our actual 2010 earnings of
$1.98 per diluted share, a 42% reduction in our earnings.
Factors that may affect our medical care costs include the level of utilization of health care services,
unexpected patterns in the annual flu season, increases in hospital costs, an increased incidence or acuity of high
dollar claims related to catastrophic illnesses or medical conditions 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, relatively low levels of hospital and specialty provider competition in
certain geographic areas, increases in the cost of pharmaceutical products and services, changes in health care
regulations and practices, epidemics, new medical technologies, and other various external factors. Many of these
factors are beyond our control and could reduce our ability to accurately predict and effectively manage the costs of
providing health care services. The inability to forecast and manage our medical care costs or to establish and
maintain a satisfactory medical care cost ratio, either with respect to a particular state health plan or across the
consolidated entity, could have a material adverse effect on our business, financial condition, cash flows, or results
of operations.
A failure to accurately estimate incurred but not reported medical care costs may negatively impact our
results of operations.
Because of the time lag between when medical services are actually rendered by our providers and when we
receive, process, and pay a claim for those medical services, we must continually estimate our medical claims
liability at particular points in time, and establish claims reserves related to such estimates. Our estimated reserves
for such “incurred but not paid,” or IBNP, medical care costs, are based on numerous assumptions. We estimate our
medical claims liabilities using actuarial methods based on historical data adjusted for claims receipt and payment
experience (and variations in that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit
changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes,
changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our ability to accurately
estimate claims for our newer lines of business or populations, such as with respect to Medicare Advantage or aged,
15
blind, and disabled Medicaid members, is impacted by the more limited experience we have had with those
populations. Finally, with regard to the new Medicaid and CHIP members we expect to enroll in 2011 through
organic growth due primarily to the recession, certain 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.
Another flu epidemic in 2011 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 2011 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.
If the responsive bids of our health plans for new or renewed Medicaid contracts are not successful, or if
our government contracts are terminated or are not renewed, our premium revenues could be materially
reduced and our operating results could be negatively impacted.
Our government contracts may be subject to periodic competitive bidding. In such process, our health plans
may face competition as other plans, many with greater financial resources and greater name recognition, attempt to
enter our markets through the competitive bidding process. For instance, the state contract of our Washington health
plan with respect to the Healthy Options program may be subject to competitive bidding during 2011 or 2012. In the
event the responsive bids of our Washington health plan or those of other 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, the bids may be based upon assumptions regarding
enrollment, utilization, medical costs, or other factors which could result in the Medicaid contract being less
profitable than we had expected.
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 the unavailability of state or federal funding. In some jurisdictions, such cancellation may be immediate
and in other jurisdictions a notice period is required. Further, most of our contracts are terminable without cause.
Our government contracts generally run for periods of one year to three 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. Although our health plans have generally been successful in obtaining the
renewal and/or extension of their state contracts, there can be no guarantee that any of our state government
contracts will be renewed or extended. 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.
16
There are numerous risks associated with the expansion of our Texas health plan’s service area under
the CHIP Rural Service Area Program, with our acquisition of Abri Health Plan in Wisconsin, and with
our ABD expansion in California.
In September 2010, our Texas health plan began arranging health care services for approximately 64,000 low-
income children and pregnant women in 174 predominantly rural counties through Texas’ CHIP Rural Service Area
Program. In addition, on September 1, 2010, we acquired Abri Health Plan, a Medicaid managed care organization
based in Milwaukee, Wisconsin. As of December 31, 2010, Abri Health Plan served approximately 36,000
Medicaid members. During 2011, we will begin serving additional ABD members in Texas, and we expect to begin
serving additional ABD members in California. There are numerous risks associated with a health plan’s initial
expansion into a new service area or the provision of medical services to a new population, including pent-up
demand for medical services, elevated medical care costs, and our lack of actuarial experience in setting appropriate
reserve levels. In the event the medical care costs of our Texas, Wisconsin, or California health plans are higher than
anticipated, we are unable to lower the medical care ratio associated with these new populations, our reserve levels
are inadequate, or our enrollment projections are overestimated, the negative results of our Texas, Wisconsin, or
California health plan could adversely affect our business, financial condition, cash flows, or results of operations.
States may not adequately compensate us for the value of drug rebates that were previously earned by the
Company but that are now collectible by the states.
ACA includes certain provisions that change the way drug rebates are handled for drug claims filled by
Medicaid managed care plans. Retroactive to March 23, 2010, state Medicaid programs are now required to collect
federal rebates on all Medicaid-covered outpatient drugs dispensed or administered to Medicaid managed care
enrollees (excluding certain drugs that are already discounted), and pharmaceutical manufacturers are required to
pay specified rebates directly to the state Medicaid programs for those claims. This has impacted the level of rebates
received by managed care plans from the manufacturers for Medicaid managed care enrollees. Many manufacturers
are in the process of or have completed renegotiating their rebate contracts with Medicaid managed care plans and
pharmacy benefits managers to offset these new rebates paid directly to state Medicaid programs. As a result, the
drug rebate amounts paid to managed care plans like ours will likely decline significantly in the future. There are
provisions in the ACA that require rates paid to Medicaid managed care to be actuarially sound in regard to drug
rebates. Although we will be pursuing rate increases with state agencies to make us whole for the rebate amounts
lost, there can be no assurances that the premium increases we may receive, if any, will be adequate to offset the
amount of the lost rebates. If such premium increases prove to be inadequate, our business, financial condition, cash
flows, or results of operations could be adversely affected.
We derive our premium revenues from a relatively small number of state health plans.
We currently derive our premium revenues from 10 state health plans. If we were unable to continue to operate
in any of those ten 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.
There are performance and other risks associated with certain provisions in the state Medicaid contracts
of our Florida, New Mexico, Ohio, and Texas health plans.
The state contracts of our New Mexico, Ohio, and Texas health plans contain provisions pertaining to at-risk
premiums that require us to meet certain quality performance measures to earn all of our contract revenues in those
states. In the event we are unsuccessful in achieving the stated performance measure, the health plan will be unable
to recognize the revenue associated with that measure. Any failure of our health plan to satisfy one of these
performance measure provisions could adversely affect our business, financial condition, cash flows, or results of
operations.
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In addition, the state contracts of our Florida, New Mexico, and Texas health plans contain provisions
pertaining to medical cost floors, administrative cost and profit ceilings, and profit-sharing arrangements. These
provisions are subject to interpretation and application by our health plans. In the event the applicable state
government agency disagrees with our health plan’s interpretation or application of the contract provisions at issue,
the health plan could be required to adjust the amount of its obligations under these provisions and/or make a
payment or payments to the state. Any interpretation or application of these provisions at variance with our health
plan’s interpretation or inconsistent with our revenue recognition accounting treatment 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.
Receipt of inadequate or significantly delayed premiums could negatively affect our business, financial
condition, cash flows, or results of operations.
Our premium revenues consist of fixed monthly payments per member, and supplemental payments for other
services such as maternity deliveries. These premiums are fixed by contract, and we are obligated during the
contract periods to provide health care services as established by the state governments. We use a large portion of
our revenues to pay the costs of health care services delivered to our members. If premiums do not increase when
expenses related to medical services rise, our medical margins will be compressed, and our earnings will be
negatively affected. A state could increase hospital or other provider rates without making a commensurate increase
in the rates paid to us, or could lower our rates without making a commensurate reduction in the rates paid to
hospitals or other providers. In addition, if the actuarial assumptions made by a state in implementing a rate or
benefit change are incorrect or are at variance with the particular utilization patterns of the members of one of our
health plans, our medical margins could be reduced. Any of these rate adjustments in one or more of the states in
which we operate could adversely affect our business, financial condition, cash flows, or results of operations.
Furthermore, a state undergoing a budget crisis may significantly delay the premiums paid to one of our health
plans. During 2010, due to a prolonged budget impasse, some of the monthly premium payments made by the state
of California to our California health plan were several months late. Any significant delay in the monthly payment
of premiums to any of our health plans could have a material adverse affect 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.
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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 of health plans. In the case of an acquisition of a business located in a state in which we do not already
operate, we would be required to obtain the necessary licenses to operate in that state. In addition, although we may
already operate in a state in which we acquire a new business, we would be required to obtain regulatory approval if,
as a result of the acquisition, we will operate in an area of that state in which we did not operate previously. 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.
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. For
example, from July 26 to July 30, 2010, the Center for Medicare and Medicaid Services, or CMS, conducted an
on-site audit with respect to our Medicare Advantage and Prescription Drug Plan contracts in the compliance areas
of prescription drug formulary administration, prescription drug coverage determinations and appeals, prescription
drug grievances, enrollment and disenrollment, premium billing, and an evaluation of whether we had implemented
an effective compliance program. On February 25, 2011, we received from CMS the audit and inspection report.
The report provides that we will be given until April 26, 2011 to develop and implement a corrective action plan to
correct the deficiencies noted in the report and to demonstrate to CMS that the underlying deficiencies have been
corrected and are not likely to recur. If we are unable to correct the noted deficiencies, or become subject to material
fines or other sanctions, whether as a result of this most recent CMS audit or otherwise, 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.
We rely on the accuracy of eligibility lists provided by state governments. Inaccuracies in those lists would
negatively affect our results of operations.
Premium payments to our health plan segment are based upon eligibility lists produced by state governments.
From time to time, states require us to reimburse them for premiums paid to us based on an eligibility list that a state
later discovers contains individuals who are not in fact eligible for a government sponsored program or are eligible
for a different premium category or a different program. Alternatively, a state could fail to pay us for members for
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whom we are entitled to payment. Our results of operations would be adversely affected as a result of such
reimbursement to the state if we had made related payments to providers and were unable to recoup such payments
from the providers.
We are subject to extensive fraud and abuse laws which may give rise to lawsuits and claims against us,
the outcome of which may have a material adverse effect on our financial position, results of operations
and cash flows.
Because we receive payments from federal and state governmental agencies, we are subject to various laws
commonly referred to as “fraud and abuse” laws, including the federal False Claims Act, which permit agencies and
enforcement authorities to institute suit against us for violations and, in some cases, to seek treble damages,
penalties, and assessments. Liability under such federal and state statutes and regulations may arise if we know, or it
is found that we should have known, that information we provide to form the basis for a claim for government
payment is false or fraudulent, and some courts have permitted False Claims Act suits to proceed if the claimant was
out of compliance with program requirements. Qui tam actions under federal and state law can be brought by any
individual on behalf of the government. Qui tam actions have increased significantly in recent years, causing greater
numbers of health care companies to have to defend a false claim action, pay fines, or be excluded from the
Medicare, Medicaid, or other state or federal health care programs as a result of an investigation arising out of such
action. Many states, including states where we currently operate, have enacted parallel legislation. In the event we
are subject to liability under a qui tam action, our business and operating results could be adversely affected.
Federal regulations require entities subject to HIPAA to update their transaction formats for electronic
data exchange from current HIPAA 4010 requirement to the new HIPAA 5010 standards, which are not
only burdensome and complex, but could adversely impact administrative expense and compliance.
A federal mandate known as HIPAA 5010 will require health plans to use new standards for conducting certain
operational and administrative transactions electronically beginning in January 2012. These administrative trans-
actions include: claims, remittance, eligibility and claims status requests and responses. The HIPAA 5010 upgrade
was prompted by government and industry’s shared goal of providing higher-quality, lower-cost health care and the
need for a comprehensive electronic data exchange environment for the ICD-10 mandate to be implemented by
October 2013. Upgrading to the new HIPAA 5010 standards should increase transaction uniformity, support pay for
performance, and streamline reimbursement transactions. We, along with other health plans, face significant
pressure to make sure that we have installed our software and tested it for compatibility with our business partners.
Because HIPAA 5010 affects electronic transactions such as patient eligibility, claims filing, claims status, and
remittance advice, we must proceed proactively to achieve full functionality of HIPAA 5010 transactions before the
deadline. Otherwise we may face transaction rejections and subsequent payment delays, which could have a
material adverse effect on our business, cash flows, and results of operations. As the deadline approaches, we
continue to upgrade and test our claims management systems to accommodate HIPAA 5010 and prevent any
operational disruptions.
Our business could be adversely impacted by adoption of the new ICD-10 standardized coding set for
diagnoses.
The U.S. Department of Health and Human Services, or HHS, has released rules pursuant to HIPAA which
mandate the use of standard formats in electronic health care transactions. HHS also has published rules requiring
the use of standardized code sets and unique identifiers for providers. By October 2013, the federal government will
require that health care organizations, including health insurers, upgrade to updated and expanded standardized
code sets used for documenting health conditions. These new standardized code sets, known as ICD-10, will require
substantial investments from health care organizations, including us. While use of the ICD-10 code sets will require
significant administrative changes, we believe that the cost of compliance with these regulations has not had and is
not expected to have a material adverse effect on our cash flows, financial position, or results of operations.
However, these changes may result in errors and otherwise negatively impact our service levels, and we may
experience complications related to supporting customers that are not fully compliant with the revised requirements
as of the applicable compliance date. Furthermore, if physicians fail to provide, appropriate codes for services
provided as a result of the new coding set, we may not be reimbursed, or adequately reimbursed, for such services.
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If we are unable to deliver quality care, maintain good relations with the physicians, hospitals, and other
providers with whom we contract, or if we are unable to enter into cost-effective contracts with such
providers, our profitability could be adversely affected.
We contract with physicians, hospitals, and other providers as a means to ensure access to health care services
for our members, to manage health care costs and utilization, and to better monitor the quality of care being
delivered. We compete with other health plans to contract with these providers. We believe providers select plans in
which they participate based on criteria including reimbursement rates, timeliness and accuracy of claims payment,
potential to deliver new patient volume and/or retain existing patients, effectiveness of resolution of calls and
complaints, and other factors. We cannot be sure that we will be able to successfully attract and retain providers to
maintain a competitive network in the geographic areas we serve. In addition, in any particular market, providers
could refuse to contract with us, demand higher payments, or take other actions which could result in higher health
care costs, disruption to provider access for current members, a decline in our growth rate, or difficulty in meeting
regulatory or accreditation requirements.
The Medicaid program generally pays doctors and hospitals at levels well below those of Medicare and private
insurance. Large numbers of doctors, therefore, do not accept Medicaid patients. In the face of fiscal pressures,
some states may reduce rates paid to providers, which may further discourage participation in the Medicaid
program.
In some markets, certain providers, particularly hospitals, physician/hospital organizations, and some
specialists, may have significant market positions or even monopolies. If these providers refuse to contract with
us or utilize their market position to negotiate favorable contracts which are disadvantageous to us, our profitability
in those areas could be adversely affected.
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 or
we have already paid claims to a delegated provider and payments cannot be recouped if the delegated provider
becomes insolvent. To reduce the risk that delegated providers are unable to pay referral claims, we monitor the
operational and financial performance of such providers. We also maintain contingency plans that include
transferring members to other providers in response to potential network instability. In certain instances, we have
required providers to place funds on deposit with us as protection against their potential insolvency. These funds are
frequently in the form of segregated funds received from the provider and held by us or placed in a third-party
financial institution. These funds may be used to pay claims that are the financial responsibility of the provider in
the event the provider is unable to meet these obligations. However, there can be no assurances that these
precautionary steps will fully protect us against the insolvency of a delegated provider. Liabilities incurred or losses
suffered as a result of provider insolvency could have an adverse effect on our business, financial condition, cash
flows, or results of operations.
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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.
If a state fails to renew its federal waiver application for mandated Medicaid enrollment into managed
care or such application is denied, our membership in that state will likely decrease.
States may only mandate Medicaid enrollment into managed care under federal waivers or demonstrations.
Waivers and programs under demonstrations are approved for two- to five-year periods and can be renewed on an
ongoing basis if the state applies and the waiver request is approved or renewed by CMS. We have no control over
this renewal process. If a state does not renew its mandated program or the federal government denies the state’s
application for renewal, our business would suffer as a result of a likely decrease in membership.
If state regulators do not approve payments of dividends and distributions by our subsidiaries, it may
negatively affect our business strategy.
We are a corporate parent holding company and hold most of our assets at, and conduct most of our operations
through, direct subsidiaries. As a holding company, our results of operations depend on the results of operations of
our subsidiaries. Moreover, we are dependent on dividends or other intercompany transfers of funds from our
subsidiaries to meet our debt service and other obligations. The ability of our subsidiaries to pay dividends or make
other payments or advances to us will depend on their operating results and will be subject to applicable laws and
restrictions contained in agreements governing the debt of such subsidiaries. In addition, our health plan 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, 2010, 2009, and 2008 without approval of the
regulatory authorities were approximately $18.8 million, $9.0 million, and $7.6 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
convertible senior notes.
Unforeseen changes in pharmaceutical regulations or market conditions may impact our revenues and
adversely affect our results of operations.
A significant category of our health care costs relate to pharmaceutical products and services. Evolving
regulations and state and federal mandates regarding coverage may impact the ability of our health plans to continue
to receive existing price discounts on pharmaceutical products for our members. Other factors affecting our
pharmaceutical costs include, but are not limited to, the price of pharmaceuticals, geographic variation in utilization
22
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.
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 Health Information Technology for Eco-
nomic and Clinical Health Act provisions of the ARRA further expand 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,
increasing penalties for violations, and requiring public disclosure of improper disclosures of health information of
more than 500 individuals.
Under ARRA, civil penalties for HIPAA violations by covered entities are increased up to an annual maximum
of $1.5 million for uncorrected violations based on willful neglect. In addition, imposition of these penalties is now
more likely because ARRA strengthens enforcement. For example, commencing February 2010, HHS was required
to conduct periodic audits to confirm compliance. Investigations of violations that indicate willful neglect, for
which penalties are mandatory beginning in February 2011, are statutorily required. In addition, state attorneys
general are authorized to bring civil actions seeking either injunctions or damages in response to violations of
HIPAA privacy and security regulations that threaten the privacy of state residents. Initially monies collected will be
transferred to a division of HHS for further enforcement, and within three years, a methodology will be adopted for
distributing a percentage of those monies to affected individuals to fund enforcement and provide incentive for
individuals to report violations. In addition, ARRA requires us to notify affected individuals, HHS, and in some
cases the media when unsecured personal health information is subject to a security breach.
ARRA also contains a number of provisions that provide incentives for states to initiate certain programs
related to health care and health care technology, such as electronic health records. While provisions such as these
do not apply to us directly, states wishing to apply for grants under ARRA, or otherwise participating in such
programs, may impose new health care technology requirements on us through our contracts with state Medicaid
agencies. We are unable to predict what such requirements may entail or what their effect on our business may be.
We will continue to assess our compliance obligations as regulations under ARRA are promulgated and more
guidance becomes available from HHS and other federal agencies. The new privacy and security requirements,
however, may require substantial operational and systems changes, employee education and resources and there is
no guarantee that we be able to implement them adequately or prior to their effective date. Given HIPAA’s
complexity and the anticipated new regulations, which may be subject to changing and perhaps conflicting
interpretation, our ongoing ability to comply with all of the HIPAA requirements is uncertain, which may expose us
to the criminal and increased civil penalties provided under ARRA and may require us to incur significant costs in
order to seek to comply with its requirements.
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 subject us to civil and criminal penalties and have a material
adverse effect on our business, financial condition, cash flows, or results of operations.
Risks Related to the Operation of Our Molina Medicaid Solutions Business
MMIS operational problems in Idaho or Maine could result in reduced or withheld payments, damage
assessments, increased administrative costs, or even contract termination, any of which could adversely
affect our business, financial condition, cash flows, or results of operations.
From and after the MMIS operational or “go live” date of June 1, 2010 after which it began pilot operations,
Molina Medicaid Solutions has experienced certain problems with the MMIS in Idaho. On October 5, 2010, Molina
Medicaid Solutions received from the Idaho Department of Administration a notice to cure letter with respect to its
23
alleged non-compliance with certain provisions of the MMIS project agreements. Molina Medicaid Solutions and
the Idaho Department of Health and Welfare (“DHW”) have been working together to resolve the MMIS problems,
and Molina Medicaid Solutions has developed a corrective action plan with respect to the identified problems and
defects. Molina Medicaid Solutions believes it has ameliorated or corrected many of the identified problems, and
that it will ultimately be successful in resolving all of the MMIS issues in Idaho. However, in the event Molina
Medicaid Solutions is unsuccessful in correcting all of the identified problems, the Idaho Department of Admin-
istration may: (i) reduce or withhold its payments to Molina Medicaid Solutions, (ii) require Molina Medicaid
Solutions to provide services at no additional cost to Idaho, (iii) require the payment of damages, or (iv) terminate its
contract with Molina Medicaid Solutions. In addition, Molina Medicaid Solutions may incur much greater
administrative costs than expected in correcting the MMIS problems, or in advancing interim payments to Idaho
providers. For example, the consulting and outside service costs for Idaho following its go-live operational date
have not declined from the pre-operational level as had been previously expected. Finally, Idaho DHW may not
accept the MMIS developed and implemented by Molina Medicaid Solutions, or CMS may not certify such MMIS.
All of such risks are also applicable to the MMIS in Maine which became operational and began pilot
operations as of September 1, 2010. The realization of any of the foregoing risks could adversely affect our business,
financial condition, cash flows, or results of operations.
We may be unable to retain or renew the state government contracts of the Molina Medicaid Solutions
segment on terms consistent with our expectations or at all.
Molina Medicaid Solutions currently has management contracts in only six states. If we are unable to continue
to operate in any of those six states, or if our current operations in any of those six states were significantly curtailed,
the revenues and cash flows of Molina Medicaid Solutions could decrease materially, and as a result our profitability
would be negatively impacted.
