Molina Healthcare Annual Report 2011

FY2011 Annual Report · Molina Healthcare

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AnnuAl
R e p oR t

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 1.7 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)

EBITDA1
($ millions)

1,697

1,613

1,455

1,256

1,149

$4,603

$3,990

$3,660

$3,091

$2,462

$166

$155

$141

$126

$90

Diluted Earnings Per Share
(split adjusted)

$1.43

$1.35

$1.32

$0.79

$0.452

‘07

‘08

‘09 ‘10

‘11

‘07

‘08

‘09 ‘10

‘11

‘07

‘08

‘09 ‘10

‘11

‘07

‘08

‘09 ‘10

‘11

1 eBItDA is a non-GAAp
financial measure.

2 includes non-cash Missouri
health plan impairment charge of
($1.34) per diluted share.

Annual Meeting

The annual meeting of stockholders will be held on
Wednesday, May 2, 2012, at 10:00 a.m. local time, at:

Molina Center
300 Oceangate, Suite 950
Long Beach, CA 90802

(562) 435-3666

Financial Highlights

(Amounts in thousands, except net income per share)
Revenue:

Premium revenue
Service revenue
Investment income
Rental income
Total revenue

Operating Costs and Expenses:

Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Depreciation and amortization

Total operating costs and expenses

Impairment of goodwill and intangible assets

Operating income
Interest expense
Income before income taxes
Provision for income taxes
Net income

Net income per share(1):

Basic
Diluted

Weighted average shares outstanding(1):

Basic
Diluted

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(2)
Effective tax rate

Year Ended
December 31,

2011

2010

$
$

4,603,407 $
160,447
5,539
547
4,769,940

3,859,994
143,987
415,932
154,589
50,690
4,625,192
64,575
80,173
15,519
64,654
43,836
20,818 $

0.45 $
0.45 $

45,756
46,425

81.7%
2.2%
83.9%
8.7%
3.4%
67.8%

3,989,909
89,809
6,259
—
4,085,977

3,370,857
78,647
345,993
139,775
45,704
3,980,976
—
105,001
15,509
89,492
34,522
54,970

1.34
1.32

41,174
41,631

82.4%
2.1%
84.5%
8.5%
3.5%
38.6%

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock split in the form of a stock dividend that

was effective May 20, 2011.

(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.

(3)

Computed as a percentage of total revenue.

Molina Healthcare | Annual Report 2011

To Our Stockholders

I am pleased to report that Molina Healthcare built upon a very successful
2010 and performed extremely well again last year. We entered 2011 with
a sound strategy that we executed in a way that improved our performance
and made us stronger. We laid foundations for future growth, achieving
certification of our Medicaid management information system in Maine,
winning large contract awards in Texas, serving more of the aged, blind
or disabled in California, and preparing for opportunities in many of our
states to serve those who are dually eligible for Medicaid and Medicare.

Though we operate in an extremely challenging and complex
reimbursement environment – where 60% of the states in which we do
business actually cut their premium rates in fiscal 2011 – we achieved
very positive financial results. Our cash flow from operations of $225
million in 2011 was a record for our company.

While we reported earnings of only $0.45 for the full year, those results
were severely impacted by a non-cash impairment charge associated
with the loss of our Missouri health plan contract, which will expire
without renewal on June 30, 2012. Were it not for the loss of our Missouri
contract, which represented only 5% of our 2011 revenue, we would have
reported diluted earnings per share of $1.79 for the year, which would
have also been another record for the Company.

A key driver of our performance in 2011 was our ability to manage
medical costs and hospital utilization by our members in ways that make
the most effective use of health care resources while ensuring access to
excellent care and promoting better overall health outcomes.

While our established health plans continued to grow, we also became
more firmly situated in key states such as Texas and Florida, where our
presence is relatively new. In addition, with the growth of our Medicaid
management information systems business, we strengthened our ability
to serve state government clients at multiple points on the Medicaid
continuum. We believe that as the need for cost-effective care leads states
to move more Medicaid beneficiaries into managed care programs, our
experience and proven performance, combined with our position as the
most diversified company in our industry, leave us well positioned to
capitalize on those opportunities.

Growing from a Position of Strength
In all but three of the states where we operate health plans, our programs
are well established. Such operational maturity is reflected in the success
of those plans as they’ve been able to apply the experience and expertise

they acquired over time, achieving growth and solid performance amid a
flat or decreasing reimbursement environment.

For example, at our Michigan health plan, one of our operationally mature
plans, we worked with hospitals on concurrent review and observation of
patients admitted to the emergency room. All too often, emergency room
visits turn into hospital admissions before a diagnosis has been confirmed.
We are helping turn more of those visits into one-day observation stays
and reducing unnecessary hospitalizations without compromising access
or quality of care. Our efforts in Michigan have been very successful in
helping us control costs, and now we are expanding this program to other
markets. It’s efforts like these that reduced our overall hospital utilization in
2011. For our members, that trend doesn’t mean less care; it means better
care. It means patients are receiving services that are more coordinated
and that their chronic conditions are managed in ways that help keep them
healthier and out of the hospital.

While our legacy plans performed strongly, we focused particular
attention on our newer plans in Florida, Texas and Wisconsin in 2011.
Even though newer markets present challenges, we did not lose our focus
on the long term. A small initial presence in a market impacts our ability
to negotiate with providers early on, but as we grow in size and build
relationships over time, stronger performance follows. In Florida, despite
severe reimbursement pressures, our plan’s year-over-year performance
improved between 2010 and 2011. Our strong management team
there has implemented a comprehensive medical cost-reduction plan
that will lay the groundwork for even better performance in the state
moving forward. In Texas, we faced a short-term challenge in the form
of high utilization. Here, too, we are following a comprehensive cost
management approach that addresses provider issues, utilization and
unit costs. At the same time we are steadily growing our market presence
in Texas, which will strengthen our position there as the state expands
its Medicaid managed care program. Last year, we won new contracts
to administer the STAR and STAR+PLUS programs in the El Paso and
Hidalgo (South Rio Grande Valley) service areas, as well as the STAR and
CHIP programs in the Dallas service area.

A Continuum of Services — and New Opportunities
We believe we have gained a real competitive advantage in recent years
by greatly increasing our ability to serve clients more comprehensively.

Along with beneficiaries of the TANF (Temporary Assistance to Needy
Families) program, who make up nearly 80% of our plan membership,

Molina Healthcare | Annual Report 2011

we also serve a fast growing number of aged, blind or disabled (ABD)
patients, along with recipients of the Children’s Health Insurance
Program (CHIP) – uninsured children whose parents do not qualify for
Medicaid – and a relatively small but strategically important group of
dual eligibles who qualify for both Medicaid and Medicare.

Starting in 2010, we broadened the scope of our services – and the
foundation on which to build future growth – with our entry into the
Medicaid management information systems business. Through Molina
Medicaid Solutions (MMS), which processes Medicaid transactions
and delivers related IT services to state clients, we diversified our
services, expanded our presence to five new states, and positioned
ourselves to pursue opportunities in states that lack Medicaid managed
care programs. We diversified our revenue streams, too, establishing
Molina in a fee-based, non-risk side of the Medicaid field. The business
is focused on the same Medicaid agency client base as our traditional
managed care plans, is scalable, and leverages our technology platform.
State Medicaid agencies can now enjoy an integrated solution to manage
the care of their Medicaid beneficiaries, administer the flow of related
information seamlessly, meet new coding requirements, meet emerging
standards for combating fraud and abuse, and ensure good stewardship
over public dollars.