If the responsive bids to RFPs of Molina Medicaid Solutions are not successful, including its responsive
bid in Louisiana during 2011, our revenues could be materially reduced and our operating results could
be negatively impacted.
The government contracts of Molina Medicaid Solutions may be subject to periodic competitive bidding. In
such process, Molina Medicaid Solutions may face competition as other service providers, some with much greater
financial resources and greater name recognition, attempt to enter our markets through the competitive bidding
process. For instance, the state MMIS contract of Louisiana is currently subject to competitive bidding. Molina
Medicaid Solutions also anticipates bidding in other states which have issued RFPs for procurement of a new
MMIS. In the event the responsive bid in Louisiana is not successful, we will lose our fiscal agent contract in that
state, and our revenues could be materially reduced as a result. In addition, in the event our responsive bids in other
states are not successful, we will be unable to grow in a manner consistent with our projections. Even if our
responsive bids are successful, the bids may be based upon assumptions or other factors which could result in the
contract being less profitable than we had expected or had been the case prior to competitive re-bidding.
Because of the complexity and duration of the services and systems required to be delivered under the
government contracts of Molina Medicaid Solutions, there are substantial risks associated with full
performance under the contracts.
The state contracts of Molina Medicaid Solutions typically require significant investment in the early stages
that is expected to be recovered through billings over the life of the contracts. These contracts involve the
construction of new computer systems and communications networks and the development and deployment of
complex technologies. Substantial performance risk exists under each contract. Some or all elements of service
delivery under these contracts are dependent upon successful completion of the design, development, construction,
and implementation phases. Any increased or unexpected costs or 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 condition, cash
flows, or results of operations.
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If we fail to comply with our state government contracts or government contracting regulations, our
business may be adversely affected.
Molina Medicaid Solutions’ contracts with state government customers may include unique and specialized
performance requirements. In particular, contracts with state government customers are subject to various
procurement regulations, contract provisions, and other requirements relating to their formation, administration,
and performance. Any failure to comply with the specific provisions in our customer contracts or any violation of
government contracting regulations could result in the imposition of various civil and criminal penalties, which may
include termination of the contracts, forfeiture of profits, suspension of payments, imposition of fines, and
suspension from future government contracting. Further, any negative publicity related to our state government
contracts or any proceedings surrounding them may damage our business by affecting our ability to compete for
new contracts. The termination of a state government contract, our suspension from government work, or any
negative impact on our ability to compete for new contracts, could have an adverse effect on our business, financial
condition, cash flows, or results of operations.
System security risks and systems integration issues that disrupt our internal operations or information
technology services provided to customers could adversely affect our financial results 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.
Molina Medicaid Solutions routinely processes, stores, and transmits large amounts of data for our clients,
including sensitive and personally identifiable information. Breaches of our security measures could expose us, our
customers, or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and
potential liability for us and damage to our brand and reputation. Accordingly, we could lose existing or potential
government customers for outsourcing services or other information technology solutions or incur significant
expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in our
products. In addition, the cost and operational consequences of implementing further data protection measures
could be significant.
Portions of our information technology infrastructure also may experience interruptions, delays, or cessations
of service or produce errors in connection with systems integration or migration work that takes place from time to
time. We may not be successful in implementing new systems and transitioning data, which could cause business
disruptions and be more expensive, time consuming, disruptive, and resource-intensive. Such disruptions could
adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins, or lost
government customers resulting from these disruptions could adversely affect our financial results, reputation, and
stock price.
In the course of providing services to customers, Molina Medicaid Solutions may inadvertently infringe
on the intellectual property rights of others and be exposed to claims for damages.
The solutions we provide to our state government customers may inadvertently infringe on the intellectual
property rights of third parties resulting in claims for damages against us. The expense and time of defending
against these claims may have a material and adverse impact on our profitability. Additionally, the publicity we may
receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our
ability to develop new MMIS business.
25
Inherent in the government contracting process are various risks which may materially and adversely
affect our business and profitability.
We are subject to the risks inherent in the government contracting process. These risks include government
audits of billable contract costs and reimbursable expenses and compliance with government reporting require-
ments. In the event we are found to be out of compliance with government contracting requirements, our reputation
may be adversely impacted and our relationship with the government agencies we work with may be damaged,
resulting in a material and adverse effect on our profitability.
Our performance on contracts, including those on which we have partnered with third parties, may be
adversely affected if we or the third parties fail to deliver on commitments.
In some instances, our contracts require that we partner with other parties including software and hardware
vendors to provide the complex solutions required by our state government customers. Our ability to deliver the
solutions and provide the services required by our customers is dependent on our and our partners’ ability to meet
our customers’ delivery schedules. If we or our partners fail to deliver services or products on time, our ability to
complete the contract may be adversely affected, which may have a material and adverse impact on our revenue and
profitability.
Risks Related to our General Business Operations
Restrictions and covenants in our credit facility may limit our ability to make certain acquisitions or
reduce our liquidity and capital resources.
We have a $150 million senior secured credit facility that imposes numerous restrictions and covenants,
including prescribed consolidated leverage and fixed charge coverage ratios, net worth requirements, and acqui-
sition 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. In addition, our credit
facility matures in May 2012. 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, or if we are unable to renew or refinance our credit facility prior to its maturity, 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.
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 2010, we
had total premium revenue of $4.0 billion, an increase of 100% over a five-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 business, financial condition, cash flows, 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
26
members and the public. For instance, some states mandate minimum medical expense levels as a percentage of
premium revenues. These laws and regulations, and their interpretations, are subject to frequent change. The
interpretation of certain contract provisions by our governmental regulators may also change. Changes in existing
laws or regulations, or their interpretations, or the enactment of new laws or regulations, could reduce our
profitability by imposing additional capital requirements, increasing our liability, increasing our administrative and
other costs, increasing mandated benefits, forcing us to restructure our relationships with providers, or requiring us
to implement additional or different programs and systems. Changes in the interpretation of our contracts could also
reduce our profitability if we have detrimentally relied on a prior interpretation.
Our business depends on our information and medical management systems, and our inability to
effectively integrate, manage, and keep secure our information and medical management systems, could
disrupt our operations.
Our business is dependent on effective and secure information systems that assist us in, among other things,
processing provider claims, monitoring utilization and other cost factors, supporting our medical management
techniques, and providing data to our regulators. Our providers also depend upon our information systems for
membership verifications, claims status, and other information. If we experience a reduction in the performance,
reliability, or availability of our information and medical management systems, our operations, ability to pay
claims, and ability to produce timely and accurate reports could be adversely affected. In addition, if the licensor or
vendor of any software which is integral to our operations were to become insolvent or otherwise fail to support the
software sufficiently, our operations could be negatively affected.
Our information systems and applications require continual maintenance, upgrading, and enhancement to
meet our operational needs. Moreover, our acquisition activity requires transitions to or from, and the integration of,
various information systems. If we experience difficulties with the transition to or from information systems or are
unable to properly implement, maintain, upgrade or expand our system, we could suffer from, among other things,
operational disruptions, loss of members, difficulty in attracting new members, regulatory problems, and increases
in administrative expenses.
Our business requires the secure transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in
compromises or breaches of our security systems and member data stored in our information systems. Anyone who
circumvents our security measures could misappropriate our confidential information or cause interruptions in
services or operations. The internet is a public network, and data is sent over this network from many sources. In the
past, computer viruses or software programs that disable or impair computers have been distributed and have
rapidly spread over the internet. Computer viruses could be introduced into our systems, or those of our providers or
regulators, which could disrupt our operations, or make our systems inaccessible to our members, providers, or
regulators. We may be required to expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. Because of the confidential health information we
store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and
loss. Our security measures may be inadequate to prevent security breaches, and our business operations would be
negatively impacted by cancellation of contracts and loss of members if security breaches are not prevented.
Because our corporate headquarters are located in Southern California, our business operations may be
significantly disrupted as a result of a major earthquake.
Our corporate headquarters is located in Long Beach, California. In addition, the claims of our health plans are
also processed in Long Beach. Southern California is exposed to a statistically greater risk of a major earthquake
than most other parts of the United States. If a major earthquake were to strike the Los Angeles area, our corporate
functions and claims processing could be significantly impaired for a substantial period of time. Although we have
established a disaster recovery and business resumption plan with back-up operating sites to be deployed in the case
of such a major disruptive event, there can be no assurances that the disaster recovery plan will be successful or that
the business operations of all our health plans, including those that are remote from any such event, would not be
substantially impacted by a major Southern California earthquake.
27
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 our
16 primary care clinics in California and two in Washington are employees of our health plans. As a direct employer
of physicians and ancillary medical personnel and as an operator of primary care clinics, our plans are subject to
liability for negligent acts, omissions, or injuries occurring at one of its clinics or caused by one of their employees.
We maintain medical malpractice insurance for our clinics 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
other resources than we do. For these reasons, we may be unable to grow our membership, or may lose members to
other health plans.
Failure to maintain effective internal controls over financial reporting could have a material adverse
effect on our business, operating results, and stock price.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over
financial reporting. In particular, we must perform system and process evaluation and testing of our internal controls
over financial reporting to allow management to report on, and our independent registered public accounting firm to
attest to, our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
2002. Our future testing, or the subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our
compliance with Section 404 will continue to require that we incur substantial accounting expense and expend
significant management time and effort. Moreover, if we are not able to continue to comply with the requirements of
Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies
28
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.
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, or
the adoption of new pronouncements could significantly affect our stated 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, 2010, our investments in auction rate securities included amounts designated as
available-for-sale securities amounted to $24.6 million par value (fair value of $20.4 million). As a result of
the decrease in fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized
losses of $0.2 million to accumulated other comprehensive loss for the fiscal year ended December 31, 2010. 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 appropriate. 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 as available-for-sale. Our non-current restricted investments are designated as held-to-maturity.
Available-for-sale investments are carried at fair value, and the unrealized gains or losses are included in
accumulated other comprehensive income or loss as a separate component of stockholders’ equity, unless the
decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such
securities until their full cost can be recovered. For our available-for-sale investments and held-to-maturity
investments, if a decline in value is deemed to be other-than-temporary and we do not have the intent and ability to
hold such security until its full cost can be recovered, the security is deemed to be other-than-temporarily impaired
and it is written down to fair value and the loss is recorded as an expense.
In accordance with applicable accounting standards, we review our investment securities to determine if declines in
fair value below cost are other-than-temporary. This review is subjective and requires a high degree of judgment. We
conduct this review on a quarterly basis, using both quantitative and qualitative factors, to determine whether a decline in
value is other-than-temporary. Such factors considered include the length of time and the extent to which market value
has been less than cost, the financial condition and near term prospects of the issuer, recommendations of investment
advisors and forecasts of economic, market or industry trends. This review process also entails an evaluation of our
ability and intent to hold individual securities until they mature or full cost can be recovered.
The current economic environment and recent volatility of the securities markets increase the difficulty of
assessing investment impairment and the same influences tend to increase the risk of potential impairment of these
assets. Over time, the economic and market environment may provide additional insight regarding the fair value of
certain securities, which could change our judgment regarding impairment. This could result in realized losses
relating to other-than-temporary declines to be recorded as an expense. Given the current market conditions and the
significant judgments involved, there is continuing risk that declines in fair value may occur and material
other-than-temporary impairments may result in realized losses in future periods which could have an adverse
effect on our business, financial condition, cash flows, or results of operations.
29
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our
profitability.
We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by changes in
the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and
liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws, including pending tax
law changes. 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 us, 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 Our Common Stock
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,
• 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,
• general economic conditions, including unemployment rates, inflation, and interest rates, and
• the factors set forth under “Risk Factors” in this report.
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 55% of our capital stock. Our president
30
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.
Future sales of our common stock or equity-linked securities in the public market could adversely affect
the trading price of our common stock and our ability to raise funds in new stock offerings.
We may issue equity securities in the future, including securities that are convertible into or exchangeable for,
or that represent the right to receive, common stock. Sales of a substantial number of shares of our common stock or
other equity securities, including sales of shares in connection with any future acquisitions, could be substantially
dilutive to our stockholders. These sales may have a harmful effect on prevailing market prices for our common
stock and our ability to raise additional capital in the financial markets at a time and price favorable to us. Moreover,
to the extent that we issue restricted stock units, stock appreciation rights, options, or warrants to purchase our
common stock in the future and those stock appreciation rights, options, or warrants are exercised or as the restricted
stock units vest, our stockholders may experience further dilution. Holders of our shares of common stock have no
preemptive rights that entitle holders to purchase a pro rata share of any offering of shares of any class or series and,
therefore, such sales or offerings could result in increased dilution to our stockholders. Our certificate of
incorporation provides that we have authority to issue 80,000,000 shares of common stock and 20,000,000 shares
of preferred stock. As of December 31, 2010, 30,308,616 shares of common stock and no shares of preferred or
other capital stock were issued and outstanding.
It may be difficult for a third party to acquire 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
addition, any change in control of our state health plans would require the approval of the applicable insurance
regulator in each state in which we operate.
Our certificate of incorporation and bylaws also contain provisions that could have the effect of delaying,
deferring, or preventing a change in control of our Company that stockholders may consider favorable or beneficial.
These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors
and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in
the future for shares of our common stock. These provisions include:
• a staggered board of directors, so that it would take three successive annual meetings to replace all directors,
• prohibition of stockholder action by written consent, and
• advance notice requirements for the submission by stockholders of nominations for election to the board of
directors and for proposing matters that can be acted upon by stockholders at a meeting.
In addition, changes of control are often subject to state regulatory notification, and in some cases, prior
approval.
We do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid any cash dividends. While we have in the past and may again in the future use
our available cash to repurchase our securities, we do not anticipate declaring or paying any cash dividends in the
foreseeable future.
31
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
We lease a total of 67 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 and business process outsourcing industries are subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and regulations can be subject to government
review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated
with violations of these laws and regulations include significant fines and penalties, exclusion from participating in
publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages,
including claims for punitive damages, which are not covered by insurance. 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
32
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.” As of
February 15, 2011, there were 115 holders of record of our common stock. The high and low sales prices of our
common stock for specified periods are set forth below:
Date Range
2010
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.39
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31.20
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31.80
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.28
2009
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.74
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.75
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.05
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.49
$20.02
$25.00
$25.28
$24.65
$16.22
$18.11
$19.36
$17.05
Dividends
We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to
fund our business, and we do not anticipate paying any cash dividends in the future.
Our ability to pay dividends is partially dependent on, among other things, our receipt of cash dividends from
our regulated subsidiaries. The ability of our regulated subsidiaries to pay dividends to us is limited by the state
departments of insurance in the states in which we operate or may operate, as well as requirements of the
government-sponsored health programs in which we participate. Any future determination to pay dividends will be
at the discretion of our Board and will depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions. For more information regarding restrictions on the
ability of our regulated subsidiaries to pay dividends to us, please see Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Regulatory Capital and Dividends Restrictions.
Unregistered Issuances of Equity Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2010)
Plan Category
Equity compensation
plans approved by
security holders . . . . . .
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)
513,614(1)
$30.59
3,744,530(2)
33
(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, 2011 increased the total number of shares reserved for
issuance under the 2002 Incentive Plan to 4,800,000 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.
34
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, 2005 to December 31, 2010. 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
12/05
12/06
12/07
12/08
12/09
12/10
Molina Healthcare, Inc.
S&P 500
Peer Group
* $100 invested on 12/31/05 in stock or index,
including reinvestment of dividends. Fiscal year ending
December 31.
35
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, 2010 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.
2010(1)(3)
2009(2)(3)
2007(2)(8)
2006(2)(9)
Year Ended December 31,
2008(2)(3)
Statements of Income Data:
Revenue:
Premium revenue . . . . . . . . . . . . . . . . $ 3,989,909 $ 3,660,207 $ 3,091,240 $ 2,462,369 $ 1,985,109
Service revenue(1) . . . . . . . . . . . . . . .
—
19,886
Investment income . . . . . . . . . . . . . . .
—
21,126
—
30,085
89,809
6,259
—
9,149
Total revenue . . . . . . . . . . . . . . . . . . .
Expenses:
Medical care costs . . . . . . . . . . . . . . .
Cost of service revenue(1) . . . . . . . . . .
General and administrative
expenses(2) . . . . . . . . . . . . . . . . . . .
Premium tax expenses(2)(3) . . . . . . . .
Depreciation and amortization . . . . . . .
4,085,977
3,669,356
3,112,366
2,492,454
2,004,995
3,370,857
78,647
3,176,236
—
2,621,312
—
2,080,083
—
1,678,652
—
345,993
139,775
45,704
276,027
128,581
38,110
249,646
100,165
33,688
205,057
81,020
27,967
168,280
60,777
21,475
Total expenses . . . . . . . . . . . . . . . . . .
3,980,976
3,618,954
3,004,811
2,394,127
1,929,184
Gain on purchase of convertible senior
notes. . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . .
Provision for income taxes(3) . . . . . . .
—
105,001
(15,509)
89,492
34,522
1,532
51,934
(13,777)
38,157
7,289
—
107,555
(13,231)
94,324
34,726
—
98,327
(5,605)
92,722
34,996
Net income . . . . . . . . . . . . . . . . . . . . . $
54,970
$
30,868 $
59,598 $
57,726 $
—
75,811
(2,353)
73,458
27,731
45,727
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . $
2.00 $
1.98 $
1.19 $
1.19 $
2.15 $
2.15 $
2.04 $
2.03 $
1.64
1.62
Weighted average number of common
shares outstanding . . . . . . . . . . . . . .
Weighted average number of common
shares and potential dilutive
common shares outstanding . . . . . . .
Operating Statistics:
Medical care ratio(4). . . . . . . . . . . . . .
General and administrative expense
ratio(5) . . . . . . . . . . . . . . . . . . . . . .
Premium tax ratio(6) . . . . . . . . . . . . . .
Members(7) . . . . . . . . . . . . . . . . . . . .
27,449,000
25,843,000
27,676,000
28,275,000
27,966,000
27,754,000
25,984,000
27,772,000
28,419,000
28,164,000
84.5%
86.8%
84.8%
84.5%
84.6%
8.5%
3.5%
7.5%
3.5%
8.0%
3.2%
8.2%
3.3%
8.4%
2.3%
1,613,000
1,455,000
1,256,000
1,149,000
1,077,000
36
2010(1)
2009
As of December 31,
2008
2007(8)
2006(9)
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (including current
maturities) . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . .
$ 455,886
1,509,214
$ 469,501
1,244,035
$ 387,162
1,148,068
$ 459,064
1,170,016
$403,650
864,475
164,014
790,157
719,057
158,900
701,297
542,738
164,873
616,306
531,762
160,166
655,640
514,376
45,000
444,309
420,166
(1) Service revenue and cost of service revenue represent revenue and costs generated by our Molina Medicaid
Solutions segment. Because we acquired this business on May 1, 2010, results for the year ended December 31,
2010 include eight months of results for this segment.
(2) Prior to 2010, general and administrative expenses have included premium tax expenses. Beginning in 2010, we
have reported premium tax expenses on a separate line in the statements of income data. Prior periods have been
reclassified to conform to this presentation.
(3) Effective January 1, 2008 through December 31, 2009, income tax expense included both the Michigan
business income tax, or BIT, and Michigan modified gross receipts tax, or MGRT. Effective January 1, 2010, we
have recorded the MGRT as a premium tax and not as an income tax. We will continue to record the BIT as an
income tax. For the years ended December 31, 2009, and 2008, amounts for premium tax expense and income
tax expense have been reclassified to conform to this presentation. The MGRT amounted to $6.2 million,
$5.5 million, and $5.1 million for the years ended December 31, 2010, 2009, and 2008, respectively.
(4) Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a
key operating indicator used to measure our performance in delivering efficient and cost effective health care
services. Changes in the medical care ratio from period to period result from changes in Medicaid funding by
the states, 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.
(5) General and administrative expense ratio represents such expenses as a percentage of total revenue.
(6) Premium tax ratio represents such expenses as a percentage of premium revenue.
(7) Number of members at end of period.
(8) 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.
(9) 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.
37
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.
Reclassifications
Effective January 1, 2010, we have recorded the Michigan modified gross receipts tax, or MGRT, as a premium
tax and not as an income tax. Prior periods have been reclassified to conform to this presentation.
In prior periods, general and administrative, or G&A, expenses have included premium tax expenses.
Beginning in 2010, we have reported premium tax expenses on a separate line in the accompanying consolidated
statements of income. Prior periods have been reclassified to conform to this presentation.
Overview
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care
needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid
program. Our business comprises our Health Plans segment, consisting of licensed health maintenance organi-
zations serving Medicaid populations in ten states, and our Molina Medicaid Solutions segment, which provides
design, development, implementation, and business processing solutions to Medicaid agencies in an additional five
states. Our direct delivery business currently consists of 16 primary care community clinics in California and two
primary care community clinics in Washington, and we also manage three county-owned primary care clinics under
a contract with Fairfax County, Virginia.
Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico,
Ohio, Texas, Utah, Washington, and Wisconsin. These health plans served approximately 1.6 million members
eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families
and individuals as of December 31, 2010. The health plans are operated by our respective wholly owned
subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Effective
January 1, 2010, we terminated operations at our small Medicare health plan in Nevada.
On May 1, 2010, we acquired a health information management business which we now operate under the
name, Molina Medicaid SolutionsSM. Our Molina Medicaid Solutions segment provides design, development,
implementation, and business process outsourcing solutions to state governments for their Medicaid Management
Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other
health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of
Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration
services for the Florida Medicaid program. We paid $131.3 million to acquire Molina Medicaid Solutions. The
acquisition was funded with available cash of $26 million and $105 million drawn under our credit facility.
With the addition of Molina Medicaid Solutions, we have added a segment to our internal financial reporting
structure in 2010. We now report our financial performance based on the following two reportable segments:
(i) Health Plans; and (ii) Molina Medicaid Solutions.
Fiscal Year 2010 Overview and Highlights
During 2010, we experienced diversified revenue growth thanks to increased enrollment in our health plans,
our successful entry into the Medicaid health information management business, and an acquisition that established
us in a new state. Meanwhile, stronger medical management and disciplined cost control helped us realize
improvements in our health plan medical margins. Many of these factors contributed to our Company’s strong
financial performance in 2010. For the year, our net income rose to $55.0 million, or $1.98 per diluted share, an
increase of 78% over 2009. We earned premium revenues of $4.0 billion, up 9% over the previous year. Meanwhile,
during a year when costs continued to rise for the health care industry, we achieved a medical care ratio of 84.5%,
compared with a medical care ratio of 86.8% for fiscal year 2009.
38
During 2010, we continued to pursue the expansion of our Medicaid health plan business. In September 2010,
we completed the $15.5 million acquisition of Abri Health Plan of Milwaukee, which served approximately 36,000
Medicaid beneficiaries as of December 31, 2010. We also expanded our growing presence in Texas, where we were
already serving patients in the Houston, San Antonio, and Laredo service areas. In May 2010, we were awarded a
contract to serve Medicaid managed care patients in the seven-county Dallas service area starting in February 2011.
In September 2010, we won an additional contract to administer the CHIP program (including the CHIP Perinatal
program) in 174 predominately rural counties across the state. As of December 31, 2010, we served approximately
63,000 children and pregnant women under this contract. The new contracts not only provide increased scale for
leveraging our resources in Texas, they make Molina an increasingly important player in a state where the potential
revenue opportunity will grow as new Medicaid beneficiaries qualify for coverage under health care reform.
In addition, during 2010 we expanded our operation of community-based primary care clinics — the business
field in which Molina began over 30 years ago — so that we can serve the needs of our patients while also serving
the states that pay for their health care.
Finally, on May 1, 2010, we acquired Molina Medicaid Solutions, an acquisition which has complemented our
core business model of serving government programs, expanded our service offerings diversified our revenue base,
and expanded our level of participation in the Medicaid program.
2010 Financial Performance Summary
The following table briefly summarizes our financial performance for the years ended December 31, 2010, 2009,
and 2008. All ratios, with the exception of the medical care ratio and the premium tax ratio, are shown as a percentage of
total revenue. The medical care ratio and the premium tax ratio are computed as a percentage of premium revenue
because there are direct relationships between premium revenue earned, and the cost of health care and premium taxes.
2010
Year Ended December 31,
2009
(Dollar amounts in thousands, except per-share
data)
2008
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . $
1.98
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,989,909
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
89,809
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,001
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
54,970
1,613,000
Total ending membership . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97.6%
2.2
0.2
— $
$
1.19
$3,660,207
$
51,934
$
$
30,868
1,455,000
$
2.15
$3,091,240
—
$ 107,555
$
59,598
1,256,000
99.8%
—
0.2
99.3%
—
0.7
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
100.0%
100.0%
Medical care ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense ratio . . . . . . . . . . . . .
Premium tax ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84.5%
8.5%
3.5%
2.6%
1.3%
38.6%
86.8%
7.5%
3.5%
1.4%
0.8%
19.1%
84.8%
8.0%
3.2%
3.5%
1.9%
36.8%
Health Plans Segment
Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts with
the states in which our health plans operate. The majority of medical costs associated with premium revenues are
risk-based costs — while the health plans receive fixed per-member per-month, or PMPM, premium payments from
the states, the health plans are at risk for the costs of their members’ health care. Our Health Plans segment operates
39
in a highly regulated environment with stringent capitalization requirements. These capitalization requirements,
among other things, limit the health plans’ ability to pay dividends to us without regulatory approval.
As of December 31, 2010, our health plans were located in California, Florida, Michigan, Missouri,
New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. Additionally, we operate three county-owned
primary care clinics in Virginia.
Molina Medicaid Solutions Segment
Our Molina Medicaid Solutions segment provides design, development, implementation, and business process
outsourcing solutions to state governments for their Medicaid Management Information Systems, or MMIS.
Among the principle differences between the Molina Medicaid Solutions segment and the Health Plans segment
are:
• The Molina Medicaid Solutions segment, unlike the Health Plans segment, does not assume risk for medical
costs. We believe that over time the Molina Medicaid Solutions segment will experience less volatility in
profits than the Health Plans segment because the costs incurred for the provision of business process
outsourcing services are less volatile than those incurred for the provision of medical care.
• Revenue earned by the Molina Medicaid Solutions segment will be much less than that earned by the Health
Plans segment. The revenue earned by our Health Plans segment is intended to include the cost of the
medical care actually provided to our health plan membership. Such costs typically amount to approxi-
mately 85% of the revenue of the health plans segment. The revenue received by the Molina Medicaid
Solutions segment is intended only to pay for certain administrative costs (plus profit) of the Medicaid
program — not the actual cost of services provided to Medicaid members.
• In general, we expect the operating profit margin percentage generated by the Molina Medicaid Solutions
segment to be higher than the operating profit margin percentage generated by the Health Plans segment.
While total profit is likely to be lower for the Molina Medicaid Solutions segment than for the Health Plans
segment, the percentage of revenue that we retain as profit is likely to be higher for the Molina Medicaid
Solutions segment.
• The capital requirements of the Molina Medicaid Solutions segment are — except in the case of new
contract start-ups — considerably less than those of our Health Plans segment.
• Regulatory approval is not required for the Molina Medicaid Solutions segment to pay dividends to us.
While we believe that the acquisition of the Molina Medicaid Solutions segment diversifies our risk profile, we
also believe that the two segments are complementary from strategic and operating perspectives. From a strategic
perspective, both segments allow us to participate in an expanding sector of the economy while continuing our
mission to serve low-income families and individuals eligible for government-sponsored health care programs.
Operationally, the segments share a common systems platform — allowing for efficiencies of scale — and common
experience in meeting the needs of state Medicaid programs. We also believe that we have opportunities to market
various cost containment and quality practices used by our Health Plans segment (such as care management and
care coordination programs) to state MMIS customers who wish to incorporate certain aspects of managed care
programs into their own fee-for-service programs.
Composition of Revenue and Membership
Health Plans Segment
Premium revenue is fixed in advance of the periods covered and, except as described in “Critical Accounting
Policies” below, is not generally subject to significant accounting estimates. For the year ended December 31, 2010,
we received approximately 94% of our premium revenue as a fixed PMPM amount, pursuant to our Medicaid
contracts with state agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services, or
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.
40
For the year ended December 31, 2010, we received approximately 6% of our premium revenue in the form of
“birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state
health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.
The amount of the premiums paid to us may vary substantially between states and among various government
programs. PMPM premiums for CHIP members are generally among our lowest, with rates as low as approximately
$75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the TANF
Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range
between approximately $100 in California to $230 in Missouri. Among our Medicaid ABD membership, PMPM
premiums range from approximately $320 in Utah to $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 $1,100 PMPM, with Medicare revenue totaling $265.2 million, $135.9 million, and
$95.1 million, for the years ended December 31, 2010, 2009, and 2008, respectively.
41
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2009
2008
2010
344,000
61,000
227,000
81,000
91,000
245,000
94,000
79,000
355,000
36,000
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
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,613,000
1,455,000
1,256,000
Total Ending Membership by State for our Medicare
Advantage Plans(1):
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,900
500
6,300
600
700
8,900
2,600
2,100
—
3,300
400
500
4,000
1,300
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,500
11,600
Total Ending Membership by State for our Aged, Blind or
Disabled Population:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,900
10,000
31,700
5,700
28,200
19,000
8,000
4,000
1,700
13,900
8,800
32,200
5,700
22,600
17,600
7,500
3,200
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
122,200
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) We acquired the Wisconsin health plan on September 1, 2010. As of December 31, 2010, the Wisconsin health
plan had approximately 3,000 Medicare Advantage members covered under a reinsurance contract with a third
party; these members are not included in the membership tables herein.
42
Molina Medicaid Solutions Segment
Our Molina Medicaid Solutions segment provides technology solutions to state Medicaid programs that
include system design, development, implementation, and technology outsourcing services. In addition, this
segment offers business process outsourcing services such as claims processing, provider enrollment, pharmacy
drug rebate services, recipient eligibility management, and pre-authorization services to state Medicaid agencies.
Molina Medicaid Solutions has contracts with five states to design, develop, implement, maintain, and operate
Medicaid Management Information Systems (MMIS). These contracts extend over a number of years, and cover the
life of the MMIS from inception through at least the first five years of its operation. The contracts are subject to
extension by the exercise of an option, and also by renewal of the base contract. The contracts have a life cycle
beginning with the design, development, and implementation of the MMIS and continuing through the operation of
the system. Payment during the design, development, and implementation phase of the contract, or the DDI phase, is
generally based upon the attainment of specific milestones in systems development as agreed upon ahead of time by
the parties. Payment during the operations phase typically takes the form of either a flat monthly fee or payment for
specific measures of capacity or activity, such as the number of claims processed, or the number of Medicaid
beneficiaries served by the MMIS. Contracts may also call for the adjustment of amounts paid if certain activity
measures exceed or fall below certain thresholds. In some circumstances, revenue recognition may be delayed for
long periods while we await formal customer acceptance of our products and/or services. In those circumstances,
recognition of a portion of our costs may also be deferred.
Under our contracts in Louisiana, New Jersey, and West Virginia, we provide primarily business process
outsourcing and technology outsourcing services, because the development of the MMIS solution has been
completed. Under these contracts, we recognize outsourcing service revenue on a straight-line basis over the
remaining term of the contract. In Maine, we completed the DDI phase of our contract effective September 1, 2010.
In Idaho, we expect to complete the DDI phase of our contract during 2011. We began revenue and cost recognition
for our Maine contract in September 2010, and expect to begin revenue and cost recognition for our Idaho contract
in 2011.
Additionally, Molina Medicaid Solutions provides pharmacy rebate administration services under a contract
with the state of Florida.
Composition of Expenses
Health Plans Segment
Operating expenses for the Health Plans segment include expenses related to the provision of medical care
services, G&A expenses, and premium tax expenses. Our results of operations are impacted by our ability to
effectively manage expenses related to medical care services and to accurately estimate medical costs incurred.
Expenses related to medical care services are captured in the following four categories:
• Fee-for-service — 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,
43
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
manager 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
substantial portion of these expenses. For the years ended December 31, 2010, 2009 and 2008, medically
related administrative costs were approximately $85.5 million, $74.6 million and $75.9 million,
respectively.
Our medical care costs include amounts that have been paid by us through the reporting date as well as
estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. See “Critical
Accounting Policies” below for a comprehensive discussion of how we estimate such liabilities.
Molina Medicaid Solutions Segment
Cost of service revenue consists primarily of the costs incurred to provide business process outsourcing and
technology outsourcing services under our contracts in Louisiana, Maine, New Jersey, West Virginia and Florida, as
well as certain selling, general and administrative expenses. Additionally, certain indirect costs incurred under our
contracts in Maine (prior to exiting the DDI phase of that contract in September, 2010) and Idaho are also expensed
to cost of services.
In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware,
and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are
amortized on a straight-line basis over the remaining original contract term, consistent with the revenue recognition
period. We began to recognize deferred costs for our Maine contract in September 2010, at the same time we began
to recognize revenue associated with that contract. In Idaho, we expect to begin recognition of deferred contact
costs during 2011, in a manner consistent with our anticipated recognition of revenue.
Results of Operations
Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009
Health Plans Segment
Premium Revenue
Premium revenue grew 9.0% in the year ended December 31, 2010, compared with the year ended
December 31, 2009, due to a membership increase of 10.9%. On a PMPM basis, however, consolidated premium
revenue decreased 2.1% because of declines in premium rates. The decrease in PMPM revenue was due to the
transfer of the pharmacy benefit to the state fee-for-service programs in Ohio (effective February 1, 2010) and
Missouri (effective October 1, 2009). Exclusive of the transfer of the pharmacy benefit in Ohio and Missouri,
Medicaid premium revenue PMPM increased approximately 1.5% over the year ended December 31, 2009.
Medicare enrollment exceeded 24,000 members at December 31, 2010, and Medicare premium revenue was
$265.2 million for the year ended December 31, 2010, compared with $135.9 million for the year ended
December 31, 2009.
44
Medical Care Costs
The following table provides the details of consolidated medical care costs for the periods indicated (dollars in
thousands except PMPM amounts):
Year Ended December 31,
2010
2009
Amount
PMPM
% of
Total
Amount
PMPM
Fee-for-service . . . . . . . . . . . . .
Capitation . . . . . . . . . . . . . . . .
Pharmacy . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . .
$2,360,858
555,487
325,935
128,577
$128.73
30.29
17.77
7.01
70.0% $2,077,489
558,538
16.5
414,785
9.7
125,424
3.8
$126.14
33.91
25.18
7.62
% of
Total
65.4%
17.6
13.1
3.9
Total . . . . . . . . . . . . . . . . . . . .
$3,370,857
$183.80
100.0% $3,176,236
$192.85
100.0%
The medical care ratio decreased to 84.5% for the year ended December 31, 2010, compared with 86.8% for
the year ended December 31, 2009.
The medical care ratio of the California health plan decreased to 83.5% for the year ended December 31, 2010,
compared with 92.2% for the year ended December 31, 2009, primarily due to lower inpatient facility fee-for-service
costs resulting from provider network restructuring and improved medical management.
The medical care ratio of the Florida health plan increased to 95.4% for the year ended December 31, 2010,
from 93.8% for the year ended December 31, 2009, primarily due to higher capitation costs and higher
fee-for-service costs in the outpatient and physician categories.
The medical care ratio of the Michigan health plan increased to 83.7% for the year ended December 31, 2010,
from 81.5% for the year ended December 31, 2009, primarily due to higher inpatient facility fee-for-service costs.
The medical care ratio of the New Mexico health plan decreased to 80.6% for the year ended December 31,
2010, from 85.7% for the year ended December 31, 2009, primarily due to reduced fee-for-service costs which more
than offset decreased premium revenue PMPM.
The medical care ratio of the Ohio health plan decreased to 79.1% for the year ended December 31, 2010, from
86.1% for the year ended December 31, 2009, primarily due to an increase in Medicaid premium PMPM of
approximately 6% effective January 1, 2010 (exclusive of the reduction related to pharmacy benefits), partially
offset by higher inpatient facility fee-for-service costs.
The medical care ratio of the Utah health plan decreased to 91.3% for the year ended December 31, 2010, from
91.8% for the year ended December 31, 2009, due to improved financial performance in the second half of 2010.
That improved financial performance was the result of reduced fee-for-service costs in the second half of 2010 and
an increase in Medicaid premium PMPM of approximately 7% effective July 1, 2010.
The medical care ratio of the Washington health plan decreased to 83.9% for the year ended December 31,
2010 from 84.5% for the year ended December 31, 2009, primarily due to reduced fee-for-service costs which more
than offset decreased premium revenue PMPM. Premium revenue PMPM decreased for all of 2010 compared with
2009 because the rate increase of approximately 2.5% effective July 1, 2010 was not enough to offset decreases
received during the second half of 2009.
45
Health Plans Segment Operating Data
The following table summarizes member months, premium revenue, medical care costs, medical care ratio,
and premium taxes by health plan for the periods indicated (PMPM amounts are in whole dollars; member months
and other dollar amounts are in thousands):
Year Ended December 31, 2010
Medical Care Costs
Medical
Care Ratio
California . . . . .
Florida . . . . . . .
Michigan . . . . . .
Missouri . . . . . .
New Mexico . . .
Ohio . . . . . . . . .
Texas . . . . . . . .
Utah . . . . . . . . .
Washington . . . .
Wisconsin(2) . . .
Other(3) . . . . . .
Member
Months(1)
Premium Revenue
Total
PMPM
4,197
664
2,708
946
1,104
2,817
708
921
4,141
134
—
$ 506,871 $120.77
256.87
232.66
222.98
332.02
305.42
266.72
280.27
183.27
224.75
—
170,683
630,134
210,852
366,784
860,324
188,716
258,076
758,849
30,033
8,587
Total
PMPM
$ 423,021 $100.79
245.07
194.80
190.66
267.61
241.69
229.97
255.84
153.75
206.35
—
162,839
527,596
180,291
295,633
680,802
162,714
235,576
636,617
27,574
38,194
Year Ended December 31, 2009
Medical Care Costs
Medical
Care Ratio
California . . . . .
Florida . . . . . . .
Michigan . . . . . .
Missouri . . . . . .
New Mexico . . .
Ohio . . . . . . . . .
Texas . . . . . . . .
Utah . . . . . . . . .
Washington . . . .
Wisconsin(2) . . .
Other(3),(4) . . . .
Member
Months(1)
Premium Revenue
Total
PMPM
4,135
386
2,523
927
1,042
2,411
402
793
3,847
—
—
$ 481,717 $116.49
264.94
220.94
248.25
387.67
333.33
335.69
261.43
188.77
—
—
102,232
557,421
230,222
404,026
803,521
134,860
207,297
726,137
—
12,774
Total
PMPM
$ 443,892 $107.34
248.62
180.12
206.59
332.03
286.82
275.78
240.02
159.58
—
—
95,936
454,431
191,585
346,044
691,402
110,794
190,319
613,876
—
37,957
Premium Tax
Expense
$ 6,912
1
39,187
—
9,300
67,358
3,251
—
13,513
—
253
Premium Tax
Expense
$ 16,446
16
36,482
—
11,043
47,849
2,513
—
14,175
—
57
83.5%
95.4
83.7
85.5
80.6
79.1
86.2
91.3
83.9
91.8
—
92.2%
93.8
81.5
83.2
85.7
86.1
82.2
91.8
84.5
—
—
18,340
$3,989,909 $217.56
$3,370,857 $183.80
84.5%
$139,775
16,466
$3,660,207 $222.24
$3,176,236 $192.85
86.8%
$128,581
(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) We acquired the Wisconsin health plan on September 1, 2010.
(3) “Other” medical care costs also include medically related administrative costs at the parent company.
(4) 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.”
Days in Medical Claims and Benefits Payable
Beginning January 1, 2010, and for all prior periods presented, we are reporting days in medical claims and
benefits payable relating to fee-for-service medical claims only. This computation includes only fee-for-service
46
medical care costs and related liabilities, and therefore calculates the extent of reserves for those liabilities that are
most subject to estimation.
The days in medical claims and benefits payable amount previously reported included all medical care costs
(fee-for-service, capitation, pharmacy, and administrative), and all medical claims liabilities, including those
liabilities that are typically paid concurrently, or shortly after the costs are incurred, such as capitation costs and
pharmacy costs. Medical claims liabilities in this calculation do not include accrued costs — such as salaries —
associated with the administrative portion of medical costs. By including only fee-for-service medical costs and
liabilities in this computation, our days in claims payable metric is more indicative of the size of our reserves for
liabilities subject to a substantial degree of estimation. The days in medical claims and benefits payable, excluding
our Wisconsin health plan which was acquired September 1, 2010, were as follows:
Days in claims payable — fee-for-service only . . . . . . . . . . . . .
Number of claims in inventory at end of period . . . . . . . . . . . .
Billed charges of claims in inventory at end of period (in
2010
42 days
143,600
December 31,
2009
44 days
93,100
2008
51 days
87,300
thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,900
$131,400
$115,400
Molina Medicaid Solutions Segment
Molina Medicaid Solutions contributed $2.6 million to operating income for the year ended December 31,
2010, but reported an operating loss of $3.6 million for the quarter ended December 31, 2010. The operating loss for
the fourth quarter of 2010 was primarily the result of system stabilization costs incurred for two of Molina Medicaid
Solutions’ contracts.
Performance of the Molina Medicaid Solutions segment for the year ended December 31, 2010 was as follows:
Service revenue before amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: amortization of contract backlog recorded as contra-service revenue . . . . . . . . . .
(In thousands)
$98,125
(8,316)
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of customer relationship intangibles recorded as amortization . . . . . . . . .
89,809
78,647
5,135
3,418
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,609
47
Consolidated Expenses
General and Administrative Expenses
General and administrative, or G&A, expenses, were $346.0 million, or 8.5% of total revenue, for the year
ended December 31, 2010 compared with $276.0 million, or 7.5% of total revenue, for the year ended December 31,
2009. The increase in the G&A ratio was the result of higher administrative expenses for the Health Plans segment,
driven in part by the cost of our Medicare expansion, higher variable compensation expense as a result of
substantially improved financial performance in 2010, employee severance and settlement costs, and costs relating
to the acquisitions of Molina Medicaid Solutions and the Wisconsin health plan.
Medicare-related administrative costs . . . . . . . . . . .
Non Medicare-related administrative costs:
Year Ended December 31,
2010
2009
Amount
% of Total
Revenue
Amount
% of Total
Revenue
(In thousands)
$ 30,254
0.7%
$ 18,564
0.5%
Health Plans segment administrative payroll,
including employee incentive compensation . .
239,146
Molina Medicaid Solutions segment
administrative expenses . . . . . . . . . . . . . . . . .
Employee severance and settlement costs . . . . . .
Molina Medicaid Solutions and Wisconsin plan
5,135
5,548
acquisition costs . . . . . . . . . . . . . . . . . . . . . .