Making the Most of Medicaid Growth
We compete in an industry that is both large and growing and
within that industry, the government health care sector, where the
opportunities are especially attractive. Today, state governments face
no bigger economic issue than rising health care costs. In fact, most
states now spend more on health care than they devote to public
education. We believe that for the foreseeable future, fiscal pressures
on the states will continue to intensify. Enhanced federal matching
funds, which provided some temporary relief to state budgets, have
expired. Meanwhile, we expect that the expansion of Medicaid under
the Affordable Care Act will bring 16 million more Americans into
the program by 2019. The absolute necessity to control these costs will
drive more states to shift their Medicaid patients from costly, reactive
and episodic fee-for-service models into managed care. As a result
of these converging trends, the Medicaid pipeline across the country
continues to expand. We also believe that because of our experience,
track record for effectively managing both costs and utilization, and
our diversified suite of services, Molina is poised to capitalize on this
growing opportunity.

Molina Healthcare | Annual Report 2011

We are positioned even more strongly to capitalize on the growth of
managed care services to the dual-eligible population. Dual eligibles
are individuals who qualify for both Medicare and Medicaid services.
Medicare covers hospitalization, physician services, lab and x-ray
services, durable medical equipment, as well as outpatient and other
services. Medicaid, on the other hand, covers their Medicare premiums
and cost sharing, and – for those below certain income and asset
thresholds – long-term care services and prescription drugs.

While dual eligibles account for approximately 15% of Medicaid enrollees
nationwide, they contribute almost 40% of the cost – an estimated
$300 billion each year. They also tend to have multiple chronic health
conditions, including a higher than average degree of behavioral health
issues. These patients are forced to navigate a system with two sets of
providers, benefits, and even enrollment cards. This fragmentation
can result in unnecessary, duplicative, or missed services. As a result,
Medicare and Medicaid spending on these patients is five times higher
than that for Medicare beneficiaries. As the federal government now
clearly recognizes, dual eligibles are ideal candidates for managed care.

We are uniquely situated to serve this population, which represents a
natural extension of our business. Our dual-eligible Medicare special needs
plan ranks as the eighth-largest in the country. We are already established
in the three states with the largest dual-eligible populations: California,
Florida and Texas. These states are also among those to which the Centers
for Medicare & Medicaid Services (CMS) has awarded planning grants
for migrating dual-eligible beneficiaries into managed care. These three
states also stand to experience the greatest growth in traditional Medicaid
managed care patients over the next five years. While dual eligibles
currently comprise just 2% of our members, they represent a great growth
opportunity for us, and we intend to make the most of it.

Diversification through Primary Care
Of course, let’s not forget that Molina Healthcare is among the very
few companies in our field with its own primary care clinics, providing
another strategically important element of diversification. What some
might view as a legacy actually provides us with a unique advantage that
we believe will become more important over time, given the trends that
affect our industry. For example, the proposed expansion of Medicaid
in the coming years, combined with an increasingly aging population,
will exacerbate the shortage of physicians who serve Medicaid patients.
We have the ability, however, to strategically situate clinics in areas of
physician shortages, providing our members with quick, consistent

Molina Healthcare | Annual Report 2011

Looking to the Longer Term
Molina Healthcare began in 1980 with a mission to bring quality care to
those who need it most, but can least afford it. It is at the heart of our
organizational culture. Over three decades, we’ve remained committed to
that mission as we’ve grown from a single primary care clinic in Southern
California into a company with a national footprint. It is at the core of
what makes Molina different and, we believe, the biggest single reason for
our success. As we look toward an evolving health care marketplace that
is moving steadily in our direction, we can draw on a unique combination
of strengths: a legacy of physician-focused leadership; exceptional
experience in the industry; a flexible delivery model that includes health
plans, fiscal agents and direct delivery of care; and the most diversified
service offerings and revenue sources in our field. No other health care
organization can say that.

Our results for 2011 demonstrate that we are following the right approach
for this environment and that the underlying fundamentals of our
business continue to support our strategies and aspirations for the future.

We look forward to taking the next, exciting steps toward realizing those
aspirations during 2012, and we are grateful, as ever, for your support and
investment in our success.

Sincerely,

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

access to salaried staff physicians. In addition, having our own clinics
better equips us to serve certain patient populations, such as aged, blind
or disabled recipients and dual eligibles – market segments that are of
growing importance to us. Our clinics also help us to maintain greater
control over costs and achieve better economies of scale, because they
tend to see large volumes of similar types of patients. Finally, we have
learned through experience that seeing our plan members in our clinics
correlates with higher HEDIS scores (a tool used by health plans to
measure performance on a range of dimensions of care and service),
improved patient satisfaction, greater loyalty to the Molina brand name
and, most important of all, quality outcomes.

At the beginning of last year, we operated 21 clinics in California, Washington
and Virginia. During 2012 we have plans to open up approximately 15
more clinics in California, Utah, New Mexico, Texas, Florida and Ohio.
While we will never seek to supplant our provider network of primary
care physicians, we are slowly, carefully and selectively adding to the
number of primary care facilities we operate, and we are investing in the
corporate infrastructure to fuel more of this strategic growth.

The Quality Imperative
Though managing medical costs is essential to our business, we
remain equally focused on quality: quality care (and access to care),
quality outcomes as well as quality cost management and information
management for state clients. To us, quality also means accurate, timely
payments to providers that minimize administrative red tape. As of
the end of the year, nine of our ten Medicaid health plans had earned
quality accreditations from the national committee for quality assurance
(NCQA), this designation continues to represent the gold standard for
quality-of-care accreditation agencies.

But, for us, NCQA accreditation is not the ultimate measure; it is
only a milestone. From the beginning, quality has been a part of
Molina Healthcare’s corporate DNA. We also measure quality by the
improvement in our HEDIS scores and by the level of patient satisfaction.
And, we know that, no matter how well we measure up, there is always
room to perform even better. Accordingly, we will make an even more
coordinated effort over the next several years to work closely with our
members as well as our providers so we can better understand – and
respond to – their needs.

In other words, we continue to draw on our long experience to create
wins for all our stakeholders.

Molina Healthcare | Annual Report 2011

Corporate Information

Board of Directors

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

John P.
Szabo, Jr.
Private
Investor

Sally K.
Richardson
Exec Director,
Institute for
Health Policy;
Research
Associate &
VP, Health
Services Ctr of
WV University

Steven
Orlando,
CPA
Founder,
Orlando
Consulting

Charles Z.
Fedak,
CPA, MBA
Founder,
Charles Z. Fedak
& Co., CPAs

Frank E.
Murray, MD
Retired Private
Practitioner

Garrey E.
Carruthers,
Ph.D.
Dean,
College of Business
of New Mexico
State University

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

Joseph W. White, CPA, MBA
Chief Accounting Officer

Jeff Barlow, JD, MPH
General Counsel and Corporate Secretary

Richard A. Hopfer, Jr.
Chief Information Officer

Stephen O’Dell, MHSA
Senior Vice President, Growth & Corpo-
rate Development

Juan José Orellana, MBA
Vice President, Marketing &
Investor Relations

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, 2011.