2,957
All other Health Plans segment administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,953
5.9
0.1
0.1
0.1
1.6
204,432
5.6
—
1,257
—
51,774
—
—
—
1.4
7.5%
$345,993
8.5%
$276,027
Premium Tax Expense
Premium tax expense relating to Health Plans segment premium revenue was 3.5% of revenue for both years
ended December 31, 2010, and 2009.
Depreciation and Amortization
Depreciation and amortization related to our Health Plans segment is all recorded in “Depreciation and
Amortization” in the consolidated statements of income. Depreciation and amortization related to our Molina
Medicaid Solutions segment is recorded within three different captions in the consolidated statements of income as
follows:
• Amortization of purchased intangibles relating to customer relationships is reported as amortization in
“Depreciation and Amortization;”
• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of service
revenue; and
• Depreciation is recorded as cost of service revenue.
48
The following table presents all depreciation and amortization recorded in our consolidated statements of
income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as cost
of service revenue, and reconciles that amount to the consolidated statements of cash flows.
Year Ended December 31,
2010
2009
Amount
% of Total
Revenue
Amount
% of Total
Revenue
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,230
18,474
Amortization of intangible assets . . . . . . . . . . . . . . . .
Depreciation and amortization reported in the
consolidated statements of income . . . . . . . . . . . . .
45,704
Amortization recorded as reduction of service
revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation recorded as cost of service revenue . . . .
8,316
6,745
Depreciation and amortization reported in the
(In thousands)
0.7%
0.4
$25,172
12,938
1.1
0.2
0.2
38,110
—
—
0.7%
0.3
1.0
—
—
consolidated statements of cash flows . . . . . . . . . . $60,765
1.5%
$38,110
1.0%
Interest Expense
Interest expense increased to $15.5 million for the year ended December 31, 2010, from $13.8 million for the
year ended December 31, 2009. We incurred higher interest expense relating to the $105 million draw on our credit
facility (beginning May 1, 2010) to fund the acquisition of Molina Medicaid Solutions. Amounts borrowed to fund
this acquisition were repaid in the third quarter using proceeds from our equity offering in the third quarter of 2010.
Interest expense includes non-cash interest expense relating to our convertible senior notes, which totaled
$5.1 million and $4.8 million for the years ended December 31, 2010, and 2009, respectively.
Income Taxes
Income tax expense was recorded at an effective rate of 38.6% for the year ended December 31, 2010
compared with 19.1% for the year ended December 31, 2009. The lower rate in 2009 was primarily due to discrete
tax benefits recorded in 2009 as a result of settling tax examinations, and higher than previously estimated tax
credits.
For the year ended December 31, 2009, amounts for premium tax expense and income tax expense have been
reclassified to conform to the 2010 presentation of MGRT as a premium tax. The MGRT amounted to $6.2 million
and $5.5 million for the years ended December 31, 2010, and 2009, respectively. There was no impact to net income
for either period presented relating to this change.
Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008
Health Plans Segment
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
thus decreases in premiums were not matched by lower medical costs. In Washington, premium reductions not
49
linked to decreases in the Medicaid fee schedule lowered our medical margin by approximately $13 million in 2009.
In Missouri, the transfer of the pharmacy benefit to the state fee-for-service program effective October 1, 2009
reduced our medical margin by approximately $1.2 million in 2009.
Medical care costs
The following table provides the details of consolidated medical care costs for the periods indicated (dollars in
thousands except PMPM amounts):
Year Ended December 31,
2009
2008
Amount
PMPM
% of
Total
Amount
PMPM
Fee-for-service . . . . . . . . . . . . .
Capitation . . . . . . . . . . . . . . . .
Pharmacy . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . .
$2,077,489
558,538
414,785
125,424
$126.14
33.91
25.18
7.62
65.4% $1,709,806
450,440
17.6
356,184
13.1
104,882
3.9
$116.69
30.74
24.31
7.16
% of
Total
65.2%
17.2
13.6
4.0
Total . . . . . . . . . . . . . . . . . . . .
$3,176,236
$192.85
100.0% $2,621,312
$178.90
100.0%
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.
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 transferred to the sate fee-for-service program 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.
50
Health Plans Segment Operating Data
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; member months and other dollar
amounts are in thousands):
Year Ended December 31, 2009
Medical Care Costs
Medical
Care Ratio
California . . . . .
Florida(2) . . . . .
Michigan . . . . . .
Missouri . . . . . .
New Mexico . . .
Ohio . . . . . . . . .
Texas . . . . . . . .
Utah . . . . . . . . .
Washington . . . .
Other(3),(4) . . . .
Member
Months(1)
Premium Revenue
Total
PMPM
4,135
386
2,523
927
1,042
2,411
402
793
3,847
—
$ 481,717 $116.49
264.94
220.94
248.25
387.67
333.33
335.69
261.43
188.77
—
102,232
557,421
230,222
404,026
803,521
134,860
207,297
726,137
12,774
Total
PMPM
$ 443,892 $107.34
248.62
180.12
206.59
332.03
286.82
275.78
240.02
159.58
—
95,936
454,431
191,585
346,044
691,402
110,794
190,319
613,876
37,957
Year Ended December 31, 2008
Medical Care Costs
Medical
Care Ratio
California . . . . .
Florida(2) . . . . .
Michigan . . . . . .
Missouri . . . . . .
New Mexico . . .
Ohio . . . . . . . . .
Texas . . . . . . . .
Utah . . . . . . . . .
Washington . . . .
Other(3),(4) . . . .
Member
Months(1)
Premium Revenue
Total
PMPM
3,721
—
2,526
910
970
1,998
348
659
3,514
—
$ 417,027 $112.06
—
—
201.86
509,782
247.62
225,280
359.45
348,576
301.76
602,826
316.32
110,178
236.75
155,991
202.02
709,943
—
11,637
Total
PMPM
$ 363,776 $ 97.75
—
—
160.64
405,683
202.58
184,298
294.92
286,004
274.91
549,182
242.09
84,324
210.98
139,011
163.64
575,085
—
33,949
Premium Tax
Expense
$ 16,446
16
36,482
—
11,043
47,849
2,513
—
14,175
57
Premium Tax
Expense
$ 12,503
—
31,760
—
11,713
30,505
1,995
—
11,668
21
92.2%
93.8
81.5
83.2
85.7
86.1
82.2
91.8
84.5
—
87.2%
—
79.6
81.8
82.1
91.1
76.5
89.1
81.0
—
16,466
$3,660,207 $222.24
$3,176,236 $192.85
86.8%
$128,581
14,646
$3,091,240 $210.97
$2,621,312 $178.90
84.8%
$100,165
(1) A member month is defined as the aggregate of each month’s ending membership for the period presented.
(2) The Florida health plan began enrolling members in December 2008.
(3) “Other” medical care costs also include medically related administrative costs at the parent company.
(4) 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.”
51
General and administrative expenses
G&A expenses were 7.5% of revenue in the year ended December 31, 2009, compared with 8.0% for the year
ended December 31, 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, G&A decreased to $16.76 in 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
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:
Year Ended December 31,
2009
2008
Amount
% of Total
Revenue
Amount
% of Total
Revenue
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,172
12,938
Amortization of intangible assets . . . . . . . . . . . . . . . .
Depreciation and amortization reported in the
(In thousands)
0.7%
0.3
$20,718
12,970
0.7%
0.4
consolidated statements of cash flows . . . . . . . . . . $38,110
1.0%
$33,688
1.1%
Gain on Retirement of Convertible Senior Notes
In February 2009, we purchased and retired $13.0 million face amount of our convertible senior notes. In
connection with the purchase of the notes, we recorded a pretax gain of $1.5 million in 2009. There was no
comparable transaction in 2008.
Interest Expense
Interest expense was $13.8 million for the year ended December 31, 2009, a slight increase over interest
expense of $13.2 million for the year ended December 31, 2008. Interest expense includes non-cash interest expense
relating to our convertible senior notes, which totaled $4.8 million, and $4.7 million for the years ended
December 31, 2009, and 2008, respectively.
Income Taxes
Income taxes were recorded at an effective rate of 19.1% for the year ended December 31, 2009, compared
with 36.8% in the prior year. 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.
52
For the years ended December 31, 2009 and 2008, amounts for premium tax expense and income tax expense
have been reclassified to conform to the presentation of MGRT as a premium tax. The MGRT amounted to
$5.5 million and $5.1 million for the years ended December 31, 2009, and 2008, respectively. There was no impact
to net income for either period presented relating to this change.
Acquisitions
Wisconsin Health Plan. On September 1, 2010, we acquired Abri Health Plan, a Medicaid managed care
organization based in Milwaukee, Wisconsin. As of December 31, 2010, we expect the final purchase price for the
acquisition to be approximately $15.5 million, subject to adjustments. As of December 31, 2010, we had paid
$8.5 million of the total purchase price. In the first quarter of 2011 we will compute the final purchase price based on
the plan’s membership on that date.
Molina Medicaid Solutions. On May 1, 2010, we acquired a health information management business which
we now operate under the name, Molina Medicaid SolutionsSM as described in “Overview,” above.
Florida Health Plan. On December 31, 2009, we acquired 100% of the voting equity interests in Florida
NetPASS, LLC, or NetPASS. The final purchase price totaled $29.6 million.
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 premium revenue or 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
five years or less (excluding auction rate securities and variable rate securities, for which interest rates are
periodically reset) and that the average maturity be two years or less. Professional portfolio managers operating
under documented guidelines manage our investments. As of December 31, 2010, 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. All of our investments are classified as current assets, except for our investments
in auction rate securities, which are classified as non-current assets. Our restricted investments are invested
principally in certificates of deposit and U.S. treasury securities.
Investment income decreased to $6.3 million for the year ended December 31, 2010, compared with
$9.1 million for year ended December 31, 2009. This decline was primarily due to lower interest rates in
2010. The annualized portfolio yields for the years ended December 31, 2010, 2009, and 2008, were 0.7%, 1.2%,
and 3.0%, respectively.
Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates
increase. We have the ability to hold our restricted investments until maturity and, as a result, we would not expect to
incur significantly losses 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.
53
Cash provided by operating activities for the year ended December 31, 2010 was $161.6 million compared
with $155.4 million for the year ended December 31, 2009, an increase of $6.2 million. Deferred revenue, which
was a use of operating cash totaling $41.9 million in 2010, was a source of operating cash totaling $88.2 million in
2009. In 2009, the state of Ohio typically paid premiums in advance of the month the premium was earned. In 2010,
the state of Ohio delayed its premium payments to mid-month for the month premium is earned. Therefore, we did
not receive advance payments for the Ohio health plan’s premiums during 2010. The change in deferred revenue
was offset by increases in net income, depreciation and amortization, and other current liabilities.
Cash used in investing activities increased significantly in 2010 compared with 2009, due chiefly to the
acquisition of Molina Medicaid Solutions, which totaled $131.3 million.
Cash provided by financing activities increased due to funds generated by our equity offering in the third
quarter of 2010, which totaled $111.1 million, net of issuance costs. Amounts borrowed under our credit facility to
fund the acquisition of Molina Medicaid Solutions in the second quarter of 2010 were repaid in the third quarter
using proceeds from the equity offering.
Reconciliation of Non-GAAP(1) to GAAP Financial Measures
EBITDA(2)
Year Ended
December 31,
2010
2009
(In thousands)
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,001
Add back:
$51,934
Depreciation and amortization reported in the consolidated statements of
cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,765
38,110
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,766
$90,044
(1) GAAP stands for U.S. generally accepted accounting principles.
(2) We calculate EBITDA consistently on a quarterly and annual basis by adding back depreciation and amor-
tization to operating income. Operating income includes investment income. EBITDA is not prepared in
conformity with GAAP because it excludes depreciation and amortization, as well as interest expense, and the
provision for income taxes. This non-GAAP financial measure should not be considered as an alternative to the
GAAP measures of net income, operating income, operating margin, or cash provided by operating activities,
nor should EBITDA be considered in isolation from these GAAP measures of operating performance.
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.
Capital Resources
At December 31, 2010, the parent company — Molina Healthcare, Inc. — held cash and investments of
approximately $65.1 million, including $6.0 million in non-current auction rate securities, compared with
$45.6 million of cash and investments at December 31, 2009.
On a consolidated basis, at December 31, 2010, we had working capital of $392.4 million compared with
$321.2 million at December 31, 2009. At December 31, 2010 and December 31, 2009, cash and cash equivalents
were $455.9 million and $469.5 million, respectively. At December 31, 2010, investments were $315.8 million,
including $20.4 million in non-current auction rate securities, and at December 31, 2009, investments were
$234.5 million, including $59.7 million in non-current auction rate securities.
54
Credit Facility
We are a party to an Amended and Restated Credit Agreement, dated as of March 9, 2005, as amended by the
first amendment on October 5, 2005, the second amendment on November 6, 2006, the third amendment on May 25,
2008, the fourth amendment on April 29, 2010, and the fifth amendment on April 29, 2010, among Molina
Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”) for a
revolving credit line of $150 million that matures in May 2012. The Credit Facility is intended to be used for general
corporate purposes. We borrowed $105 million under the Credit Facility to acquire Molina Medicaid Solutions in
the second quarter of 2010. During the third quarter of 2010, we repaid this amount using proceeds from our equity
offering, described in Note 14 to the accompanying audited consolidated financial statements for the year ended
December 31, 2010. As of December 31, 2010, and 2009, there was no outstanding principal debt balance under the
Credit Facility. However, as of December 31, 2010, our lenders had issued two letters of credit in the aggregate
principal amount of $10.3 million in connection with the contract of MMS with the states of Maine and Idaho.
To the extent that in the future we incur any obligations under the Credit Facility, such obligations will be
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, 2010, we were in compliance with all financial covenants
in the Credit Facility.
The commitment fee on the total unused commitments of the lenders under the Credit Facility is 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 is 200 basis points at every level of the
pricing grid. Thus, the applicable margins under the Credit Facility range between 2.75% and 3.75% for LIBOR
loans, and between 1.75% and 2.75% for base rate loans. The Credit Facility carves out from our indebtedness and
restricted payment covenants under the Credit Facility the $187.0 million current principal amount of the
convertible senior notes, although the $187.0 million indebtedness is included in the calculation of our consolidated
leverage ratio. The fixed charge coverage ratio set forth pursuant to the Credit Facility was 2.75x (on a pro forma
basis) at December 31, 2009, and 3.00x thereafter.
The fifth amendment increased 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 and second quarters of 2010,
and through August 14, 2010. Effective as of August 15, 2010, the consolidated leverage ratio under the Credit
Facility reverted back to 2.75 to 1.0. In connection with the lenders’ approval of the fifth amendment, we paid an
amendment fee of 25 basis points on the amount of each consenting lender’s commitment. We also paid 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 August 15, 2010.
Shelf Registration Statement
In December 2008, we filed a shelf registration statement on Form S-3 with the Securities and Exchange
Commission covering the issuance of up to $300 million of our securities, including common stock, warrants, or
debt securities, and up to 250,000 shares of outstanding common stock that may be sold from time to time by the
Molina Siblings Trust 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. As a result of the offering described below, we may now offer up
to $182.5 million of our securities from time to time under the shelf registration statement.
In August 2010, we sold 4,350,000 shares of common stock covered by this registration statement. The public
offering price for this sale was $25.65 per share, net of the underwriting discount. Our proceeds from the sales
totaled approximately $111.1 million, net of the issuance costs. We used the proceeds from these sales to repay the
Credit Facility and for general corporate purposes. Also in August 2010, the Molina Siblings Trust, as a selling
stockholder, sold 250,000 shares of outstanding common stock covered by this registration statement.
55
Securities Purchase Programs
Under securities purchase programs announced in 2009, we purchased and retired $13.0 million face amount
of our convertible senior notes. Also during 2009, we purchased approximately 1,352,000 shares of our common
stock for $28 million.
Convertible Senior Notes
In October 2007, we sold $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due
2014 (the “Notes”). During 2009, we purchased and retired $13.0 million face amount of the Notes. As of
December 31, 2010, the remaining aggregate principal amount of the Notes was $187.0 million. The Notes rank
equally in right of payment with our existing and future senior indebtedness.
The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial
conversion rate is 21.3067 shares of our common stock per $1,000 principal amount of the Notes. This represents an
initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain corporate
transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain
circumstances.
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, Washington, and Wisconsin. 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 $397.8 million at December 31, 2010, and $368.7 million at December 31,
2009.
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, Washington, and Wisconsin. 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, 2010, our health plans had aggregate statutory capital and surplus of approximately
$416.6 million, compared to the required minimum aggregate statutory capital and surplus of approximately
$278.0 million. All of our health plans were in compliance with the minimum capital requirements at December 31,
2010. 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
2011.
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. Our most significant accounting
policies relate to:
• The determination of the amount of revenue to be recognized under certain contracts that place revenue at
risk dependent upon the achievement of certain quality or administrative measurements, or the expenditure
of certain percentages of revenue on defined expenses, or requirements that we return a certain portion of our
profits to state governments;
56
• The deferral of revenue and costs associated with contracts held by our Molina Medicaid Solutions
segment; and
• The determination of medical claims and benefits payable.
Revenue Recognition — Health Plans Segment
Certain components of premium revenue of our Health Plans segment are subject to accounting estimates, and
are therefore subject to retroactive revision. 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, 2010, 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, 2010, we had recorded a liability of $5.6 million under the
terms of these contract provisions. If the state of New Mexico disagrees with our interpretation of the
57
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. The state of New Mexico’s fiscal year ends June 30, and open
contract years typically include the current state fiscal year and the immediately preceding state fiscal year
(two state fiscal years in total). For the two open state fiscal years ending June 30, 2011, our New Mexico
health plan has received $5.4 million in at-risk revenue as of December 31, 2010. To date, we have
recognized $3.5 million of that amount as revenue, and recorded a liability of approximately $1.9 million as
of December 31, 2010, for the remainder. If the state of New Mexico disagrees with our estimation of our
compliance with the at-risk premium requirements, an adjustment to the amounts owed may be required.
• 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.
Effective February 1, 2010 an additional 0.25% of the Ohio health plan’s revenue became refundable if
certain pharmacy specific performance measures were not met. These performance measures are generally
linked to various quality-of-care measures dictated by the state. The state of Ohio’s fiscal year ends June 30,
and open contract years typically include the current state fiscal year and the immediately preceding state
fiscal year (two state fiscal years in total). For the two open state fiscal years ending June 30, 2011, our Ohio
health plan has received $13.8 million in at-risk revenue as of December 31, 2010. To date, we have
recognized $4.5 million of that amount as revenue and recorded a liability of approximately $9.3 million as
of December 31, 2010, for the remainder. If the state of Ohio disagrees with our estimation of our
compliance with the at-risk premium requirements, an adjustment to the amounts owed may be required.
During the third quarter of 2010, we reversed the recognition of approximately $3.3 million of at-risk
revenue previously recognized.
• 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, 2010.
• Texas Health Plan Profit Sharing: Under our contract with the state of Texas there is a profit-sharing
agreement, where we pay a rebate to the state of Texas if our Texas health plan generates pretax income, as
defined in the contract, above a certain specified percentage, as determined in accordance with a tiered
rebate schedule. We are limited in the amount of administrative costs that we may deduct in calculating the
rebate, if any. As of December 31, 2010, we had an aggregate liability of approximately $0.6 million accrued
pursuant to our profit-sharing agreement with the state of Texas for the 2010 and 2011 contract years (ending
August 31 of each year). We paid $2.6 million to the state under the terms of this profit sharing agreement
during the year ended December 31, 2010, for the 2009 and 2010 contract years. Because the final settlement
58
calculations include a claims run-out period of nearly one year, the amounts recorded, based on our
estimates, an adjustment to the amounts owed may be required.
• 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.
The state of Texas’s fiscal year ends August 31, and open contract years typically include the current state
fiscal year and the immediately preceding state fiscal year (two state fiscal years in total). For the two open
state fiscal years ending August 31, 2011, our Texas health plan has received $2.2 million in at-risk revenue,
all of which has been recognized as revenue, as of December 31, 2010. If the state of Texas disagrees with
our estimation of our compliance with the at-risk premium requirements, an adjustment to the amounts owed
may be required.
• 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. Based on our knowledge of member health care
utilization patterns we have recorded a liability of approximately $1.2 million related to the potential
recoupment of Medicare premium revenue at December 31, 2010. To the extent that the premium revenue
ultimately received from CMS differs from recorded amounts, we will adjust reported Medicare revenue.
Deferral of Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the
performance of three elements of service. The first of these is the design, development and implementation, or DDI,
of a Medicaid Management Information System, or MMIS. The second element, following completion of the DDI
element, is the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing
BPO services, we also provide the state with the third contracted element — training and IT support and hosting
services (training and support).
Because they include these three elements of service, our Molina Medicaid Solution segment contracts are
multiple-element arrangements. We have no vendor specific objective evidence, or VSOE, of fair value for any of
the individual elements in these contracts, and at no point in the contract will we have VSOE for the undelivered
elements in the contract. We lack VSOE of the fair value of the individual elements of our Molina Medicaid
Solutions contracts for the following reasons:
• Each contract calls for the provision of its own specific set of products and services. While all contracts
support the system of record for state MMIS, the actual services and products we provide vary significantly
between contracts; and
• The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe
systems) and our new contracts (commercial off-the-shelf technology solutions).
The absence of VSOE within the context of a multiple element arrangement requires us to delay recognition of
any revenue for an MMIS contract until completion of the DDI phase of the contract. Although the length of the DDI
phase for any MMIS contract can vary considerably, the DDI phase typically takes about two years to complete. As
a general principle, revenue recognition will therefore commence at the completion of the DDI phase, and all
59
revenue will be recognized over the period that BPO services and training and IT support services are provided.
Consistent with the deferral of revenue, recognition of all direct costs (such as direct labor, hardware, and software)
associated with the DDI phase of our contracts is deferred until the commencement of revenue recognition.
Deferred costs are recognized on a straight-line basis over the period of revenue recognition.
Provisions specific to each contract may, however, lead us to modify this general principle. In those
circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate
us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to
refuse acceptance) has been removed. In those circumstances we defer recognition of any revenue at risk (whether
DDI, BPO services or training and IT support services) until the contingency had been removed. In these
circumstances we would also defer recognition of incremental direct costs (such as direct labor, hardware, and
software) associated with the contract (whether DDI, BPO services or training and IT support services) on which
revenue recognition is being deferred. Such deferred contract costs are recognized on a straight-line basis over the
period of revenue recognition.
We began to recognize revenue (and related deferred costs) associated with our Maine contract in September
2010. In Idaho, we expect to begin recognition of deferred contact costs during 2011, in a manner consistent with
our anticipated recognition of revenue. Unamortized deferred contract costs relating to the Molina Medicaid
Solutions segment at December 31, 2010 were $28.4 million.
The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic
basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such
undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred
contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after
reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for
impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-
lived assets exceeds the fair value of those assets.
Medical Claims and Benefits Payable — Health Plans Segment
The following table provides the details of our medical claims and benefits payable as of the dates indicated:
Fee-for-service claims incurred but not paid (IBNP) . . . . . . . . . $275,259
49,598
Capitation payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,649
Pharmacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,850
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
December 31,
2009
(In thousands)
$246,508
39,995
20,609
8,204
2008
$236,492
28,111
18,837
9,002
$354,356
$315,316
$292,442
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 payable is subject to an inherent
degree of uncertainty. Our medical care costs include amounts that have been paid by us through the reporting date,
as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. Such
medical care cost liabilities include, among other items, unpaid fee-for-service claims, capitation payments owed
providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but
not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.
The most important element in estimating our medical care costs is our estimate for fee-for-service claims
which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been
paid at the reporting date are collectively referred to as medical costs that are “Incurred But Not Paid,” or IBNP. Our
IBNP, as reported on our balance sheet, represents our best estimate of the total amount of claims we will ultimately
60
pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNP monthly using
actuarial methods based on a number of factors. As indicated in the table above, our estimated IBNP liability
represented $275.3 million of our total medical claims and benefits payable of $354.4 million as of December 31,
2010. Excluding 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, 2010
was $268.3 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 per member per month (PMPM) cost
estimates.
For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims
liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to measure
the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting
date, based on historical payment patterns.
The following table reflects the change in our estimate of claims liability as of December 31, 2010 that would
have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2010, 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% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 80,667
53,778
26,889
(26,889)
(53,778)
(80,667)
For the four months of service immediately prior to the reporting date, actual claims paid are not a reliable
measure of our ultimate liability, given the inherent delay between the patient/physician encounter and the actual
submission of a claim for payment. For these months of service, we estimate our claims liability based on trended
PMPM cost estimates. These estimates are designed to reflect recent trends in payments and expense, utilization
patterns, authorized services, and other relevant factors. The following table reflects the change in our estimate of
claims liability as of December 31, 2010 that would have resulted had we altered our trend factors by the
61
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% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(64,958)
(43,305)
(21,653)
21,653
43,305
64,958
The following per-share amounts are based on a combined federal and state statutory tax rate of 37%, and
27.8 million diluted shares outstanding for the year ended December, 2010. Assuming a hypothetical 1% change in
completion factors from those used in our calculation of IBNP at December 31, 2010, net income for the year ended
December 31, 2010 would increase or decrease by approximately $8.5 million, or $0.31 per diluted share.
Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of IBNP at
December 31, 2010, net income for the year ended December 31, 2010 would increase or decrease by approx-
imately $6.8 million, or $0.25 per diluted share, net of tax. The corresponding figures for a 5% change in completion
factors and PMPM cost estimates would be $42.4 million, or $1.53 per diluted share, and $34.1 million, or $1.23 per
diluted share, respectively.
It is important to note that any change in the estimate of either completion factors or trended PMPM costs
would usually be accompanied by a change in the estimate of the other component, and that a change in one
component would almost always compound rather than offset the resulting distortion to net income. When
completion factors are overestimated, trended PMPM costs tend to be underestimated. Both circumstances will
create an overstatement of net income. Likewise, when completion factors are underestimated, trended PMPM costs
tend to be overestimated, creating an understatement of net income. In other words, errors in estimates involving
both completion factors and trended PMPM costs will usually act to drive estimates of claims liabilities and medical
care costs in the same direction. If completion factors were overestimated by 1%, resulting in an overstatement of
net income by approximately $8.5 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, once again 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 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 a
large proportion of our provider payments are based, modifications and upgrades to our claims processing systems
and practices, and increasing medical costs. Because of the complexity of our business, the number of states in
which we operate, and the need to account for different health care benefit packages among those states, we make an
overall assessment of IBNP after considering the base actuarial model reserves and the provision for adverse claims
development. We also include in our IBNP liability an estimate of the administrative costs of settling all claims
incurred through the reporting date. The development of IBNP is a continuous process that we monitor and refine on
a monthly basis as additional claims payment information becomes available. As additional information becomes
known to us, we adjust our actuarial model accordingly to establish IBNP.
On a monthly basis, we review and update our estimated IBNP and the methods used to determine that liability.
Any adjustments, if appropriate, are reflected in the period known. While we believe our current estimates are
adequate, we have in the past been required to increase significantly our claims reserves for periods previously
62
reported, and may be required to do so again in the future. Any significant increases to prior period claims reserves
would materially decrease reported earnings for the period in which the adjustment is made.
In our judgment, the estimates for completion factors will likely prove to be more accurate than trended PMPM
cost estimates because estimated completion factors are subject to fewer variables in their determination.
Specifically, completion factors are developed over long periods of time, and are most likely to be affected by
changes in claims receipt and payment experience and by provider billing practices. Trended PMPM cost estimates,
while affected by the same factors, will also be influenced by health care service utilization trends, cost trends,
product mix, seasonality, prior authorization of medical services, benefit changes, outbreaks of disease or increased
incidence of illness, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar
or catastrophic claims. As discussed above, however, errors in estimates involving trended PMPM costs will almost
always be accompanied by errors in estimates involving completion factors, and vice versa. In such circumstances,
errors in estimation involving both completion factors and trended PMPM costs will act to drive estimates of claims
liabilities (and therefore medical care costs) in the same direction.
Assuming that base reserves have been adequately set, we believe that amounts ultimately paid out should
generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion
in that liability of the allowance for adverse claims development and the accrued cost of settling those claims.
However, there can be no assurance that amounts ultimately paid out will not be higher or lower than this 8% to 10%
range, as shown by our results for the year ended December 31, 2010, when the amounts ultimately paid out were
less than the amount of the reserves we had established as of the beginning of that year by 15.7%.
As shown in greater detail in the table below, the amounts ultimately paid out on our prior period liabilities in
fiscal years 2009 and 2010 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 periods presented, in general
the overestimations 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, 2010, we recognized a benefit from prior period claims development in the
amount of $49.4 million (see table below). This amount represents our estimate as of December 31, 2010 of the
extent to which our initial estimate of medical claims and benefits payable at December 31, 2009 exceeded the
amount that will ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at
December 31, 2009 was due primarily to the following factors:
• In New Mexico, we underestimated the degree to which cuts to the Medicaid fees schedule would reduce our
liability as of December 31, 2009.
• In California, we underestimated the extent to which various network restructuring, provider contracting and
medical management initiatives had reduced our medical care costs during the second half of 2009, thereby
resulting in a lower liability at December 31, 2009.
We recognized a benefit from prior period claims development in the amount of $51.6 million in the year ended
December 31, 2009 (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 New Mexico, we overestimated at December 31, 2008 the ultimate amounts we would need to pay to
resolve certain high dollar provider claims.
• In Ohio, we underestimated the degree to which certain operational initiatives had reduced our medical costs
in the last few months of 2008.
• In Washington, we overestimated the impact that certain adverse utilization trends would have on 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
63
of paper claims would have on our liability, leading to a further underestimation of our liability at
December 31, 2008.
In estimating our claims liability at December 31, 2010, 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 in our Medicare line of business between December 31, 2009 and
December 31, 2010.
• Our assumption of risk for new populations in Texas (rural CHIP members) and Wisconsin (Medicaid
members) effective September 1, 2010.
• An increase in claims inventory at our Florida, Michigan, New Mexico, Ohio and Texas health plans
between September 30, 2010 and December 31, 2010.
• A decrease in claims inventory at our Utah health plan between September 30, 2010 and December 31, 2010.
• The transition of claims processing for our Missouri health plan from a third party service provider to our
internal claims processing platform effective April 1, 2010.
• Changes to the Medicaid fee schedule in Utah effective July 1, 2010.
• Changes to provider reimbursement rates (primarily for outpatient facility costs) in New Mexico effective
November 1, 2010.
The use of a consistent methodology in estimating our liability for claims and medical benefits payable
minimizes the degree to which the under- or overestimation of that liability at the close of one period may affect
consolidated results of operations in subsequent periods. Facts and circumstances unique to the estimation process
at any single date, however, may still lead to a material impact on consolidated results of operations in subsequent
periods. Any absence of adverse claims development (as well as the expensing through general and administrative
expense of the costs to settle claims held at the start of the period) will lead to the recognition of a benefit from prior
period claims development in the period subsequent to the date of the original estimate. In 2009 and 2010, 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.
64
The following table presents the components of the change in our medical claims and benefits payable for the
periods presented. 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,
2010
2009
Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Balance of acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of medical care costs related to:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands, except
per-member amounts)
315,316
3,228
292,442
—
$
3,420,235
(49,378)
3,227,794
(51,558)
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,370,857
3,176,236
Payments for medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,085,388
249,657
2,920,015
233,347
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,335,045
3,153,362
Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
354,356
$
315,316
Benefit from prior years as a percentage of:
Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.7%
1.2%
1.5%
17.6%
1.4%
1.6%
Claims Data(1):
Days in claims payable, fee for service only . . . . . . . . . . . . . . . . . .
Number of members at end of period . . . . . . . . . . . . . . . . . . . . . . .
Fee-for-service claims processing and inventory information:
143,600
Number of claims in inventory at end of period . . . . . . . . . . . . . . . .
218,900
Billed charges of claims in inventory at end of period . . . . . . . . . . . $
0.09
Claims in inventory per member at end of period . . . . . . . . . . . . . .
135.71
Billed charges of claims in inventory per member at end of period. . $
14,554,800
Number of claims received during the period. . . . . . . . . . . . . . . . . .
Billed charges of claims received during the period . . . . . . . . . . . . . $11,686,100
42
1,613,000
(1) “Claims Data” does not include our Wisconsin health plan acquired September 1, 2010.
44
1,455,000
$
93,100
131,400
0.06
90.31
12,930,100
$ 9,769,000
$
Commitments and Contingencies
We lease office space and equipment under various operating leases. As of December 31, 2010, our lease
obligations for the next five years and thereafter were as follows: $28.0 million in 2011, $23.8 million in 2012,
$20.3 million in 2013, $17.4 million in 2014, $13.7 million in 2015, and an aggregate of $30.6 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, 2010.
65
Contractual Obligations
In the table below, we present our contractual obligations as of December 31, 2010. Some of the amounts we
have included in this table are based on management’s estimates and assumptions about these obligations, including
their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these
estimates and assumptions are necessarily subjective, the contractual obligations we will actually pay in future
periods may vary from those reflected in the table. Amounts are in thousands.
Total
2011
2012-2013
2014-2015
2016 and Beyond
Medical claims and benefits
payable . . . . . . . . . . . . . . . . . . $354,356
$354,356
$ — $
—
$ —
Principal amount of long-term
debt(1) . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . .
Interest on long-term debt . . . . . .
Purchase commitments . . . . . . . .
187,000
133,806
26,297
28,557
—
28,004
7,012
13,401
—
44,143
14,025
14,828
187,000
31,037
5,260
328
—
30,622
—
—
Total contractual obligations . . . . $730,016
$402,773
$72,996
$223,625
$30,622
(1) Represents the principal amount due on our 3.75% Convertible Senior Notes due 2014.
As of December 31, 2010, we have recorded approximately $11.0 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,
2010 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 Funds Prime Series — Institutional Class, and the PFM Funds Government Series. These funds represent a
portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC (PFM), a
Virginia business trust registered as an open-end management investment fund. 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 five years and an average
duration of two 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.
66
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
68
69
70
71
72
74
67
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, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Molina Healthcare, Inc.’s internal control over financial reporting as of December 31, 2010, 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 8, 2011 expressed an unqualified opinion
thereon.
Los Angeles, California
March 8, 2011
/s/ ERNST & YOUNG LLP
68
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2009
2010
(Amounts in thousands,
except per-share data)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 455,886
295,375
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,190
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax refundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
15,716
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,772
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
957,939
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,537
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,444
Deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,500
Intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,228
Goodwill and indefinite-lived intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,449
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,100
Restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,649
Receivable for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,368
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,509,214
$ 469,501
174,844
136,654
6,067
8,757
14,383
810,206
78,171
—
80,846
133,408
59,687
36,274
25,455
19,988
$1,244,035
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Medical claims and benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,356
137,930
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,086
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,176
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
565,548
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164,014
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
16,235
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,649
Liability for ceded life and annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,711
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 315,316
71,732
101,985
—
489,033
158,900
12,506
25,455
15,403
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding:
30,309 shares at December 31, 2010 and 25,607 shares at December 31, 2009 . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
790,157
701,297
30
26
—
251,627
(2,192)
469,592
719,057
—
129,902
(1,812)
414,622
542,738
$1,509,214
$1,244,035
See accompanying notes.
69
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2008
2009
2010
(In thousands, except per-share data)
Revenue:
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,989,909
89,809
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,259
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,660,207
—
9,149
$3,091,240
—
21,126
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,085,977
3,669,356
3,112,366
Expenses:
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Premium tax expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,370,857
78,647
345,993
139,775
45,704
3,176,236
—
276,027
128,581
38,110
2,621,312
—
249,646
100,165
33,688
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,980,976
3,618,954
3,004,811
Gain on purchase of convertible senior notes . . . . . . . . . . . . . . . . . .
—
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,001
(15,509)
89,492
34,522
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
54,970
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.00
1.98
27,449
27,754
1,532
51,934
(13,777)
38,157
7,289
30,868
1.19
1.19
25,843
25,984
—
107,555
(13,231)
94,324
34,726
59,598
2.15
2.15
27,676
27,772
$
$
$
$
$
$
See accompanying notes.
70
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Outstanding Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Loss
(In thousands)
Retained
Earnings
Treasury
Stock
Total
28,444
$28
$210,310
$
272
$324,156 $(20,390) $514,376
Balance at January 1, 2008 . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax:
Unrealized loss on investments . . . . . . .
Total comprehensive income . . . . . . . . .
Common stock issued, net of issuance
—
—
—
—
—
(1,943)
48
176
—
26,725
—
—
—
—
(1,352)
—
234
—
25,607
—
—
—
—
—
—
—
—
(1)
—
—
—
27
—
—
—
—
(1)
—
—
—
26
—
—
—
4
—
—
—
—
—
—
(49,939)
1,262
9,340
(292)
170,681
—
—
—
—
(48,101)
(476)
8,516
(718)
129,902
—
—
—
111,127
11,271
—
59,598
— 59,598
(7,025)
4,443
(2,582)
—
—
—
—
—
— (7,025)
—
59,598
—
4,443
— 57,016
(49,940)
—
— (49,940)
— 49,940
—
—
—
—
1,262
9,340
—
(2,310)
—
383,754
—
(292)
(20,390) 531,762
—
498
498
—
—
—
—
30,868
—
30,868
— 30,868
—
498
— 31,366
(27,712)
—
(476)
— (27,712)
— 48,102
—
—
—
—
8,516
—
(1,812)
—
414,622
—
(718)
— 542,738
—
(380)
(380)
—
—
54,970
—
54,970
—
—
—
$469,592 $
— 54,970
—
(380)
— 54,590
111,131
— 11,271
(673)
—
— $719,057
costs . . . . . . . . . . . . . . . . . . . . . . . .
4,350
Employee stock grants and employee
stock plan purchases . . . . . . . . . . . . .
352
Tax deficiency from employee stock
compensation . . . . . . . . . . . . . . . . .
Balance at December 31, 2010 . . . . . . .
—
30,309
—
$30
(673)
$251,627
—
$(2,192)
See accompanying notes.
71
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (gain) loss on trading securities. . . . . . . . . . . . . . . . . . . .
Loss (gain) on rights agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment on available-for-sale securities . . .
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 business
combinations:
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 combinations . . . . . . . . . . . . . . . . . . . . . . . .
Increase in deferred contract costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in restricted investments. . . . . . . . . . . . . . . . . . . . .
Change in other noncurrent assets and liabilities . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Proceeds from common stock offering, net of issuance costs . . . . . . . .
Amount borrowed under credit facility . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of amount borrowed under credit facility . . . . . . . . . . . . . .
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit facility fees paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock compensation . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . .
2010
Year Ended December 31,
2009
(In thousands)
2008
$ 54,970
$ 30,868
$ 59,598
60,765
(4,170)
3,807
—
(4,092)
9,531
5,114
—
1,780
(968)
—
(7,539)
(9,756)
34,363
40,482
(41,899)
19,258
161,646
(48,538)
(302,842)
225,106
(130,743)
(29,319)
(5,566)
2,830
(289,072)
111,131
105,000
(105,000)
—
—
(1,671)
4,056
295
113,811
(13,615)
469,501
$ 455,886
38,110
(3,394)
3,100
—
(1)
7,485
4,782
(1,532)
1,872
(749)
—
(8,092)
383
22,874
(26,467)
88,181
(2,049)
155,371
(35,870)
(186,764)
204,365
(11,294)
—
1,928
(10,078)
(37,713)
—
—
—
(27,712)
(9,653)
—
2,015
31
(35,319)
82,339
387,162
$ 469,501
33,688
399
(6,907)
7,166
(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)
(2,942)
(64,520)
—
—
—
(49,940)
—
—
2,084
43
(47,813)
(71,902)
459,064
$ 387,162
72
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
2010
Year Ended December 31,
2009
(In thousands)
2008
Supplemental cash flow information
Cash paid during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,299
$ 23,480
$ 46,088
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,951
$
8,205
$
7,797
Schedule of non-cash investing and financing activities:
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $ 48,102
$ 49,940
Details of business combinations:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Release of escrow and other deposits . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less payable to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash paid in business purchase transactions . . . . . . . . . . . . . . . .
$(159,916)
—
—
4,723
24,450
$(130,743)
$ (34,594)
18,000
—
5,300
—
$ (11,294)
$
$
(2,262)
—
1,262
—
—
(1,000)
See accompanying notes.
73
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care
needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid
program.
Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico,
Ohio, Texas, Utah, Washington, and Wisconsin. These health plans served approximately 1.6 million members
eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families
and individuals as of December 31, 2010. The health plans are operated by our respective wholly owned
subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Effective
January 1, 2010, we terminated operations at our small Medicare health plan in Nevada.
Our Molina Medicaid Solutions, which we acquired during 2010, segment provides business processing and
information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine,
New Jersey, and West Virginia, and drug rebate administration services in Florida.
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. Our operating results for the year ended December 31, 2010, include the results of the following
businesses acquired during 2010:
• Molina Medicaid Solutions. On May 1, 2010, we acquired a health information management business
which now operates under the name, Molina Medicaid SolutionsSM. See Note 4, “Business Combinations,”
for more information relating to this acquisition.
• Wisconsin Health Plan. On September 1, 2010, we acquired Abri Health Plan, a Medicaid managed care
organization based in Milwaukee, Wisconsin. See Note 4, “Business Combinations,” for more information
relating to this acquisition.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities 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 revenue to be recognized by our Health Plans segment under certain contracts that
place revenue at risk dependent upon the achievement of certain quality or administrative measurements, or
the expenditure of certain percentages of revenue on defined expenses, or requirements that we return a
certain portion of our profits to state governments;
• The determination of medical claims and benefits payable of our Health Plans segment;
• The determination of allowances for uncollectible accounts;
• The valuation of certain investments;
• Settlements under risk or savings sharing programs;
74
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• The assessment of deferred contract costs, deferred revenue, long-lived and intangible assets, and goodwill
for impairment;
• The determination of professional and general liability claims, and reserves for potential absorption of
claims unpaid by insolvent providers;
• The determination of reserves for the outcome of litigation;
• The determination of valuation allowances for deferred tax assets; and
• The determination of unrecognized tax benefits.
Reclassifications
Effective January 1, 2010, we have recorded the Michigan modified gross receipts tax as a premium tax and not
as an income tax. For the years ended December 31, 2009, and 2008, amounts for premium tax expense and income
tax expense have been reclassified to conform to this presentation. See Note 2, “Significant Accounting Policies.”
In prior periods, general and administrative expenses have included premium tax expenses. Beginning in 2010,
we have reported premium tax expenses on a separate line in the accompanying consolidated statements of income.
Prior periods have been reclassified to conform to this presentation.
We have reclassified certain other prior year balance sheet amounts to conform to the 2010 presentation.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily
convertible into known amounts of cash and have a maturity of three months or less on the date of purchase.