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.

Molina Healthcare | Annual Report 2011

SECURITIES AND EXCHANGE COMMISSION

UNITED STATES

Washington, D.C. 20549

Form 10-K

(Mark One)

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-31719

MOLINA HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

13-4204626

(I.R.S. Employer

Identification No.)

200 Oceangate, Suite 100, Long Beach, California 90802

(Address of principal executive offices)

(562) 435-3666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. È Yes ‘ No

Act. ‘ Yes È 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. È Yes ‘ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,

every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the

preceding 12 months (or for such shorter period that the registrant was required to submit and post such

files). ‘ Yes ‘ 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 È

Non-accelerated filer ‘ (Do not check if a smaller reporting company)

Accelerated filer

‘

Smaller reporting company ‘

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). ‘ Yes È No

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2011, the last business

day of our most recently completed second fiscal quarter, was approximately $731 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, 2011).

As of February 24, 2012, approximately 45,838,000 shares of the registrant’s Common Stock, $0.001 par value per

share, were outstanding.

Portions of the registrant’s Proxy Statement for the 2012 Annual Meeting of Stockholders to be held on May 2, 2012,

are incorporated by reference into Part III of this Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

‘ 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
Common Stock, $0.001 Par Value

Name of Each Exchange on Which Registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. È Yes ‘ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ‘ Yes È 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. È Yes ‘ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). ‘ Yes ‘ 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 È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). ‘ Yes È No
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2011, the last business
day of our most recently completed second fiscal quarter, was approximately $731 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, 2011).
As of February 24, 2012, approximately 45,838,000 shares of the registrant’s Common Stock, $0.001 par value per
share, were outstanding.

Accelerated filer
‘
Smaller reporting company ‘

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2012 Annual Meeting of Stockholders to be held on May 2, 2012,
are incorporated by reference into Part III of this Form 10-K.

MOLINA HEALTHCARE, INC.

PART I

Table of Contents
Form 10-K

PART I

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

PART II

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

Item 8. Financial Statements and Supplementary Data

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

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Signatures

Page

124

125

127

128

129

Item 1: Business

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 currently consists of 17 primary care community clinics in California, two clinics

in Washington, and three county-owned clinics in Fairfax County, Virginia that we manage on behalf of the

county. 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 currently 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

approximately 1.7 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

MOLINA HEALTHCARE, INC.

PART I

Table of Contents

Form 10-K

PART I

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

Equity Securities

Item 6. Selected Financial Data

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

PART III

Item 11. Executive Compensation

Matters

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Signatures

Page

124

125

127

128

129

Item 1: Business

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 currently consists of 17 primary care community clinics in California, two clinics
in Washington, and three county-owned clinics in Fairfax County, Virginia that we manage on behalf of the
county. 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 currently 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
approximately 1.7 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 under the “investors” tab of 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 of any stockholder to our Investor Relations
department at the address of our executive offices set forth above. In accordance with New York Stock
Exchange, or NYSE, rules, on May 26, 2011, 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 and motherhood matters!sm

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 currently
about 59 percent, and ranges from a federally established FMAP floor of 50 percent to as high as 74 percent.

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.

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

procedures in place to perform a large number of crucial functions, including the determination of eligibility and

the reimbursement of medical providers for services provided. This requirement exists regardless of whether a

state has adopted a fee-for-service or a managed care delivery model. MMIS are used by states to support these

administrative activities. The federal government typically reimburses the states for 90% of the costs incurred in

the 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 2011, 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, 2011 was approximately 31,000 members. Our 2011 premium revenues from Medicare

across all health plans represented approximately 8.4% of our total premium revenues.

Overall, approximately 79% of our members are TANF, 11% are ABD, 8% are CHIP, and 2% are Medicare.

Our Strengths

We focus on serving low-income families and individuals who receive health care benefits through

government-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

administration 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

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 under the “investors” tab of 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 of any stockholder to our Investor Relations

department at the address of our executive offices set forth above. In accordance with New York Stock

Exchange, or NYSE, rules, on May 26, 2011, 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 and motherhood matters!sm

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 currently

about 59 percent, and ranges from a federally established FMAP floor of 50 percent to as high as 74 percent.

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.

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
procedures in place to perform a large number of crucial functions, including the determination of eligibility and
the reimbursement of medical providers for services provided. This requirement exists regardless of whether a
state has adopted a fee-for-service or a managed care delivery model. MMIS are used by states to support these
administrative activities. The federal government typically reimburses the states for 90% of the costs incurred in
the 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 2011, 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, 2011 was approximately 31,000 members. Our 2011 premium revenues from Medicare
across all health plans represented approximately 8.4% of our total premium revenues.

Overall, approximately 79% of our members are TANF, 11% are ABD, 8% are CHIP, and 2% are Medicare.

Our Strengths

We focus on serving low-income families and individuals who receive health care benefits through

government-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
administration 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 acquisition of our New Mexico 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.

Recognition for Quality of Care. The National Committee for Quality Assurance, or NCQA, has accredited
nine of our ten Medicaid managed care plans. Our Wisconsin plan acquired in September 2010 currently plans to
seek NCQA accreditation in early 2014. 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
1.7 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 management, care coordination and health education programs that address the particular health care
needs of our members. We also benefit from a thorough understanding of the cultural and linguistic needs of
Medicaid populations.

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 $16.8 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

centralized 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. The community clinic model offers an integrated approach that helps

us improve both the quality and cost-effectiveness of the care our members receive. Our direct delivery line of

business currently consists of 17 primary care community clinics in California, two in Washington, and three

county-owned clinics in Fairfax County, Virginia that we manage on behalf of the county. We will also be

opening up a clinic in each of New Mexico and Florida in March 2012, and intend to open up additional clinics

in California, New Mexico, Florida, Ohio, and Texas during 2012. 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 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. While we have no plans to become an

organization that fully integrates primary care delivery with our health plans, by leveraging our direct delivery

capability on a selective basis 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 two 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. However, in February 2012, CMS announced that it will postpone implementation of

ICD-10 and will be issuing shortly a notice with a new timeline governing the pace of implementation. Thus,

although delayed, the transition to ICD-10 is still expected to occur. 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 two 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.

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

transition of members from other health plans. The acquisition of our New Mexico 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.

Recognition for Quality of Care. The National Committee for Quality Assurance, or NCQA, has accredited

nine of our ten Medicaid managed care plans. Our Wisconsin plan acquired in September 2010 currently plans to

seek NCQA accreditation in early 2014. 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

1.7 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 management, care coordination and health education programs that address the particular health care

needs of our members. We also benefit from a thorough understanding of the cultural and linguistic needs of

Medicaid populations.