Investments
Our investments are principally held in debt securities, which are grouped into two separate categories for
accounting and reporting purposes: available-for-sale securities, and held-to-maturity securities. Available-for-sale
securities are recorded at fair value and unrealized gains and losses, if any, are recorded in stockholders’ equity as
other comprehensive income, net of applicable income taxes. Held-to-maturity securities are recorded at amortized
cost, which approximates fair value, and unrealized holding gains or losses are not generally recognized. Realized
gains and losses and unrealized losses judged to be other than temporary with respect to available-for-sale and
held-to-maturity securities are included in the determination of net income.
The cost of securities sold is determined using the specific-identification method, 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 five years or less (excluding
auction rate and variable rate securities where interest rates may be periodically reset), and that the average maturity
be two 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. Our auction rate securities are classified as non-
current assets. 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”
and Note 10, “Restricted Investments.”
75
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables
Receivables consist primarily of amounts due from the various states in which we operate, and are subject to
potential retroactive adjustment. Because such 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.” Additionally, we cede 100% of
the financial responsibility for Medicare members covered by our Wisconsin health plan to third a party health
reinsurer. In connection with the arrangement, as of December 31, 2010, we have recorded a receivable from the
third party reinsurer of $5.0 million along with a corresponding current liability of $5.0 million.
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. Furniture and equipment are generally depreciated
using the straight-line method over estimated useful lives ranging from three to seven years. Software developed for
internal use is capitalized. Software is generally amortized over its estimated useful life of three years. Leasehold
improvements are amortized over the term of the lease, or over their useful lives from five to 10 years, whichever is
shorter. Buildings are depreciated over their estimated useful lives of 31.5 years. See Note 8, “Property and
Equipment.”
As discussed below, the costs associated with certain of our Molina Medicaid Solutions segment equipment
and software, which may be ultimately transferred to our clients under fixed-price contracts, are capitalized and
recorded as deferred contract costs. Such costs are amortized on a straight-line basis over the shorter of the useful
life or the contract period.
Deferral of Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the
performance of three elements of service. The first of these is the design, development and implementation, or DDI,
of a Medicaid Management Information System, or MMIS. The second element, following completion of the DDI
element, is the operation of the MMIS under a business process outsourcing, or BPO, arrangement. While providing
BPO services, we also provide the state with the third contracted element — training and IT support and hosting
services (training and support).
Because they include these three elements of service, our Molina Medicaid Solution segment contracts are
multiple-element arrangements. We have no vendor specific objective evidence, or VSOE, of fair value for any of
the individual elements in these contracts, and at no point in the contract will we have VSOE for the undelivered
elements in the contract. We lack VSOE of the fair value of the individual elements of our Molina Medicaid
Solutions contracts for the following reasons:
• Each contract calls for the provision of its own specific set of products and services. While all contracts
support the system of record for state MMIS, the actual services and products we provide vary significantly
between contracts; and
• The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe
systems) and our new contracts (commercial off-the-shelf technology solutions).
The absence of VSOE within the context of a multiple element arrangement requires us to delay recognition of
any revenue for an MMIS contract until completion of the DDI phase of the contract. As a general principle, revenue
recognition will therefore commence at the completion of the DDI phase, and all revenue will be recognized over
the period that BPO services and training and IT support services are provided. Consistent with the deferral of
revenue, recognition of all direct costs (such as direct labor, hardware, and software) associated with the DDI phase
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of our contracts is deferred until the commencement of revenue recognition. Deferred costs are recognized on a
straight-line basis over the period of revenue recognition.
Provisions specific to each contract may, however, lead us to modify this general principle. In those
circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate
us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to
refuse acceptance) has been removed. In those circumstances we defer recognition of any revenue at risk (whether
DDI, BPO services or training and IT support services) until the contingency had been removed. In these
circumstances we would also defer recognition of incremental direct costs (such as direct labor, hardware, and
software) associated with the contract (whether DDI, BPO services or training and IT support services) on which
revenue recognition is being deferred. Such deferred contract costs are recognized on a straight-line basis over the
period of revenue recognition.
We began to recognize revenue (and related deferred costs) associated with our Maine contract in September
2010. In Idaho, we expect to begin recognition of deferred contact costs during 2011, in a manner consistent with
our anticipated recognition of revenue. Unamortized deferred contract costs relating to the Molina Medicaid
Solutions segment at December 31, 2010 were $28.4 million.
The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic
basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such
undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred
contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after
reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for
impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-
lived assets exceeds the fair value of those assets.
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 (generally 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 use a discounted cash flow methodology to assess the fair
values of our reporting units. 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 and indefinite-lived
asset balance 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, 2010, 2009 and 2008.
Identifiable intangible assets associated with Molina Medicaid Solutions are classified as either contract
backlog or customer relationships.
The contract backlog intangible asset comprises all contractual cash flows anticipated to be received during the
remaining contracted period for each specific contract relating to work that was performed prior to the acquisition.
The contract backlog intangible has been developed on a contract-by-contract basis. The amortization of that
portion of the contract backlog intangible associated with contracts for which revenue recognition has not yet
commenced is deferred until revenue recognition has begun. Because each acquired contract constitutes a single
revenue stream, amortization of the contract backlog intangible is recorded to contra-service revenue so that
amortization is matched to any revenues associated with contract performance that occurred prior to the acquisition
date. The contract backlog intangible asset is amortized on a straight-line basis for each specific contract over
periods generally ranging from one to six years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The customer relationship intangible asset comprises all contractual cash flows that are anticipated to be
received during the option periods of each specific contract as well as anticipated renewals of those contracts. The
customer relationship intangible is amortized on a straight-line basis for each specific contract over periods
generally ranging from four to nine years.
The determination of the value of identifiable intangible assets requires us to make estimates and assumptions
about estimated asset lives, future business trends, and growth. In addition to annual impairment testing, we
continually evaluate whether events and circumstances have occurred that indicate the balance of identifiable
intangible assets may not be recoverable. In evaluating impairment, we compare the estimated fair value of the
intangible asset to its underlying book value. Such evaluation is significantly impacted by estimates and
assumptions of future revenues, costs and expenses, and other factors. If an event occurs that would cause us
to revise our estimates and assumptions used in analyzing the value of our identifiable intangible assets, such
revision could result in a non-cash impairment charge that could have a material impact on our financial results.
Depreciation and Amortization
Depreciation and amortization related to our Health Plans segment is all recorded in “Depreciation and
Amortization” in the consolidated statements of income. Depreciation and amortization related to our Molina
Medicaid Solutions segment is recorded within three different captions in the consolidated statements of income as
follows:
• Amortization of purchased intangibles relating to customer relationships is reported as amortization in
“Depreciation and Amortization;”
• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of service
revenue; and
• Depreciation is recorded as cost of service revenue.
The following table presents all depreciation and amortization recorded in our consolidated statements of
income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as cost
of service revenue, and reconciles that amount to the consolidated statements of cash flows.
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,230
18,474
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2008
Year Ended December 31,
2009
(In thousands)
$25,172
12,938
$20,718
12,970
Depreciation and amortization reported in our consolidated
statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization recorded as reduction of service revenue . . . . . . . . . .
Depreciation recorded as cost of service revenue . . . . . . . . . . . . . .
45,704
8,316
6,745
38,110
—
—
33,688
—
—
Depreciation and amortization reported in our consolidated
statements of cash flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,765
$38,110
$33,688
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 when events or changes in business conditions suggest potential impairment. For
example, our health plan subsidiaries have generally been successful in obtaining the renewal by amendment of
their contracts in each state prior to the actual expiration of their contracts. However, there can be no assurance that
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
these contracts will continue to be renewed. Impaired assets are written down to fair value. We have determined that
no long-lived assets were impaired in the years ended December 31, 2010, 2009, and 2008.
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.
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
(including hospital inpatient services) provided to our members. The inability of delegated providers to pay referral
claims presents us with both immediate financial risk and potential disruption to member care. Depending on states’
laws, we may be held liable for such unpaid referral claims even though the delegated provider has contractually
assumed such risk. Additionally, competitive pressures may force us to pay such claims even when we have no legal
obligation to do so. To reduce the risk that delegated providers are unable to pay referral claims, we monitor the
operational and financial performance of such providers. We also maintain contingency plans that include
transferring members to other providers in response to potential network instability.
In certain instances, we have required providers to place funds on deposit with us as protection against their
potential insolvency. These reserves are frequently in the form of segregated funds received from the provider and
held by us or placed in a third-party financial institution. These funds may be used to pay claims that are the
financial responsibility of the provider in the event the provider is unable to meet these obligations. Additionally, we
have recorded liabilities for estimated losses arising from provider instability or insolvency in excess of provider
funds on deposit with us. Such liabilities were not material at December 31, 2010, or December 31, 2009.
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, 2010 we received approximately 94%
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
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506,871
170,683
Florida(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630,134
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
210,852
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
366,784
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
860,324
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
188,716
Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
258,076
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
758,849
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,033
Wisconsin(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,587
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2008
Year Ended December 31,
2009
(In thousands)
$ 481,717
102,232
557,421
230,222
404,026
803,521
134,860
207,297
726,137
—
12,774
$ 417,027
—
509,782
225,280
348,576
602,826
110,178
155,991
709,943
—
11,637
$3,989,909
$3,660,207
$3,091,240
(1) The Florida health plan began enrolling members in December 2008.
(2) We acquired the Wisconsin health plan on September 1, 2010.
For the year ended December 31, 2010, we received approximately 6% of our premium revenue in the form of
“birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state
health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.
Certain components of premium revenue are subject to accounting estimates, and therefore are subject to
retroactive revision. The most significant of these estimates involve:
• The recognition of premium revenue at our Florida, New Mexico, and Texas health plans, where we are
subject to a number of requirements, that, among other things, require us to expend a minimum amount of
revenue on certain defined medical costs, expend a maximum amount of revenue on certain defined
administrative costs, and share our profits (as defined) above a certain percentage of revenue with the state;
• The recognition of premium revenue due to the achievement of certain performance measures (generally
linked to quality of care and administrative efficiency) included in our contracts with the states of New
Mexico, Ohio, and Texas;
• The recognition of premium revenue due to the achievement of certain medical cost savings (as measured
against state fee-for-service costs) under our contract with the state of Utah; and
• The amount of Medicare premium revenue that we recognize, which may be retroactively adjusted to reflect
the acuity of care required by our members.
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. Most hospitals are paid on a fee-for-service basis in a
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
variety of ways, including per diem amounts, diagnostic-related groups or DRGs, percent of billed charges,
and case rates. As discussed below, 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 arrange-
ments, 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 per-member per-month, or
PMPM, payment to the provider without regard to the frequency, extent, or nature of the medical services
actually furnished. Under capitated contracts, we remain liable for the provision of certain health care
services. Certain of our capitated contracts also contain incentive programs based on service delivery,
quality of care, utilization management, and other criteria. Capitation payments are fixed in advance of the
periods covered and are not subject to significant accounting estimates. These payments are expensed in the
period the providers are obligated to provide services. The financial risk for pharmacy services for a small
portion of our membership is delegated to capitated providers.
• Pharmacy: Pharmacy costs include all drug, injectibles, and immunization costs paid through our
pharmacy benefit managers. As noted above, drugs and injectibles not paid through our pharmacy benefit
managers are included in fee-for-service costs, except in those limited instances where we capitate drug and
injectible costs.
• Other: Other medical care costs include medically related administrative costs, certain provider incentive
costs, reinsurance cost, and other health care expense. Medically related administrative costs include, for
example, expenses relating to health education, quality assurance, case management, disease management,
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, 2010, 2009, and 2008, medically
related administrative costs were approximately $85.5 million, $74.6 million, and $75.9 million,
respectively.
The following table provides the details of our consolidated medical care costs for the periods indicated
(dollars in thousands, except PMPM amounts):
2010
Year Ended December 31,
2009
2008
Amount
PMPM
% of
Total
Amount
PMPM
% of
Total
Amount
PMPM
Fee-for- service . . $2,360,858 $128.73
30.29
Capitation . . . . . .
17.77
Pharmacy . . . . . .
7.01
Other . . . . . . . . .
555,487
325,935
128,577
70.0% $2,077,489 $126.14
33.91
558,538
16.5
25.18
414,785
9.7
7.62
125,424
3.8
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
% of
Total
65.2%
17.2
13.6
4.0
Total . . . . . . . . $3,370,857 $183.80 100.0% $3,176,236 $192.85 100.0% $2,621,312 $178.90 100.0%
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
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.”
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 premium tax expense.
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, 2010, or 2009.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally
greater than the U.S. federal statutory rate primarily because of state taxes. The effective tax rate may be subject to
fluctuations during the year as new information is obtained. Such information may affect the assumptions used to
estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax
jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or derecognition
of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions
where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit
carryovers. For further discussion and disclosure, see Note 13, “Income Taxes.”
Through December 31, 2009, income tax expense included both the Michigan business income tax, or BIT, and
Michigan modified gross receipts tax, or MGRT. Effective January 1, 2010, we have recorded the MGRT as a
premium tax and not as an income tax, and prior years have been reclassified to conform to this presentation. We
will continue to record the BIT as an income tax. The MGRT amounted to $6.2 million, $5.5 million and
$5.1 million for the years ended December 31, 2010, 2009, and 2008 respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Generally, the MGRT is a 0.976% tax (statutory rate of 0.8% plus 21.99% surtax) on modified gross receipts,
which for most taxpayers is defined as receipts less purchases from other firms. Managed care organizations,
however, are not currently allowed to deduct payments to providers in determining modified gross receipts. As a
result, the MGRT is 0.976% of our Michigan plan’s receipts and does not vary with levels of pretax income or
margins. We believe that presentation of the MGRT as a premium tax produces financial statements that are more
useful to the reader.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and
cash equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash in
the PFM Funds Prime Series — Institutional Class, and the PFM Funds Government Series. These funds represent a
portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC (PFM), a
Virginia business trust registered as an open-end management investment fund. As of December 31, 2010, and
2009, our investments with PFM totaled $327 million and $296 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.
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.
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, 2010, we operated health plans in 10 states, primarily as a direct contractor with the states,
and in Los Angeles County, California, as a subcontractor to another health plan holding a direct contract with the
state. We are therefore dependent upon a small number of contracts to support our revenue. The loss of any one of
those contracts could have a material adverse effect on our financial position, results of operations, or cash flows.
Our ability to arrange for the provision of medical services to our members is dependent upon our ability to develop
and maintain adequate provider networks. Our inability to develop or maintain such networks might, in certain
circumstances, have a material adverse effect on our financial position, results of operations, or cash flows.
Recent Accounting Pronouncements
Revenue Recognition.
In late 2009, the Financial Accounting Standards Board, or FASB, issued the
following new accounting guidance which is first applicable for our January 1, 2011 reporting:
• ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software
Elements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the scope of ASC
Subtopic 985-605 — Software-Revenue Recognition to exclude from its requirements (a) non-software
components of tangible products and (b) software components of tangible products that are sold, licensed or
leased with tangible products when the software components and non-software components of the tangible
product function together to deliver the tangible product’s essential functionality. We do not expect the
update to impact our consolidated financial position, results of operations or cash flows.
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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a
consensus of the FASB Emerging Issues Task Force. This guidance modifies previous requirements by
allowing the use of the “best estimate of selling price” in the absence of vendor-specific objective evidence
(“VSOE”) or verifiable objective evidence (“VOE”) (now referred to as “TPE” or third-party evidence) for
determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling
price when more objective evidence of the selling price cannot be determined. In addition, the residual
method of allocating arrangement consideration is no longer permitted. As of December 31, 2010, we do not
expect the update to impact our consolidated financial position, results of operations or cash flows; however,
the future impact of the update will be dependent on future contracts and modifications to existing contracts.
Fair Value Measurements.
In January 2010, the FASB issued the following guidance which expanded the
required disclosures about fair value measurements. Effective for interim and annual reporting beginning after
December 15, 2009, with one new disclosure effective beginning after December 15, 2010, we adopted this
guidance in full during the interim period ended March 31, 2010.
• ASU No. 2010-6, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about
Fair Value Measurements. This guidance requires (a) separate disclosure of the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers,
(b) information about purchases, sales, issuances and settlements to be presented separately in the
reconciliation for Level 3 fair value measurements, (c) fair value measurement disclosures for each class
of assets and liabilities and (d) disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in
either Level 2 or Level 3. The adoption of this guidance did not impact 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 . . . . . . . . . . . . . . . . . . 25,607
Weighted-average number of shares:
2010
Year Ended December 31,
2009
(In thousands)
26,725
2008
28,444
Issued under equity offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . .
1,671
—
171
—
(988)
106
—
(871)
103
Denominator for basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . 27,449
305
Dilutive effect of employee stock options and stock grants(1) . . . . . . . .
25,843
141
27,676
96
Denominator for diluted earnings per share(2) . . . . . . . . . . . . . . . . . . . 27,754
25,984
27,772
(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, 2010, 2009 and 2008, there were approximately 478,000, 620,000, and 532,000 anti-
dilutive weighted options, respectively. Restricted shares are included in the calculation of diluted earnings per
share when their grant date fair values are below the average fair value of the common shares for each of the
84
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
periods presented. For the years ended December 31, 2010, 2009 and 2008, anti-dilutive weighted restricted
shares were insignificant.
(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, 2010, 2009 and 2008.
4. Business Combinations
Wisconsin Health Plan
On September 1, 2010, Molina acquired 100% of the voting equity interests in Avatar Partners, LLC, which is
the sole shareholder of Abri Health Plan, Inc. (“Abri”), a Medicaid managed care organization based in Milwaukee,
Wisconsin. This acquisition is consistent with our stated strategy to enter markets with competitive provider
communities, supportive regulatory environments, significant size and, where practicable, mandated Medicaid
managed care enrollment.
We expect the final purchase price for the Abri acquisition to be approximately $15.5 million, subject to
adjustments. As of December 31, 2010, we had paid $8.5 million of the total purchase price. We expect to finalize
the amount due to the sellers based on the final membership reconciliation in the first quarter of 2011. Additionally,
$2.8 million of the purchase price represents contingent consideration based on the plan’s minimum surplus
requirements as of February 1, 2011, which will also be computed in the first quarter of 2011. Any adjustments to
the estimated amount of contingent consideration will be recorded to operations in the first quarter of 2011.
Following the final membership reconciliation, 10% of the final purchase price for the membership acquired will be
deposited to an escrow account payable at the later of 12 months or the resolution of all unresolved claims. We
incurred approximately $0.5 million in acquisition costs relating to this acquisition in 2010, recorded to general and
administrative expenses.
In connection with this acquisition, we recorded $5.5 million in goodwill, which is not deductible for tax
purposes, and $3.4 million in various definite-lived identifiable intangible assets, with a weighted average useful
life of 6.4 years. Accumulated amortization totaled approximately $0.4 million as of December 31, 2010, which
reflects amortization recorded since the acquisition date. We expect to record amortization relating to this
acquisition in future years as follows— 2011: $0.9 million, 2012: $0.4 million, 2013: $0.3 million, 2014:
$0.3 million, and 2015: $0.2 million.
Molina Medicaid Solutions
On May 1, 2010, we acquired a health information management business that was previously an operating unit
of Unisys Corporation. This business now operates under the name Molina Medicaid SolutionsSM, or Molina
Medicaid Solutions. Molina Medicaid Solutions provides design, development, implementation, and business
process outsourcing solutions to state governments for their Medicaid Management Information Systems (MMIS).
MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement
programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho, Louisiana, Maine,
New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida
Medicaid program. As a result of this acquisition, we are diversifying our core health plan business, and we believe
that the use of a common claims processing platform across our health plans and our new MMIS business will
enable us to achieve synergies in the operations of both.
We paid $131.3 million to acquire Molina Medicaid Solutions. The acquisition was funded with available cash
of $26 million and $105 million drawn under our credit facility. In connection with the closing, both the fourth
amendment and the fifth amendment to our credit facility became effective (see Note 12, “Long-Term Debt”). We
incurred approximately $2.5 million in acquisition costs relating to this acquisition in 2010, recorded to general and
administrative expenses. Additionally, effective on the acquisition date, we entered into a transition services
85
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
agreement with Unisys Corporation. Under this agreement, Unisys is providing Molina Medicaid Solutions various
systems and infrastructure support services until April 30, 2011. During 2010, we recorded approximately
$4.7 million to cost of service revenue relating to this agreement.
Recording of assets acquired and liabilities assumed: The transaction has been accounted for using the
acquisition method of accounting which requires, among other things, that most assets acquired and liabilities
assumed be recognized at their fair values as of the acquisition date.
The following table summarizes the acquisition-date fair values of the assets acquired and liabilities assumed:
Assets
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment and other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 17,128
3,901
783
48,150
72,367
142,329
Less: liabilities
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,079
Net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$131,250
A single estimate of fair value results from a complex series of judgments about future events and uncertainties
and relies heavily on estimates and assumptions. Results that differ from the estimates and judgments used to
determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset
lives, can materially impact our results of operations.
Accounts receivable: Accounts receivable are stated at fair value, based on the gross contractual amounts
receivable. We have collected substantially all of the accounts receivable as of the acquisition date.
Identifiable intangible assets: The following table is a summary of the fair value estimates of the identifiable
intangible assets and their weighted-average useful lives:
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract backlog. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Fair
Value
(In thousands)
$24,550
23,600
$48,150
Weighted Average
Useful Life
(Years)
5.3
2.4
Accumulated amortization totaled approximately $11.7 million as of December 31, 2010, which reflects total
amortization recorded since the acquisition date. For identifiable intangible assets recorded as of December 31,
2010, we expect to record amortization in future years as follows — 2011: $13.2 million, 2012: $7.6 million, 2013:
$7.6 million, 2014: $5.6 million, and 2015: $0.8 million.
Goodwill: Goodwill in the amount of $72.4 million was recognized for this acquisition, all of which is
expected to be deductible for tax purposes. The total goodwill amount was calculated as the excess of the
consideration transferred over the net assets recognized and represents the future economic benefits arising from
86
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other assets acquired that could not be individually identified and separately recognized. The goodwill recorded as
part of the acquisition of Molina Medicaid Solutions includes:
• Expected synergies and other benefits that we believe will result from combining the operations of Molina
Medicaid Solutions with the operations of Molina;
• Any intangible assets that do not qualify for separate recognition such as the assembled workforce; and
• The value of the going-concern element of Molina Medicaid Solutions’ existing businesses (the higher rate
of return on the assembled collection of net assets versus acquiring all of the net assets separately).
Accounts payable and accrued liabilities: Accounts payable and accrued liabilities include $1.3 million
payable to the seller of Molina Medicaid Solutions, which represented a working capital adjustment provided in the
purchase agreement. This working capital adjustment was paid to the seller in August 2010. The working capital
adjustment provided that the net working capital, or current assets minus current liabilities, on Molina Medicaid
Solutions’ opening balance sheet would equal $10 million. To the extent the final net working capital conveyed by
the seller exceeded $10 million, the amount would be payable back to the seller; conversely, to the extent that net
working capital conveyed by the seller was less than $10 million, the shortage would be a receivable from the seller.
Thus, the $1.3 million amount described above represented the amount payable to the seller for net working capital
in excess of $10 million on the opening balance sheet.
Pro-forma impact of the acquisition: The unaudited pro-forma results presented below include the effects of
the acquisition as if it had been consummated as of January 1, 2010, 2009 and 2008. The pro-forma results include
the amortization associated with the acquired intangible assets and interest expense associated with debt used to
fund the acquisition. To better reflect the combined operating results, material non-recurring charges directly
attributable to the transaction have been excluded. In addition, the pro-forma results do not include any anticipated
synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information
below is not necessarily indicative of either future results of operations or results that might have been achieved had
the acquisition been consummated as of January 1, 2010, January 1, 2009, or January 1, 2008.
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,124,058
57,800
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.08
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . $
$3,767,888
26,192
$
1.01
$
$3,202,581
54,228
$
1.95
$
Year Ended December 31,
2009
2010
2008
Florida Health Plan
On December 31, 2009, we acquired 100% of the voting equity interests in Florida NetPASS, LLC, or
NetPASS. The final purchase price for this acquisition totaled $29.6 million. As of the final membership
reconciliation in the second quarter of 2010, we transitioned approximately 49,600 members from NetPASS to
our Florida health plan, and have recorded $18.0 million in goodwill, and $11.6 million in intangible assets relating
to these members.
On April 15, 2010, the former owners of NetPASS filed suit in federal court stating that we had not paid
$12 million of the purchase price that was owed and based on a formula in the purchase agreement. Because the
purchase agreement contained an arbitration clause, the Florida health plan filed a demand for arbitration seeking a
declaration that the full purchase price had been paid and the purchase agreement had been fulfilled. The former
owners of NetPASS filed a counter-demand for an additional $10 million and seeking a declaration regarding the
anti-competition clause in the purchase agreement. The parties have exchanged documents and will start to take
depositions. Arbitration is scheduled to commence June 10, 2011. We continue to believe that their claims do not
have any merit and that we will prevail in this action.
87
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
As described in Note 12, “Long-Term Debt,” the carrying amount of the convertible senior notes was
$164.0 million, and $158.9 million as of December 31, 2010, and 2009, respectively. Based on quoted market
prices, the fair value of our convertible senior notes issued in October 2007 was approximately $188.4 million, and
$160.8 million as of December 31, 2010, and 2009, 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.
As of December 31, 2010, we held certain assets that are required to be measured at fair value on a recurring
basis. These included investments as follows:
Balance Sheet Classification
Description
Current assets:
Investments
Non-current assets:
Investments
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).
As of December 31, 2010, $24.6 million par value (fair value of $20.4 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, 2010.
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, 2009, and continued to be unavailable as of December 31, 2010. 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, 2010. 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, 2010, all of our auction rate securities were designated as available-for-sale securities. As
a result of the decrease in fair value of auction rate securities designated as available-for-sale, we recorded pretax
unrealized losses of $0.2 million to accumulated other comprehensive loss for the year ended December 31, 2010.
We have deemed these unrealized losses to be temporary and attribute the decline in value to liquidity issues, as a
result of the failed auction market, rather than to credit issues. Any future fluctuation in fair value related to these
instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to
88
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accumulated other comprehensive loss. If we determine that any future valuation adjustment was other-than-tem-
porary, we would record a charge to earnings as appropriate.
Until July 2, 2010, we held certain auction rate securities (designated as trading securities) with an investment
securities firm. In the fourth quarter of 2008, we entered into a rights agreement with this firm that (1) allowed 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) gave the investment securities firm the right to purchase the auction rate securities
from us any time after the agreement date as long as we received the par value. On June 30, 2010, and July 1, 2010,
all of the eligible auction rate securities remaining at that time were settled at par value.
During 2010, the aggregate auction rate securities (designated as trading securities) settled amounted to
$40.9 par value (fair value $36.7 million). For the years ended December 31, 2010, 2009, and 2008, we recorded
pretax gains (losses) of $4.2 million, $3.4 million, and ($0.4) million, respectively, on the auction rate securities
underlying the Rights.
We accounted for the Rights as a freestanding financial instrument and, until July 2, 2010, recorded the value
of the Rights under the fair value option. When the remaining eligible auction rate securities were sold at par value
on July 1, 2010, the value of the Rights was zero. For the years ended December 31, 2010, 2009, and 2008, we
recorded pretax (losses) gains of ($3.8) million, ($3.1) million and $6.9 million, respectively, on the Rights.
Our assets measured at fair value on a recurring basis at December 31, 2010, were as follows:
Fair Value Measurements at Reporting Date Using
Level 3
Level 1
Level 2
Total
(In thousands)
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprise securities . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . .
Auction rate securities (available-for-sale) . . . . . . . . . .
$177,929
59,713
30,563
23,918
3,252
20,449
$177,929
59,713
30,563
23,918
3,252
—
$315,824
$295,375
$—
—
—
—
—
—
$—
$ —
—
—
—
—
20,449
$20,449
The following table presents our assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3):
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains (realized or unrealized):
Included in earnings:
(Level 3)
(In thousands)
$ 63,494
Gain on auction rate securities designated as trading securities . . . . . . . . . . . . . . . .
Loss on change in fair value of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,170
(3,807)
(208)
(43,200)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,449
The amount of total losses for the period included in other comprehensive income
attributable to the change in unrealized gains relating to assets still held at
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(208)
89
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As described in Note 4, “Business Combinations,” we have recorded a $2.8 million liability for contingent
consideration related to the acquisition of our Wisconsin health plan. We have estimated the fair value of this
liability based on our expectations regarding the Wisconsin health plan’s statutory net worth as of January 31, 2011
as well as the Wisconsin health plan’s minimum required statutory net worth as of that date. The liability for
contingent consideration related to this acquisition was measured at fair value on a recurring basis using significant
unobservable inputs (Level 3). The following table presents a roll forward of this liability for 2010:
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition through acquisition — 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Level 3)
(In thousands)
$ —
2,800
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,800
6.
Investments
The following tables summarize our investments as of the dates indicated:
Cost or
Amortized
Cost
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . $179,124
59,790
Government-sponsored enterprise securities (GSEs) . . . . .
Municipal securities (including non-current auction rate
December 31, 2010
Gross
Unrealized
Gains
Losses
(In thousands)
Estimated
Fair
Value
$193
293
$1,388
370
$177,929
59,713
securities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,247
23,864
3,252
78
114
—
4,313
60
—
51,012
23,918
3,252
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities (including non-current auction rate
securities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . .
$321,277
$678
$6,131
$315,824
Cost or
Amortized
Cost
December 31, 2009
Gross
Unrealized
Gains
Losses
(In thousands)
Estimated
Fair
Value
$ 32,543
89,451
$ 206
504
$ 185
281
$ 32,564
89,674
82,009
28,052
3,258
3,120
92
—
4,154
84
—
80,975
28,060
3,258
$235,313
$3,922
$4,704
$234,531
The contractual maturities of our investments as of December 31, 2010 are summarized below.
90
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortized
Cost
Estimated
Fair
Value
(In thousands)
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $168,948
127,549
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
930
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,850
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$167,856
127,144
990
19,834
$321,277
$315,824
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 $124.5 million, $60.3 million, and $55.3 million for the years ended December 31,
2010, 2009 and 2008, respectively. Net realized investment gains for the years ended December 31, 2010, 2009 and
2008 were $110,000, $267,000, and $342,000 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, 2010 and 2009 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 do not intend to sell these securities prior to
maturity, we are unlikely to experience gains or losses. In the unlikely event that we dispose of these securities
before maturity, we expect that realized gains or losses, if any, will be immaterial.
Approximately 40% of our investment in municipal securities consists 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, 2010.
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, 2010.
In a Continuous Loss
Position
for Less than 12 Months
as of December 31, 2010
Estimated
Fair
Value
Unrealized
Losses
In a Continuous Loss
Position
for 12 Months or More
as of December 31, 2010
Estimated
Fair
Value
Unrealized
Losses
(In thousands)
Total as of December 31, 2010
Estimated
Fair
Value
Unrealized
Losses
Corporate debt
securities . . . . . . . . . . $103,225
13,014
18,884
5,480
GSEs . . . . . . . . . . . . . . .
Municipal securities . . . .
U.S. treasury notes . . . . .
$140,603
$1,060
71
117
40
$1,288
$10,490
7,539
25,271
6,806
$50,106
$ 328
299
4,196
20
$113,715
20,553
44,155
12,286
$4,843
$190,709
$1,388
370
4,313
60
$6,131
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. At December 31, 2009, we previously reported only those available-for-sale investments in an
unrealized loss position for at least two consecutive months. To conform to the current year presentation, we have
91
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
included all available-for-sale investments in an unrealized loss position at December 31, 2009. This presentation
change increased the total amount of unrealized losses reported in the following table by $113,000 at December 31,
2009. The accompanying increase to the estimated fair value of the underlying investments amounted to
$42.9 million at December 31, 2009.
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
$13,513
30,460
12,460
21,824
$78,257
149
187
78
84
$498
$ 1,203
7,297
24,031
—
$32,531
$
36
94
3,902
—
$ 14,716
37,757
36,491
21,824
$4,032
$110,788
$ 185
281
3,980
84
$4,530
Corporate debt
securities . . . . . . . . . . .
GSEs . . . . . . . . . . . . . . .
Municipal securities . . . .
U.S. treasury notes . . . . .
7. Receivables
Health Plans segment receivables consist primarily of amounts due from the various states in which we
operate. Such receivables are subject to potential retroactive adjustment. Because all of our receivable amounts are
readily determinable and our creditors are in almost all instances state governments, our allowance for doubtful
accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determi-
nation is made. Accounts receivable were as follows:
December 31,
2010
2009
(In thousands)
Health Plans Segment:
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,482
13,596
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,841
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,310
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,622
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,589
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,486
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,437
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,598
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Health Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Molina Medicaid Solutions Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,961
20,229
$ 34,289
14,977
19,670
11,919
37,004
6,107
9,910
—
2,778
136,654
—
$168,190
$136,654
92
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Property and Equipment
A summary of property and equipment is as follows:
December 31,
2010
2009
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized computer software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(In thousands)
3,524
49,735
60,074
90,003
3,524
41,476
54,898
66,526
Less: accumulated depreciation and amortization on building and
improvements, furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated amortization for capitalized computer software costs. . . .
(54,341)
(48,458)
(50,911)
(37,342)
(102,799)
(88,253)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,537
$ 78,171
203,336
166,424
Depreciation expense recognized for building and improvements, and furniture and equipment was $13.9 million,
$11.0 million, and $9.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Amortization
expense recognized for capitalized computer software costs was $20.1 million, $14.2 million, and $11.7 million for the
years ended December 31, 2010, 2009, and 2008, respectively.
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, for customer relationships is
approximately 5 years, for backlog is approximately 2 years, and for provider networks is approximately 10 years.
Based on the balances of our identifiable intangible assets as of December 31, 2010, we estimate that our intangible
asset amortization will be $27.5 million in 2011, $19.0 million in 2012, $15.8 million in 2013, $12.8 million in
2014, and $7.0 million in 2015. 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 (Health Plans segment) . . . . . . $120,920
Customer relationships (Molina Medicaid Solutions
segment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog (Molina Medicaid Solutions segment) . . . . . . . . . .
Provider networks (Health Plans segment) . . . . . . . . . . . . .
24,550
23,600
18,622
$64,201
$ 56,719
3,418
8,316
6,257
21,132
15,284
12,365
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . $187,692
$82,192
$105,500
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
93
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of goodwill and indefinite-lived intangible assets were as follows (in
thousands):
Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,408
72,367
Goodwill recorded for acquisition of Molina Medicaid Solutions on May 1, 2010 . . . . . .
5,474
Goodwill recorded for acquisition of the Wisconsin health plan on September 1, 2010 . . .
979
Goodwill adjustment related to the 2009 acquisition of the Florida health plan . . . . . . . . .
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $212,228
10. Restricted Investments
Pursuant to the regulations governing our health plan subsidiaries, we maintain statutory deposits and deposits
required by state Medicaid authorities. Additionally, we maintain restricted investments as protection against the
insolvency of capitated providers. The following table presents the carrying value of restricted investments by
health plan, and by our insurance company:
December 31,
2010
2009
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(In thousands)
372
4,508
4,689
1,000
508
15,881
9,066
3,501
1,279
151
260
885
368
2,052
4,686
1,000
503
15,497
9,036
1,515
578
151
—
888
The contractual maturities of our held-to-maturity restricted investments as of December 31, 2010 are
summarized below.
$42,100
$36,274
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40,757
1,218
125
$40,792
1,216
158
$42,100
$42,166
Amortized
Cost
Estimated
Fair Value
(In thousands)
94
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2010 and 2009. 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.
Balances at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance of acquired subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2010
2009
(Dollars in thousands, except
per-member amounts)
$ 315,316
3,228
$ 292,442
—
3,420,235
(49,378)
3,227,794
(51,558)
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,370,857
3,176,236
Payments for medical care costs related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,085,388
249,657
2,920,015
233,347
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,335,045
3,153,362
Balances at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 354,356
$ 315,316
Benefit from prior years as a percentage of:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.7%
1.2%
1.5%
17.6%
1.4%
1.6%
For the year ended December 31, 2010, we recognized a benefit from prior period claims development in the
amount of $49.4 million. This amount represents our estimate as of December 31, 2010 of the extent to which our
initial estimate of medical claims and benefits payable at December 31, 2009 exceeded the amount that will
ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at December 31, 2009
was the result of the following factors:
• In New Mexico, we underestimated the degree to which cuts to the Medicaid fees schedule would reduce our
liability as of December 31, 2009.
• In California, we underestimated the extent to which various network restructuring, provider contracting and
medical management initiatives had reduced our medical care costs during the second half of 2009, thereby
resulting in a lower liability at December 31, 2009.
For the year ended December 31, 2009, we recognized a benefit from prior period claims development in the
amount of $51.6 million. This amount represented our estimate as of December 31, 2009 of the extent to which our
initial estimate of medical claims and benefits payable at December 31, 2008 exceeded the amount that was
ultimately be paid out in satisfaction of that liability. 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.
95
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The use of a consistent methodology in estimating our liability for claims and medical benefits payable
minimizes the degree to which the under- or over-estimation 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. In 2010 and 2009 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
Credit Facility
We are a party to an Amended and Restated Credit Agreement, dated as of March 9, 2005, as amended by the
first amendment on October 5, 2005, the second amendment on November 6, 2006, the third amendment on May 25,
2008, the fourth amendment on April 29, 2010, and the fifth amendment on April 29, 2010, among Molina
Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”) for a
revolving credit line of $150 million that matures in May 2012. The Credit Facility is intended to be used for general
corporate purposes. As described below and in Note 4, “Business Combinations,” we borrowed $105 million under
the Credit Facility to acquire Molina Medicaid Solutions in the second quarter of 2010. During the third quarter of
2010, we repaid this amount using proceeds from our equity offering, described in Note 14, “Stockholders’ Equity.”
As of December 31, 2010, and 2009, there was no outstanding principal balance under the Credit Facility. However,
as of December 31, 2010, our lenders had issued two letters of credit in the aggregate principal amount of
$10.3 million in connection with the contract of MMS with the states of Maine and Idaho.
To the extent that in the future we incur any obligations under the Credit Facility, such obligations will be
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, 2010, we were in compliance with all financial covenants
in the Credit Facility.
The commitment fee on the total unused commitments of the lenders under the Credit Facility is 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 is 200 basis points at every level of the
pricing grid. Thus, the applicable margins under the Credit Facility range between 2.75% and 3.75% for LIBOR
loans, and between 1.75% and 2.75% for base rate loans. The Credit Facility carves out from our indebtedness and
restricted payment covenants under the Credit Facility the $187.0 million current principal amount of the
convertible senior notes, although the $187.0 million indebtedness is included in the calculation of our consolidated
leverage ratio. The fixed charge coverage ratio set forth pursuant to the Credit Facility was 2.75x (on a pro forma
basis) at December 31, 2009, and 3.00x thereafter.
The fifth amendment increased the maximum consolidated leverage ratio under the Credit Facility to 3.25 to
1.00 for the fourth quarter of 2009 (on a pro forma basis), and to 3.50 to 1.00 for the first and second quarters of
2010, and through August 14, 2010. Effective as of August 15, 2010, the consolidated leverage ratio under the
Credit Facility reverted back to 2.75 to 1.00. In connection with the lenders’ approval of the fifth amendment, we
paid an amendment fee of 25 basis points on the amount of each consenting lender’s commitment. We also paid 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 August 15, 2010.
96
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2010 (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, the conversion rate will increase 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.
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.
The proceeds from the issuance of the Notes have been allocated between a liability component and an equity
component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-
year U.S. treasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting
debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash
interest expense. As of December 31, 2010, we expect the Notes to be outstanding until their October 1, 2014
maturity date, for a remaining amortization period of 45 months. The Notes’ if-converted value did not exceed their
principal amount as of December 31, 2010. At December 31, 2010, the equity component of the Notes, net of the
97
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
impact of deferred taxes, was $24.0 million. The following table provides the details of the liability amounts
recorded:
Details of the liability component:
Principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $187,000
(22,986)
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$187,000
(28,100)
Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $164,014
$158,900
December 31,
2010
2009
(In thousands)
2010
Years Ended December 31,
2009
(In thousands)
2008
Interest cost recognized for the period relating to the:
Contractual interest coupon rate of 3.75% . . . . . . . . . . . . . . . . . .
Amortization of the discount on the liability component . . . . . . .
$ 7,012
5,114
$ 7,076
4,782
$ 7,500
4,707
Total interest cost recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,126
$11,858
$12,207
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 2009 on the purchase of the Notes was $1.5 million.
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
2009. The purchase program extended through December 31, 2009. See the details regarding the common stock
purchases at Note 14, “Stockholders’ Equity.”
13.
Income Taxes
The provision for income taxes consisted of the following:
2010
Year Ended December 31,
2009
(In thousands)
2008
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,395
2,144
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,421
(1,558)
$32,972
1,866
Total current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,539
7,863
34,838
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,717)
700
1,924
(2,498)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,017)
(574)
378
(490)
(112)
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,522
$ 7,289
$34,726
98
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2010
Year Ended December 31,
2009
(In thousands)
$13,355
(2,637)
(3,315)
(114)
$31,323
1,849
(57)
1,407
$33,014
894
450
368
Reported income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,522
$ 7,289
$34,726
Through December 31, 2009, the Company’s income tax expense included both the Michigan business income
tax, or BIT, and the Michigan modified gross receipts tax, or MGRT. Effective January 1, 2010, the Company has
recorded the MGRT as a premium tax and not as an income tax. The Company will continue to record the BIT as an
income tax. For the years ended December 31, 2009 and December 31, 2008, premium tax expense and income tax
expense have been reclassified to conform to this presentation.
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 2010, 2009, and 2008, tax-related deficiencies on share-based compensation were $673,000, $718,000,
and $292,000, respectively. Such amounts were recorded as adjustments to income taxes payable with a corre-
sponding decrease to additional paid-in capital.
99
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, 2010
and 2009 were as follows:
December 31,
2010
2009
(In thousands)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,618
877
Reserve liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(120)
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,126
Other accrued medical costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(254)
Unrealized (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,517
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,006)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(69)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,716
Deferred tax asset, net of valuation allowance — current . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability, net of valuation allowance — long term . . . . . . . . . . . .
791
3,071
1,960
(358)
1,362
1,559
(135)
(20,110)
6,829
(9,673)
(337)
(1,194)
(16,235)
$ 2,494
285
1,151
1,628
27
(408)
6,554
(2,894)
(80)
8,757
(281)
2,501
—
(866)
237
1,480
(264)
(10,415)
6,817
(11,555)
(160)
—
(12,506)
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(519)
$ (3,749)
At December 31, 2010, we had federal and state net operating loss carryforwards of $475,000 and $28 million,
respectively. The federal net operating loss begins expiring in 2018, and state net operating losses begin expiring in
2015. The utilization of the net operating losses is subject to certain limitations under federal law.
At December 31, 2010, we had California enterprise zone tax credit carryovers of $3 million which do not
expire.