Our Strategy

objective, we intend to:

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

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 $16.8 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

centralized 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. The community clinic model offers an integrated approach that helps

us improve both the quality and cost-effectiveness of the care our members receive. Our direct delivery line of
business currently consists of 17 primary care community clinics in California, two in Washington, and three
county-owned clinics in Fairfax County, Virginia that we manage on behalf of the county. We will also be
opening up a clinic in each of New Mexico and Florida in March 2012, and intend to open up additional clinics
in California, New Mexico, Florida, Ohio, and Texas during 2012. 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 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. While we have no plans to become an
organization that fully integrates primary care delivery with our health plans, by leveraging our direct delivery
capability on a selective basis 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 two 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. However, in February 2012, CMS announced that it will postpone implementation of
ICD-10 and will be issuing shortly a notice with a new timeline governing the pace of implementation. Thus,
although delayed, the transition to ICD-10 is still expected to occur. 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 two 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.

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. For instance, on February 17, 2012, our Missouri health plan was
notified that it was not awarded a new contract under that state’s RFP, and therefore its contract will now expire
on June 30, 2012.

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
informational reporting; quality assurance; marketing; financial standards; timeliness of claims payments; health
education, wellness and prevention programs; safeguarding of member information; fraud and abuse detection
and reporting; grievance procedures; and organization and administrative systems. A health plan’s compliance
with these requirements is subject to monitoring by state regulators. A health plan is subject to periodic
comprehensive quality assurance evaluation by a third-party reviewing organization and generally by the
insurance department of the jurisdiction that licenses the health plan. 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 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!” 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 Diabetes”

is a diabetes disease management program. “Heart Health Living” is a cardiovascular disease management

program for members who have suffered from congestive heart failure, angina, heart attack, or high blood

pressure.

Educational Programs. Educational programs are an important aspect of our approach to health care

delivery. These programs are designed to increase awareness of various diseases, conditions, and methods of

prevention in a manner that supports our providers while meeting the unique needs of our members. For example,

we provide our members with information to guide them through various episodes of care. This information,

which is available in several languages, is designed to educate parents on the use of primary care physicians,

emergency rooms, and nurse call centers.

Pharmacy Management Programs. Our pharmacy management programs focus on physician education

regarding appropriate medication utilization and encouraging the use of generic medications. Our pharmacists

and medical directors work with our pharmacy benefits manager to maintain a formulary that promotes both

improved patient care and generic drug use. We employ full-time pharmacists and pharmacy technicians who

work with physicians to educate them on the uses of specific drugs, the implementation of best practices, and the

importance of cost-effective care.

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. For instance, on February 17, 2012, our Missouri health plan was

notified that it was not awarded a new contract under that state’s RFP, and therefore its contract will now expire

on June 30, 2012.

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

informational reporting; quality assurance; marketing; financial standards; timeliness of claims payments; health

education, wellness and prevention programs; safeguarding of member information; fraud and abuse detection

and reporting; grievance procedures; and organization and administrative systems. A health plan’s compliance

with these requirements is subject to monitoring by state regulators. A health plan is subject to periodic

comprehensive quality assurance evaluation by a third-party reviewing organization and generally by the

insurance department of the jurisdiction that licenses the health plan. 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 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!” 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 Diabetes”
is a diabetes disease management program. “Heart Health Living” is a cardiovascular disease management
program for members who have suffered from congestive heart failure, angina, heart attack, or high blood
pressure.

Educational Programs. Educational programs are an important aspect of our approach to health care
delivery. These programs are designed to increase awareness of various diseases, conditions, and methods of
prevention in a manner that supports our providers while meeting the unique needs of our members. For example,
we provide our members with information to guide them through various episodes of care. This information,
which is available in several languages, is designed to educate parents on the use of primary care physicians,
emergency rooms, and nurse call centers.

Pharmacy Management Programs. Our pharmacy management programs focus on physician education

regarding appropriate medication utilization and encouraging the use of generic medications. Our pharmacists
and medical directors work with our pharmacy benefits manager to maintain a formulary that promotes both
improved patient care and generic drug use. We employ full-time pharmacists and pharmacy technicians who
work with physicians to educate them on the uses of specific drugs, the implementation of best practices, and the
importance of cost-effective care.

Provider Network and Contract Management. The quality, depth, and scope of our provider network are

essential if we are to ensure quality, cost-effective care for our members. In partnering with quality, cost-
effective providers, we utilize clinical and financial information derived by our medical informatics function, as
well as the experience we have gained in serving Medicaid members to gain insight into the needs of both our
members and our providers. As we grow in size, we seek to strengthen our ties with high-quality, cost-effective
providers by offering them greater patient volume.

Plan Administration and Operations

Management Information Systems. All of our health plan information technology and systems operate on a

single platform. This approach avoids the costs associated with maintaining multiple systems, improves
productivity, and enables medical directors to compare costs, identify trends, and exchange best practices among
our plans. Our single platform also facilitates our compliance with current and future regulatory requirements.

The software we use is based on client-server technology and is scalable. We believe the software is
flexible, easy to use, and allows us to accommodate anticipated enrollment growth and new contracts. The open
architecture of the system gives us the ability to transfer data from other systems without the need to write a
significant amount of computer code, thereby facilitating the integration of new plans and acquisitions.

We have designed our corporate website with a focus on ease of use and visual appeal. Our website has a

secure ePortal which allows providers, members, and trading partners to access individualized data. The ePortal
allows the following self-services:

• Provider Self Services. Providers have the ability to access information regarding their members and

claims. Key functionalities include Check Member Eligibility, View Claim, and View/Submit
Authorizations.

• 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,

management companies, and individual IPAs — are able to exchange data files (such as those that may
be required by the Health Insurance Portability and Accountability Act of 1996, or HIPAA, or any
other proprietary format) with us using the file exchange functionality.

Best Practices. We continuously seek to promote best practices. Our approach to quality is broad,
encompassing traditional medical management and the improvement of our internal operations. We have staff
assigned full-time to the development and implementation of a uniform, efficient, and quality-based medical care
delivery model for our health plans. These employees coordinate and implement Company-wide programs and
strategic initiatives such as preparation of the Healthcare Effectiveness Data and Information Set, or HEDIS, and
accreditation by the NCQA. We use measures established by the NCQA in credentialing the physicians in our
network. We routinely use peer review to assess the quality of care rendered by providers. Nine of our ten health
plans are accredited by the NCQA. Our Wisconsin plan acquired in September 2010 currently plans to seek
NCQA accreditation in early 2014.

Claims Processing. All of our health plans operate on a single managed care platform for claims processing

(the QNXT 3.4 system).

Centralized Management Services. We provide certain centralized medical and administrative services to

our health plans pursuant to administrative services agreements, including medical affairs and quality
management, health education, credentialing, management, financial, legal, information systems, and human
resources services. Fees for such services are based on the fair market value of services rendered 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

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.

liability.

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

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

productivity, and enables medical directors to compare costs, identify trends, and exchange best practices among

our plans. Our single platform also facilitates our compliance with current and future regulatory requirements.

The software we use is based on client-server technology and is scalable. We believe the software is

flexible, easy to use, and allows us to accommodate anticipated enrollment growth and new contracts. The open

architecture of the system gives us the ability to transfer data from other systems without the need to write a

significant amount of computer code, thereby facilitating the integration of new plans and acquisitions.

We have designed our corporate website with a focus on ease of use and visual appeal. Our website has a

secure ePortal which allows providers, members, and trading partners to access individualized data. The ePortal

allows the following self-services:

• Provider Self Services. Providers have the ability to access information regarding their members and

claims. Key functionalities include Check Member Eligibility, View Claim, and View/Submit

Authorizations.

• 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,

management companies, and individual IPAs — are able to exchange data files (such as those that may

be required by the Health Insurance Portability and Accountability Act of 1996, or HIPAA, or any

other proprietary format) with us using the file exchange functionality.

Best Practices. We continuously seek to promote best practices. Our approach to quality is broad,

encompassing traditional medical management and the improvement of our internal operations. We have staff

assigned full-time to the development and implementation of a uniform, efficient, and quality-based medical care

delivery model for our health plans. These employees coordinate and implement Company-wide programs and

strategic initiatives such as preparation of the Healthcare Effectiveness Data and Information Set, or HEDIS, and

accreditation by the NCQA. We use measures established by the NCQA in credentialing the physicians in our

network. We routinely use peer review to assess the quality of care rendered by providers. Nine of our ten health

plans are accredited by the NCQA. Our Wisconsin plan acquired in September 2010 currently plans to seek

NCQA accreditation in early 2014.

(the QNXT 3.4 system).

Claims Processing. All of our health plans operate on a single managed care platform for claims processing

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 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

demonstrating 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;

• 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.

enforce laws and 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

demonstrating 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;

• 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 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, 2011, we had approximately 5,200 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., 53, 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., 47, 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, 61, 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 over 30 years

of health care management experience, including staff model clinic administration, provider contracting,

managed care operations, disease management, and home care. Prior to joining us, her professional experience

included regional responsibility at FHP, Inc. and multi-state responsibility as Regional Vice-President at

Maxicare; Partners National Health Plan, a joint venture of Aetna Life Insurance Company and Voluntary

Hospital Association (VHA); and Lincoln National. She has also served as Executive Vice President of Managed

Care at Matria Healthcare, President and Chief Operating Officer of Praxis Clinical Services, and as Western

Division President of AccentCare. She holds a Juris Doctorate from Stanford University, a Master’s degree in

Public Health from the University of California, Berkeley, and a Bachelor’s degree in Communications from

Northwestern University.

Joseph W. White, 53, 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 over 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.

Stephen T. O’Dell, 60, has served as our Senior Vice President, Growth & Corporate Development, since

December 2010. Mr. O’Dell is responsible for leading the Company’s strategic growth efforts, including mergers

and acquisitions, business development and health care reform readiness strategy and implementation. Prior to

this role, Mr. O’Dell served the Company as President and CEO of our California health plan and more recently

as a Regional Vice President overseeing the strategic direction and operations of our health plans in Washington,

Utah, New Mexico and Texas as well as the Company’s medical clinics in California. Mr. O’Dell has more than

30 years of executive experience in the managed health care industry. He has held executive positions at First

Consulting Group, Blue Cross Blue Shield of Colorado, Nevada and New Mexico and FHP International.

Mr. O’Dell holds a Master of Science degree in Health Administration from the University of Colorado Health

Sciences Center and a Bachelor of Arts degree in History from Lewis & Clark College in Oregon.

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 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, 2011, we had approximately 5,200 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., 53, 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., 47, 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, 61, 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 over 30 years
of health care management experience, including staff model clinic administration, provider contracting,
managed care operations, disease management, and home care. Prior to joining us, her professional experience
included regional responsibility at FHP, Inc. and multi-state responsibility as Regional Vice-President at
Maxicare; Partners National Health Plan, a joint venture of Aetna Life Insurance Company and Voluntary
Hospital Association (VHA); and Lincoln National. She has also served as Executive Vice President of Managed
Care at Matria Healthcare, President and Chief Operating Officer of Praxis Clinical Services, and as Western
Division President of AccentCare. She holds a Juris Doctorate from Stanford University, a Master’s degree in
Public Health from the University of California, Berkeley, and a Bachelor’s degree in Communications from
Northwestern University.

Joseph W. White, 53, 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 over 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.

Stephen T. O’Dell, 60, has served as our Senior Vice President, Growth & Corporate Development, since
December 2010. Mr. O’Dell is responsible for leading the Company’s strategic growth efforts, including mergers
and acquisitions, business development and health care reform readiness strategy and implementation. Prior to
this role, Mr. O’Dell served the Company as President and CEO of our California health plan and more recently
as a Regional Vice President overseeing the strategic direction and operations of our health plans in Washington,
Utah, New Mexico and Texas as well as the Company’s medical clinics in California. Mr. O’Dell has more than
30 years of executive experience in the managed health care industry. He has held executive positions at First
Consulting Group, Blue Cross Blue Shield of Colorado, Nevada and New Mexico and FHP International.
Mr. O’Dell holds a Master of Science degree in Health Administration from the University of Colorado Health
Sciences Center and a Bachelor of Arts degree in History from Lewis & Clark College in Oregon.

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. 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. 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. In fiscal year
2011, 47 states implemented at least one new policy to control Medicaid costs and 50 states planned to do so in
fiscal year 2012. Most states reported program reductions in multiple areas. However, the “maintenance of
eligibility” requirements under the Patient Protection and Affordable Care Act generally prohibit states from

restricting Medicaid eligibility or tightening enrollment procedures. States are also moving forward with a range

of delivery system changes and programmatic initiatives designed to improve care and control costs.

Headed into state fiscal year 2013 (which in most instances starts on July 1, 2012), states do not expect

revenue collections to recover to a level sufficient to avoid additional budget cuts. Already, 29 states have

projected or have addressed shortfalls totaling $44 billion for fiscal year 2013. Among them are California and

Texas, two of the most populous states in the country. Because Medicaid is one of the largest expenditures in

every state budget, and one of the fastest-growing, it is a prime target for cost-containment efforts. 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. These budgetary pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts

which could reduce our revenues and profit margins.

Moreover, some federal deficit reduction 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.

Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which,

among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in

spending reductions to Congress. The Joint Select Committee was tasked with proposing legislation to reduce the

United States federal deficit by $1.5 trillion for fiscal years 2012-2021 by December 23, 2011. Reductions in

Medicare and Medicaid spending were initially included as a part of these deficit reduction measures. On

September 19, 2011, President Obama presented his Plan for Economic Growth and Deficit Reduction to the

Joint Select Committee, which included $72 billion in Medicaid savings. The Joint Select Committee, however,

failed to propose legislation by the December 23, 2011 deadline. Therefore, approximately $1.2 trillion in

domestic and defense spending reductions will automatically begin on January 1, 2013 and will be split evenly

between domestic and defense spending. Payments to Medicare providers are included in the automatic spending

cuts; however, the Budget Control Act of 2011 provides that Medicare payments may be reduced by no more

than 2% and certain other programs, including Medicaid, would be exempt from the automatic spending cuts. At

this time, we are unable to determine how the automatic Congressional spending cuts will affect Medicare and

Medicaid reimbursement in the future. We also cannot predict the initiatives that may be adopted in the future or

their full impact. There likely will continue to be legislative and regulatory proposals at the federal and state

levels directed at containing or lowering the cost of health care that, if adopted, could potentially have a material

adverse effect on our business, financial condition, cash flows, or results of operations.