We evaluate the need for a valuation allowance taking into consideration the ability to carry back and carry
forward tax credits and losses, available tax planning strategies and future income, including reversal of temporary
differences. We have determined that as of December 31, 2010, $1.2 million of deferred tax assets did not satisfy the
recognition criteria due to uncertainty regarding the realization of some of our state tax operating loss carryfor-
wards. We increased our valuation allowance from zero at December 31, 2009 to $1.2 million as of December 31,
2010.
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
100
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reserves are established when we believe that certain positions might be challenged despite our belief that our tax
return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as
the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to
reserves that are considered appropriate.
The roll forward of our unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at beginning of period . . . . . . . . $ (4,128)
(6,891)
Increases in tax positions for prior years . . . . . . . . . . . . . . . . . . .
—
Decreases in tax positions for prior years . . . . . . . . . . . . . . . . . .
—
Increases in tax positions for current year . . . . . . . . . . . . . . . . . .
—
Decreases in tax positions for current year . . . . . . . . . . . . . . . . .
—
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse in statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Gross unrecognized tax benefits at end of period. . . . . . . . . . . . . $(10,962)
2010
2008
Year Ended December 31,
2009
(In thousands)
$(11,676)
(3,748)
6,804
—
—
4,355
137
$ (4,128)
$(10,278)
(3,310)
2,682
(2,061)
892
—
399
$(11,676)
As of December 31, 2010, we had $11.0 million of unrecognized tax benefits of which $7.8 million, if fully
recognized, would affect our effective tax rate. We anticipate a decrease of $499,000 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, 2010, December 31, 2009, and December 31, 2008, we had accrued $82,000,
$75,000 and $1.4 million, respectively, for the payment of interest and penalties.
We may be subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2007 through
2010. 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 2010. 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
In August 2010, we commenced an underwritten public offering of 4,000,000 shares of our common stock,
conducted pursuant to an effective registration statement filed with the Securities and Exchange Commission on
December 8, 2008. In connection with the offering, we granted the underwriters an overallotment option to purchase
up to 350,000 shares, and the single selling stockholder, the Molina Siblings Trust, granted the underwriters an
option to purchase up to 250,000 shares. The overallotment option was subsequently exercised in August 2010. Our
chief financial officer, John Molina, is the trustee of the Molina Siblings Trust, with sole voting and investment
power. Dr. J. Mario Molina, our president and chief executive officer and the brother of John Molina, is a beneficiary
of the Molina Siblings Trust, as is John Molina and each of his other three siblings.
We issued 4,350,000 shares in connection with the offering, including the overallotment option. Net of the
issuance costs, proceeds from the offering totaled $111.1 million, or approximately $25.55 per share, resulting in an
increase to additional paid-in capital. We used the net proceeds of the offering to repay the outstanding indebtedness
under the Credit Facility and for general corporate purposes. We did not receive any proceeds from the sale of shares
by the selling stockholder.
In connection with the plans described in Note 16, “Stock Plans,” we issued approximately 352,000 shares and
234,000 shares of common stock, net of shares retired to settle employees’ income taxes, for the years ended
101
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2010 and 2009, respectively. This resulted in increases to additional paid-in capital of $10.6 million,
and $7.8 million, both net of deferred taxes, as of December 31, 2010, and December 31, 2009, respectively.
Under the purchase program described in Note 12, “Long-Term Debt,” we 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 increased diluted earnings per share for the year ended December 31, 2009 by $0.04.
In 2009, we retired the $27.7 million of treasury shares purchased in 2009, and we also retired $20.4 million of
treasury shares that were purchased prior to 2009 ($48.1 million in aggregate), which reduced additional paid-in
capital.
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 $5.9 million, $4.7 million and
$3.9 million in the years ended December 31, 2010, 2009, and 2008, 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 4.4 million shares reserved for issuance under the
2002 Plan as of January 1, 2010.
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 109,800 and
120,300 shares of our common stock during the years ended December 31, 2010 and 2009, 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 3.7 million as of December 31, 2010, and 3.8 million as of December 31,
2009.
102
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:
2010
Year Ended December 31,
2009
2008
Pretax
Charges
Net-of-Tax
Amount
Pretax
Charges
Pretax
Charges
Pretax
Charges
Net-of-Tax
Amount
$8,007
$5,044
$5,789
$3,589
$5,171
$3,206
Restricted stock awards. . . . . . . . .
Stock options (including expense
relating to our ESPP) . . . . . . . .
1,524
960
1,696
1,052
2,640
1,637
Total . . . . . . . . . . . . . . . . . . . . . .
$9,531
$6,004
$7,485
$4,641
$7,811
$4,843
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, 2010, there was $12.5 million of unrecognized compensation cost
related to unvested restricted stock awards, which we expect to recognize over a weighted-average period of
2.5 years. This unrecognized compensation cost assumes an estimated forfeiture rate of 7.8% as of December 31,
2010. Also as of December 31, 2009, there was $0.2 million of unrecognized compensation expense related to
unvested stock options, which we expect to recognize over a weighted-average period of 0.3 years.
The total fair value of restricted shares vested during the years ended December 31, 2010, 2009, and 2008 was
$6.4 million, $3.2 million, and $2.5 million, respectively. Unvested restricted stock activity for the year ended
December 31, 2010 was as follows:
Unvested balance as of December 31, 2009. . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
687,630
554,475
(271,381)
(134,975)
Unvested balance as of December 31, 2010. . . . . . . . . . . . . . . . . . . .
835,749
Weighted-
Average Grant Date
Fair Value
$24.64
$22.95
$25.95
$23.26
$23.32
The total intrinsic value of stock options exercised during the year ended December 31, 2010 was $0.3 million.
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. Stock option activity for the year ended
December 31, 2010 was as follows:
Outstanding at December 31, 2009 . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Options
650,739
(64,662)
(72,463)
Outstanding at December 31, 2010 . . . . . . . . . . . .
513,614
Weighted-
Average
Exercise
Price
$30.25
$24.16
$33.24
$30.59
Exercisable and expected to vest at December 31,
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
512,381
$30.59
Exercisable at December 31, 2010 . . . . . . . . . . . .
468,564
$30.47
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
(000s)
4.9
4.9
4.7
$528
$528
$528
103
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,
2010:
Range of Exercise Prices
$16.98 - $28.66 . . . . . . . . . . . . . . . .
$29.17 - $32.58 . . . . . . . . . . . . . . . .
$33.56 - $44.29 . . . . . . . . . . . . . . . .
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)
Number
Outstanding
243,889
174,950
94,775
513,614
4.1
6.0
4.7
Weighted-
Average
Exercise
Price
$26.13
$31.33
$40.71
Options Exercisable
Weighted-
Average
Exercise
Price
$28.66
$31.23
$39.73
Number
Exercisable
243,889
135,200
89,475
468,564
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, 2010, and 2009, our carrying amount for this investment totaled $4.4 million, and $4.1 million,
respectively. For the years ended December 31, 2010, 2009 and 2008, we paid $22.0 million, $21.8 million, and
$15.4 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”). Until
October 2010, Pacific Hospital was 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 $1.0 million, $0.7 million, and $0.2 million, for the years ended December 31, 2010, 2009 and
2008, respectively. As of October 2010, Pacific Hospital is no longer owned by Abrazos Healthcare, Inc. or any
other related party to the Company.
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,
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 28,004
23,794
20,349
17,366
13,671
30,622
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$133,806
Rental expense related to these leases amounted to $25.1 million, $20.8 million, and $17.5 million for the years
ended December 31, 2010, 2009, and 2008, respectively.
104
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employment Agreements
In 2002 we entered into employment agreements with our Chief Executive Officer and Chief Financial Officer,
which have been amended and restated as of December 31, 2009. These employment agreements had initial terms
of one to three years and are subject to automatic one-year extensions thereafter. Should the executives be
terminated without cause or resign for good reason before a change of control, as defined, we will pay one year’s
base salary and termination bonus, as defined, in addition to full vesting of 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 the
executives are terminated for cause, no further payments are due under the contracts.
If termination occurs within two years following a change of control, the executives 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.
Legal Proceedings
The health care and business process outsourcing industries are subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and regulations can be subject to government
review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated
with violations of these laws and regulations include significant fines and penalties, exclusion from participating in
publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages,
including claims for punitive damages, which are not covered by insurance. The outcome of such legal actions is
inherently uncertain. Nevertheless, we believe that these actions, when finally concluded and determined, are not
likely to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Professional Liability Insurance
We carry medical professional liability insurance for health care services rendered through our clinics in
California, Virginia and Washington. Claims-made coverage under the policies for California and Washington is
$1.0 million per occurrence with an annual aggregate limit of $3.0 million for Washington, beginning in 2010, and
for California, each of the years ended December 31, 2010, 2009 and 2008. Claims-made coverage under the
Virginia policy is $2.0 million per occurrence with an annual aggregate limit of $6.0 million for each of the years
ended December 31, 2010 and 2009, and beginning July 1, 2008. 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.
105
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Regulatory Capital and Dividend Restrictions
Our principal operations are conducted through our health plan subsidiaries operating in California, Florida,
Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington and Wisconsin. 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
$397.8 million at December 31, 2010, and $368.7 million at December 31, 2009. The National Association of
Insurance Commissioners, or NAIC, adopted rules effective December 31, 1998, which, if implemented by the
states, set minimum capitalization requirements for insurance companies, HMOs and other entities bearing risk for
health care coverage. The requirements take the form of risk-based capital (RBC) rules. Michigan, Missouri, New
Mexico, Ohio, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to
state. California and Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not
formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may
increase the minimum capital required for those states.
As of December 31, 2010, our health plans had aggregate statutory capital and surplus of approximately
$416.6 million compared with the required minimum aggregate statutory capital and surplus of approximately
$278.0 million. All of our HMOs were in compliance with the minimum capital requirements at December 31,
2010. 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. Segment Reporting
Our reportable segments are consistent with how we manage the business and view the markets we serve. In the
second quarter of 2010, we added a segment to our internal financial reporting structure as a result of the acquisition
of Molina Medicaid Solutions described in Note 4, “Business Combinations.” We now report our financial
performance based on the following two reportable segments — Health Plans and Molina Medicaid Solutions. The
Health Plans segment represents our former single-segment health plan operations. The Molina Medicaid Solutions
segment represents the operations of our new MMIS solutions business.
We rely on an internal management reporting process that provides segment information to the operating
income level for purposes of making financial decisions and allocating resources. The accounting policies of the
segments are the same as those described in Note 2, “Significant Accounting Policies.” The cost of services shared
106
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
between the Health Plans and Molina Medicaid Solutions segments is charged to the Health Plans segment.
Operating segment revenues and profitability were as follows:
Year ended December 31, 2010
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $3,989,909
89,809
6,259
— 89,809
—
6,259
Molina
Medicaid
Solutions
(In thousands)
Total
Health Plans
$3,989,909
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,996,168
$89,809
$4,085,977
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 102,392
$ 2,609
$ 105,001
Year ended December 31, 2009
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,660,207
—
9,149
$ — $3,660,207
—
9,149
—
—
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,669,356
$ — $3,669,356
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
51,934
$ — $
51,934
Year ended December 31, 2008
Premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,091,240
—
21,126
$ — $3,091,240
—
21,126
—
—
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,112,366
$ — $3,112,366
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 107,555
$ — $ 107,555
Reconciliation to Income before Income Taxes
Segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,001
(15,509)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Year Ended December 31,
2009
(In thousands)
$ 51,934
(13,777)
$107,555
(13,231)
2008
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,492
$ 38,157
$ 94,324
Segment Assets
As of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,333,599
Health Plans
Molina
Medicaid
Solutions
(In thousands)
$175,615
Total
$1,509,214
As of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,244,035
$
— $1,244,035
107
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2010 and
2009.
Premium revenue . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(1):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
For The Quarter Ended
March 31,
2010
June 30,
2010
September 30,
2010
December 31,
2010
(In thousands)
$965,220
—
20,438
17,081
10,590
$976,685
21,054
21,178
17,079
10,579
$1,005,115
32,271
29,953
25,353
16,173
$1,042,889
36,484
33,432
29,979
17,628
$
$
0.41
0.41
$
$
0.41
0.41
$
$
0.58
0.57
$
$
0.58
0.58
For The Quarter Ended
March 31,
2009
June 30,
2009
September 30,
2009
December 31,
2009
Premium revenue . . . . . . . . . . . . . . . . . . . . .
Service revenue . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss)(2) . . . . . . . . . . . . . .
Income (loss) before income taxes(2) . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share(1),(3):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$857,484
—
23,161
19,746
12,211
$925,507
—
19,488
16,265
14,565
$914,805
—
15,089
11,810
8,564
$
$
0.46
0.46
$
$
0.56
0.56
$
$
0.34
0.33
$962,411
—
(5,804)
(9,664)
(4,472)
$
$
(0.18)
(0.18)
(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, 2010 and 2009.
(2) Effective January 1, 2010, the Company has recorded the Michigan gross receipts tax as a premium tax and not
as an income tax. For each of the quarters in the year ended December 31, 2009, premium tax expense and
income tax expense have been reclassified to conform to this presentation.
(3) For the quarter ended December 31, 2009, no potentially dilutive options or unvested stock awards were
included in the computation of our diluted loss per share because to do so would have been anti-dilutive for that
period.
108
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
21. Condensed Financial Information of Registrant
Following are our parent company only condensed balance sheets as of December 31, 2010 and 2009, and our
condensed statements of income and condensed statements of cash flows for each of the three years in the period
ended December 31, 2010.
Condensed Balance Sheets
December 31,
2010
2009
(In thousands except per-
share data)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,020
2,000
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,928
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,006
19,059
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,009
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances to related parties and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98,022
81,445
58,719
6,046
702,096
16,397
$ 26,040
3,002
—
—
19,121
11,435
59,598
65,067
45,943
16,516
545,731
16,742
$962,725
$749,597
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,910
164,014
8,425
14,319
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,577
158,900
10,769
12,613
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
243,668
206,859
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized, outstanding 30,309 shares
at December 31, 2010 and 25,607 shares at December 31, 2009 . . . . . . . . . . . . . . .
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
26
—
251,627
(2,192)
469,592
—
129,902
(1,812)
414,622
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
719,057
542,738
$962,725
$749,597
109
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Income
2010
Year Ended December 31,
2009
(In thousands)
2008
Revenue:
Management fees and other operating revenue . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$238,883
1,153
$218,911
1,540
$190,538
2,733
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
240,036
220,451
193,271
Expenses:
Medical care costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,582
218,834
27,166
26,865
160,792
25,223
21,759
143,709
18,980
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
276,582
212,880
184,448
Gain on purchase of convertible senior notes . . . . . . . . . . . . . . . . . . . . . .
—
1,532
—
Operating (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes and equity in net income of subsidiaries . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss before equity in net income of subsidiaries . . . . . . . . . . . . . . . . .
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(36,546)
(15,500)
(52,046)
(16,936)
(35,110)
90,080
9,103
(13,770)
(4,667)
(3,755)
(912)
31,780
8,823
(13,167)
(4,344)
(456)
(3,888)
63,486
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 54,970
$ 30,868
$ 59,598
110
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Cash Flows
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Year Ended December 31,
2009
(In thousands)
2008
$ 19,380
$ 40,551
$ 17,532
70,800
(2,019)
14,083
(139,762)
(40,419)
(5,723)
829
21,960
(3,844)
12,669
(2,894)
(32,245)
(17,074)
(540)
42,872
(25,515)
56,833
(1,000)
(33,047)
(6,542)
3,170
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . .
102,211
(21,968)
36,771
Financing activities:
Proceeds from common stock offering, net of issuance costs . . . . . . . . . .
Amount borrowed under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of amount borrowed under credit facility . . . . . . . . . . . . . . . .
Treasury stock purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of credit facility fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from employee stock compensation . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock plan
111,131
105,000
(105,000)
—
—
—
— (27,712)
(9,653)
—
—
(1,671)
31
295
—
—
—
(49,940)
—
—
43
purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,056
2,015
2,084
Net cash provided (used in) by financing activities . . . . . . . . . . . . . . . . .
113,811
(35,319)
(47,813)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . .
30,980
26,040
(16,736)
42,776
6,490
36,286
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57,020
$ 26,040
$ 42,776
111
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 2010, 2009, and 2008 for these services totaled $238.5 million, $218.6 million, and
$190.4 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 2010, 2009, and 2008, the Registrant received dividends from its subsidiaries totaling $81.3 million,
$76.7 million, and $91.5 million, respectively. Such amounts have been recorded as a reduction to the investments
in the respective subsidiaries.
During 2010, 2009, and 2008, the Registrant made capital contributions to certain subsidiaries totaling
$10.5 million, $54.7 million, and $48.6 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, 2010 and 2009, the Registrant’s carrying amount for this investment
totaled $4.4 million and $4.1 million, respectively. For the years ended December 31, 2010, 2009 and 2008, the
Registrant paid $22.0 million, $21.8 million, and $15.4 million, respectively, for medical service fees to this
provider.
112
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Registrant is a party to a fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific
Hospital”). Until October 2010, Pacific Hospital was 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 $1.0 million, $0.7 million, and $0.2 million, for the years ended
December 31, 2010, 2009 and 2008, respectively. As of October 2010, Pacific Hospital is no longer owned by
Abrazos Healthcare, Inc. or any other related party to the Company.
113
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, 2010 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, 2010. 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.
Our management’s evaluation did not include an assessment of the effectiveness of internal control over financial
reporting at Molina Medicaid Solutions, which was acquired on May 1, 2010. The assets and net assets of Molina
Medicaid Solutions at December 31, 2010 were approximately $175.6 million and $133.1 million, respectively. Total
revenue and net income of Molina Medicaid Solutions included in our consolidated results of operations for the year
ended December 31, 2010 were approximately $89.8 million and $1.8 million, respectively. Our management has not
had sufficient time to make an assessment of this subsidiary’s internal control over financial reporting.
Based on our assessment, management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2010, 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 115 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, 2010.
Item 9B. Other Information
None.
114
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, 2010, 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.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, manage-
ment’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the
internal controls of Molina Medicaid Solutions (acquired May 1, 2010), which is included in the 2010 consolidated
financial statements of Molina Healthcare, Inc. and constituted $175.6 million and $133.1 million of total and net assets,
respectively, as of December 31, 2010, and $89.8 million and $1.8 million of revenues and net income, respectively, for
the year then ended. Our audit of internal control over financial reporting of Molina Healthcare, Inc. also did not include
an evaluation of the internal control over financial reporting of Molina Medicaid Solutions.
In our opinion, Molina Healthcare, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, 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, 2010 and 2009, and the
related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2010 and our report dated March 8, 2011 expressed an unqualified opinion thereon.
Los Angeles, California
March 8, 2011
/s/ ERNST & YOUNG LLP
115
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
(a) Directors of the Registrant
Information concerning our directors will appear in our Proxy Statement for our 2011 Annual Meeting of
Stockholders under “Proposal No. 1 — Election of Three Class III 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 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 2011 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 2011
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 2010, 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 2011 Annual Meeting under the captions
“Compensation Committee Interlocks,” “Non-Employee Director Compensation,” and “Compensation Discussion
and Analysis,” is incorporated herein by reference. The information which will appear in our Proxy Statement under
the caption “Compensation Committee Report” is not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information concerning the security ownership of certain beneficial owners and management will appear in
our Proxy Statement for our 2011 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.
116
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 2011 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 2011
Annual Meeting of Stockholders under “Disclosure of Auditor Fees.” This portion of our Proxy Statement is
incorporated herein by reference.
117
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 67 through 113 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, 2010 and 2009
Consolidated Statements of Income — Years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2010, 2009, and
2008
Consolidated Statements of Cash Flows — Years ended December 31, 2010, 2009, and 2008
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.
118
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 8th day of March, 2011.
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 8, 2011
John C. Molina
John C. Molina, J.D.
Director, Chief Financial Officer, and
Treasurer (Principal Financial Officer)
March 8, 2011
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 8, 2011
Director
March 8, 2011
Director
March 8, 2011
Director
March 8, 2011
Director
March 8, 2011
Director
March 8, 2011
Director
March 8, 2011
119
Introducing
Who knew there were so many doctors in the family?
Molina Medicaid Solutions, which was once a small part of a big
technology outsourcer, has become an important member of a
Medicaid service family that has been committed to delivering
quality care to mothers, families, children and seniors for more
than three decades.
Today, Molina provides Medicaid managed care and Medicaid
health care information management services to help our state
government partners meet the diverse needs of more than four
million Medicaid and Medicare beneficiaries in 15 states across
the country.
It also became the next chapter in a story about caring for people.
The story began in a small clinic in Long Beach, California when
Dr. C. David Molina founded our company on the principle
that every person deserves access to quality doctors, nurses and
hospitals. Dr. Molina believed every patient should be treated
like family. From that simple beginning, Molina Healthcare
has grown into one of the largest and most successful Medicaid
managed care companies in the United States.
We employ nearly 4,200 people nationally and are proud to be
known as a quality-focused organization and a committed, loyal
and trustworthy Medicaid and Medicare service provider to the
people, governments and communities we serve.
Though we have grown, we remain committed to the principles
of Dr. C. David Molina: treating every patient like a member of
the family. Molina Medicaid Solutions, welcome to the family!
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1980-2 0 1
0
“I hope that no one ever forgets that
it all began with a single clinic.”
C. David Molina, MD, MPH
Founder
(1926-1996)
200 oceangate, suite 100
long Beach, CA 90802
www.Molinahealthcare.com
© 2011 Molina healthcare, inc.
All rights reserved.
7843CoRp0311