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

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. 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. 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. In fiscal year

2011, 47 states implemented at least one new policy to control Medicaid costs and 50 states planned to do so in

fiscal year 2012. Most states reported program reductions in multiple areas. However, the “maintenance of

eligibility” requirements under the Patient Protection and Affordable Care Act generally prohibit states from

restricting Medicaid eligibility or tightening enrollment procedures. States are also moving forward with a range
of delivery system changes and programmatic initiatives designed to improve care and control costs.

Headed into state fiscal year 2013 (which in most instances starts on July 1, 2012), states do not expect

revenue collections to recover to a level sufficient to avoid additional budget cuts. Already, 29 states have
projected or have addressed shortfalls totaling $44 billion for fiscal year 2013. Among them are California and
Texas, two of the most populous states in the country. Because Medicaid is one of the largest expenditures in
every state budget, and one of the fastest-growing, it is a prime target for cost-containment efforts. 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. These budgetary pressures may result in unexpected Medicaid, CHIP, or Medicare rate cuts
which could reduce our revenues and profit margins.

Moreover, some federal deficit reduction 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.

Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which,

among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in
spending reductions to Congress. The Joint Select Committee was tasked with proposing legislation to reduce the
United States federal deficit by $1.5 trillion for fiscal years 2012-2021 by December 23, 2011. Reductions in
Medicare and Medicaid spending were initially included as a part of these deficit reduction measures. On
September 19, 2011, President Obama presented his Plan for Economic Growth and Deficit Reduction to the
Joint Select Committee, which included $72 billion in Medicaid savings. The Joint Select Committee, however,
failed to propose legislation by the December 23, 2011 deadline. Therefore, approximately $1.2 trillion in
domestic and defense spending reductions will automatically begin on January 1, 2013 and will be split evenly
between domestic and defense spending. Payments to Medicare providers are included in the automatic spending
cuts; however, the Budget Control Act of 2011 provides that Medicare payments may be reduced by no more
than 2% and certain other programs, including Medicaid, would be exempt from the automatic spending cuts. At
this time, we are unable to determine how the automatic Congressional spending cuts will affect Medicare and
Medicaid reimbursement in the future. We also cannot predict the initiatives that may be adopted in the future or
their full impact. There likely will continue to be legislative and regulatory proposals at the federal and state
levels directed at containing or lowering the cost of health care that, if adopted, could potentially have a material
adverse effect on our business, financial condition, cash flows, or results of operations.

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. As a result, several state officials have stated that the fiscal
pressure that Medicaid puts on states is expected to increase if the federal health-care overhaul takes place in
2014. Although the federal government is required to pick up the costs for people newly eligible for the program,
many who are now eligible but not enrolled are expected to be drawn in, and states must shoulder part of those
costs.

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
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. The United States Supreme Court is scheduled to hear oral arguments
on certain aspects of these cases in March 2012, including the constitutionality of the individual mandate and of
the requirement imposed on states that they expand coverage under the Medicaid program. We cannot predict the
ultimate outcome of any of the litigation. Further, various Congressional leaders have indicated a desire to revisit
or repeal the health care reform law. 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. There have separately been a number of bills
introduced that would 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. Any
partial or complete repeal or amendment or implementation difficulties, or uncertainty regarding such events,
could materially and adversely impact our ability to capitalize on the opportunities presented by the ACA or may
cause us to incur additional costs of compliance.

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 $8 billion 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 2011 of 83.9% had been one percentage point higher, or
84.9%, our earnings for 2011 would have been approximately $0.25 per diluted share rather than our actual 2011
earnings of $0.45 per diluted share, a 44% 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, 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 2012 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.

An increased incidence of flu in 2012 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. An atypically high incidence of flu in 2012, 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

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. As a result, several state officials have stated that the fiscal

pressure that Medicaid puts on states is expected to increase if the federal health-care overhaul takes place in

2014. Although the federal government is required to pick up the costs for people newly eligible for the program,

many who are now eligible but not enrolled are expected to be drawn in, and states must shoulder part of those

costs.

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

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. The United States Supreme Court is scheduled to hear oral arguments

on certain aspects of these cases in March 2012, including the constitutionality of the individual mandate and of

the requirement imposed on states that they expand coverage under the Medicaid program. We cannot predict the

ultimate outcome of any of the litigation. Further, various Congressional leaders have indicated a desire to revisit

or repeal the health care reform law. 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. There have separately been a number of bills

introduced that would 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. Any

partial or complete repeal or amendment or implementation difficulties, or uncertainty regarding such events,

could materially and adversely impact our ability to capitalize on the opportunities presented by the ACA or may

cause us to incur additional costs of compliance.

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 $8 billion 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 2011 of 83.9% had been one percentage point higher, or

84.9%, our earnings for 2011 would have been approximately $0.25 per diluted share rather than our actual 2011

earnings of $0.45 per diluted share, a 44% 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, 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 2012 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.

An increased incidence of flu in 2012 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. An atypically high incidence of flu in 2012, 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 Ohio and
New Mexico health plans will be subject to competitive bidding during 2012. In the event the responsive bids of
our Ohio or New Mexico health plans or those of our 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, as shown by the recent loss of our Missouri contract. 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.

There are numerous risks associated with the expansion of our Texas health plan’s service areas and with
any other expansion into new markets.

Effective March 1, 2012, our Texas health plan will be expanding into three new service delivery areas,
representing the addition of approximately 148,000 additional members. 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, unfamiliarity with
managed care processes, and our lack of actuarial experience in setting appropriate reserve levels. In the event
the medical care costs of our Texas health plan or of our other 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 health plan could adversely
affect our business, financial condition, cash flows, or results of operations.

In the event the expected reduction in the rates paid to our California health plan is not finally
implemented, is not made effective retroactive to July 1, 2011, or is otherwise modified, our results of
operations may be affected.

California Assembly Bill 97, or AB 97, is legislation that was signed by Governor Jerry Brown on

March 24, 2011. Among other things, AB 97 proposes to effect a 10% reduction in Medi-Cal provider rates. The
California Department of Health Care Services has preliminarily indicated that the 10% rate reduction could be
effective retroactive to July 1, 2011. The Company believes that this reduction in provider payments, if effected,
will translate into a premium reduction of approximately 3.5% for the California health plan.

The proposed rate reduction was submitted for approval to CMS, and on October 27, 2011, CMS indicated

its general approval of the rate cut. However, the United States District Court for the Central District of
California issued a series of injunctions barring the California Department of Health Care Services from
implementing the rate reductions as to various classes of providers. The California Department of Health Care
Services recently reported that CMS asked for a delay of the submission of the AB 97 managed care rates to
allow CMS to research its authority to review and approve the AB 97 managed care rates in light of the current
fee-for-service injunction.

If the proposed rate cut is not finally implemented, if it is not made retroactive to July 1, 2011, or if it is

otherwise modified from its current form, the results of our California health plan could be affected — positively

or negatively — depending on the action taken. In addition, recoveries from providers related to any final

implemented rate cut could also affect the results of our California health plan.

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 ten state health plans, and as of June 30, 2012, when the

contract of our Missouri health plan is scheduled to end, we will derive premium revenues from nine state health

plans. If we were unable to continue to operate in any of those nine states, or if our current operations in any

portion of the states we are in were significantly curtailed, our revenues could decrease materially. Our reliance

on operations in a limited number of states could cause our revenue and profitability to change suddenly and

unexpectedly, depending on an abrupt loss of membership, significant rate reductions, a loss of a material

contract, legislative actions, changes in Medicaid eligibility methodologies, catastrophic claims, an epidemic or

an unexpected increase in utilization, general economic conditions, and similar factors in those states. Our

inability to continue to operate in any of the states in which we currently operate, or a significant change in the

nature of our existing operations, could adversely affect our business, financial condition, cash flows, or results

of operations.

There are performance risks and other risks associated with certain provisions in the state Medicaid

contracts of several of our health plans.

The state contracts of our New Mexico, Ohio, Texas, and Wisconsin 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.

In addition, the state contracts of our California, 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

sometimes complicated contract provisions at issue, the health plan could be required to adjust the amount of its

to enter our markets through the competitive bidding process. For instance, the state contract of our Ohio and

New Mexico health plans will be subject to competitive bidding during 2012. In the event the responsive bids of

our Ohio or New Mexico health plans or those of our 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, as shown by the recent loss of our Missouri contract. 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.

There are numerous risks associated with the expansion of our Texas health plan’s service areas and with

any other expansion into new markets.

Effective March 1, 2012, our Texas health plan will be expanding into three new service delivery areas,

representing the addition of approximately 148,000 additional members. 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, unfamiliarity with

managed care processes, and our lack of actuarial experience in setting appropriate reserve levels. In the event

the medical care costs of our Texas health plan or of our other 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 health plan could adversely

affect our business, financial condition, cash flows, or results of operations.

In the event the expected reduction in the rates paid to our California health plan is not finally

implemented, is not made effective retroactive to July 1, 2011, or is otherwise modified, our results of

operations may be affected.

California Assembly Bill 97, or AB 97, is legislation that was signed by Governor Jerry Brown on

March 24, 2011. Among other things, AB 97 proposes to effect a 10% reduction in Medi-Cal provider rates. The

California Department of Health Care Services has preliminarily indicated that the 10% rate reduction could be

effective retroactive to July 1, 2011. The Company believes that this reduction in provider payments, if effected,

will translate into a premium reduction of approximately 3.5% for the California health plan.

The proposed rate reduction was submitted for approval to CMS, and on October 27, 2011, CMS indicated

its general approval of the rate cut. However, the United States District Court for the Central District of

California issued a series of injunctions barring the California Department of Health Care Services from

implementing the rate reductions as to various classes of providers. The California Department of Health Care

Services recently reported that CMS asked for a delay of the submission of the AB 97 managed care rates to

allow CMS to research its authority to review and approve the AB 97 managed care rates in light of the current

fee-for-service injunction.

If the proposed rate cut is not finally implemented, if it is not made retroactive to July 1, 2011, or if it is
otherwise modified from its current form, the results of our California health plan could be affected — positively
or negatively — depending on the action taken. In addition, recoveries from providers related to any final
implemented rate cut could also affect the results of our California health plan.

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 ten state health plans, and as of June 30, 2012, when the

contract of our Missouri health plan is scheduled to end, we will derive premium revenues from nine state health
plans. If we were unable to continue to operate in any of those nine states, or if our current operations in any
portion of the states we are in were significantly curtailed, our revenues could decrease materially. Our reliance
on operations in a limited number of states could cause our revenue and profitability to change suddenly and
unexpectedly, depending on an abrupt loss of membership, significant rate reductions, a loss of a material
contract, legislative actions, changes in Medicaid eligibility methodologies, catastrophic claims, an epidemic or
an unexpected increase in utilization, general economic conditions, and similar factors in those states. Our
inability to continue to operate in any of the states in which we currently operate, or a significant change in the
nature of our existing operations, could adversely affect our business, financial condition, cash flows, or results
of operations.

There are performance risks and other risks associated with certain provisions in the state Medicaid
contracts of several of our health plans.

The state contracts of our New Mexico, Ohio, Texas, and Wisconsin 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.

In addition, the state contracts of our California, 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
sometimes complicated 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.

operations.

Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of
authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider
network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract
and process claims. Often, we are also required to contribute significant capital to fund mandated net worth
requirements, performance bonds or escrows, or contingency guaranties. If we 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. In January 2012, State Controller
John Chiang warned that the State of California could run out of cash by March 2012 if quick action was not
taken. Mr. Chiang added that revenue is $2.6 billion lower than projected for California’s 2012 fiscal year while
spending is higher by about the same amount. In a monthly report released by Mr. Chiang in February 2012
covering California’s cash balance, receipts and disbursements for the prior month, it was noted that monthly
revenues for the month of January had come in $528 million below the latest projections contained in the
Governor’s proposed 2012-13 budget and when compared against the 2011-12 Budget Act, January revenues
were $1.2 billion below estimates. While the State Assembly of California passed a bill permitting short term

borrowing from existing funds held by certain state departments in order to get the State of California through

what is expected to be a seven-week cash shortfall, and though California also has access to an additional $865

million of internal borrowable funds due to recent legislation (SB 95) signed by the Governor, the State also

warned that one of the consequences of such short term borrowing would be the delay of payments to providers

of state services, including Medi-Cal. 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

Difficulties in executing our acquisition strategy could adversely affect our business.

The acquisitions of other health plans and the assignment and assumption of Medicaid contract rights of

other health plans have accounted for a significant amount of our growth over the last several years. Although we

cannot predict with certainty our rate of growth as the result of acquisitions, we believe that additional

acquisitions of all sizes will be important to our future growth strategy. Many of the other potential purchasers of

these assets — particularly operators of large commercial health plans — have significantly greater financial

resources than we do. Also, many of the sellers may insist on selling assets that we do not want, such as

commercial lines of business, or may insist on transferring their liabilities to us as part of the sale of their

companies or assets. Even if we identify suitable targets, we may be unable to complete acquisitions on terms

favorable to us or obtain the necessary financing for these acquisitions. For these reasons, among others, we

cannot provide assurance that we will be able to complete favorable acquisitions, especially in light of the

volatility in the capital markets over the past several years. 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. Furthermore, we may be required to renegotiate contracts with the network providers of the

acquired business. We may be unable to obtain the necessary governmental approvals, comply with these

regulatory requirements or renegotiate the necessary provider contracts in a timely manner, if at all.

In addition, we may be unable to successfully identify, consummate and integrate future acquisitions,

including integrating the acquired businesses on our information technology platform, or to implement our

operations strategy in order to operate acquired businesses profitabley. Furthermore, we may incur significant

transaction expenses in connection with a potential acquisition which may or may not be consummated. These

expenses could impact our selling, general and administrative expense ratio.

For all of the above reasons, we may not be able to consummate our proposed acquisitions as announced

from time to time to sustain our pattern of growth or to realize benefits from completed acquisitions.

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.

operations.

Failure to attain profitability in any new start-up operations could negatively affect our results of

Start-up costs associated with a new business can be substantial. For example, to obtain a certificate of

authority to operate as a health maintenance organization in most jurisdictions, we must first establish a provider

network, have infrastructure and required systems in place, and demonstrate our ability to obtain a state contract

and process claims. Often, we are also required to contribute significant capital to fund mandated net worth

requirements, performance bonds or escrows, or contingency guaranties. If we 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. In January 2012, State Controller

John Chiang warned that the State of California could run out of cash by March 2012 if quick action was not

taken. Mr. Chiang added that revenue is $2.6 billion lower than projected for California’s 2012 fiscal year while

spending is higher by about the same amount. In a monthly report released by Mr. Chiang in February 2012

covering California’s cash balance, receipts and disbursements for the prior month, it was noted that monthly

revenues for the month of January had come in $528 million below the latest projections contained in the

Governor’s proposed 2012-13 budget and when compared against the 2011-12 Budget Act, January revenues

were $1.2 billion below estimates. While the State Assembly of California passed a bill permitting short term

borrowing from existing funds held by certain state departments in order to get the State of California through
what is expected to be a seven-week cash shortfall, and though California also has access to an additional $865
million of internal borrowable funds due to recent legislation (SB 95) signed by the Governor, the State also
warned that one of the consequences of such short term borrowing would be the delay of payments to providers
of state services, including Medi-Cal. 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. 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. For these reasons, among others, we
cannot provide assurance that we will be able to complete favorable acquisitions, especially in light of the
volatility in the capital markets over the past several years. 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. Furthermore, we may be required to renegotiate contracts with the network providers of the
acquired business. We may be unable to obtain the necessary governmental approvals, comply with these
regulatory requirements or renegotiate the necessary provider contracts in a timely manner, if at all.

In addition, we may be unable to successfully identify, consummate and integrate future acquisitions,
including integrating the acquired businesses on our information technology platform, or to implement our
operations strategy in order to operate acquired businesses profitabley. Furthermore, we may incur significant
transaction expenses in connection with a potential acquisition which may or may not be consummated. These
expenses could impact our selling, general and administrative expense ratio.

For all of the above reasons, we may not be able to consummate our proposed acquisitions as announced

from time to time to sustain our pattern of growth or to realize benefits from completed acquisitions.

We face periodic routine and non-routine reviews, audits, and investigations by government agencies, and
these reviews and audits could have adverse findings, which could negatively impact our business.

We are subject to various routine and non-routine governmental reviews, audits, and investigations.
Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations
of those laws, could result in the imposition of civil or criminal penalties, the cancellation of our contracts to
provide managed care services, the suspension or revocation of our licenses, the exclusion from participation in
government sponsored health programs, or the revision and recoupment of past payments made based on audit
findings. If we are unable to correct any noted deficiencies, or become subject to material fines or other
sanctions, we 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 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 to the new HIPAA 5010 standards; however, some entities are currently in transition to the new
standards which could adversely impact administrative expense and compliance.

A federal mandate known as HIPAA 5010 requires health plans to use new standards for conducting certain

operational and administrative transactions electronically beginning in January 2012. These administrative
transactions 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, faced significant pressure to make sure that we 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 proceeded proactively to achieve full functionality of HIPAA

5010 transactions, and did so, before the January 1, 2012 deadline. However, in November 2011, CMS

announced it would delay enforcement actions related to implementation of HIPAA 5010 until March 31, 2012.

As the delayed implementation deadline approaches for full implementation of HIPAA 5010, we will continue to

test our claims management systems to 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. Originally, the federal government required

that health care organizations, including health insurers, upgrade to updated and expanded standardized code sets

used for documenting health conditions by October 2013. These new standardized code sets, known as ICD-10, will

require substantial investments from health care organizations, including us. However, in February 2012, it was

reported that CMS will postpone implementation of ICD-10 and will be issuing shortly a notice with a new timeline

governing the pace of implementation. 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.

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.

We face periodic routine and non-routine reviews, audits, and investigations by government agencies, and

these reviews and audits could have adverse findings, which could negatively impact our business.

We are subject to various routine and non-routine governmental reviews, audits, and investigations.

Violation of the laws, regulations, or contract provisions governing our operations, or changes in interpretations

of those laws, could result in the imposition of civil or criminal penalties, the cancellation of our contracts to

provide managed care services, the suspension or revocation of our licenses, the exclusion from participation in

government sponsored health programs, or the revision and recoupment of past payments made based on audit

findings. If we are unable to correct any noted deficiencies, or become subject to material fines or other

sanctions, 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 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 to the new HIPAA 5010 standards; however, some entities are currently in transition to the new

standards which could adversely impact administrative expense and compliance.

A federal mandate known as HIPAA 5010 requires health plans to use new standards for conducting certain

operational and administrative transactions electronically beginning in January 2012. These administrative

transactions 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, faced significant pressure to make sure that we 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 proceeded proactively to achieve full functionality of HIPAA
5010 transactions, and did so, before the January 1, 2012 deadline. However, in November 2011, CMS
announced it would delay enforcement actions related to implementation of HIPAA 5010 until March 31, 2012.
As the delayed implementation deadline approaches for full implementation of HIPAA 5010, we will continue to
test our claims management systems to 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. Originally, the federal government required
that health care organizations, including health insurers, upgrade to updated and expanded standardized code sets
used for documenting health conditions by October 2013. These new standardized code sets, known as ICD-10, will
require substantial investments from health care organizations, including us. However, in February 2012, it was
reported that CMS will postpone implementation of ICD-10 and will be issuing shortly a notice with a new timeline
governing the pace of implementation. 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.

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.
Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do
so or we have already paid claims to a delegated provider and payments cannot be recouped 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.

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 subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions

that they can pay to us without prior approval of, or notification to, state regulators. In California, our health plan

may dividend, without notice to or approval of the California Department of Managed Health Care, amounts by

which its tangible net equity exceeds 130% of the tangible net equity requirement. Our other health plans must

give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective

state departments of insurance for amounts over the lesser of (a) ten percent of surplus or net worth at the prior

year end or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or

disapproving a dividend is not clearly defined. Health plans that declare non-extraordinary dividends must

usually provide notice to the regulators ten or fifteen days in advance of the intended distribution date of the

non-extraordinary dividend. The aggregate amounts our health plan subsidiaries could have paid us at

December 31, 2011, 2010, and 2009 without approval of the regulatory authorities were approximately

$17.6 million, $18.8 million, and $9.0 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 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

Economic 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 now mandatory, are statutorily required. In addition, state attorneys

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.

Additionally, competitive pressures may force us to pay such claims even when we have no legal obligation to do

so or we have already paid claims to a delegated provider and payments cannot be recouped 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.

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 subsidiaries are subject to laws and regulations that limit the amount of dividends and distributions
that they can pay to us without prior approval of, or notification to, state regulators. In California, our health plan
may dividend, without notice to or approval of the California Department of Managed Health Care, amounts by
which its tangible net equity exceeds 130% of the tangible net equity requirement. Our other health plans must
give thirty days’ advance notice and the opportunity to disapprove “extraordinary” dividends to the respective
state departments of insurance for amounts over the lesser of (a) ten percent of surplus or net worth at the prior
year end or (b) the net income for the prior year. The discretion of the state regulators, if any, in approving or
disapproving a dividend is not clearly defined. Health plans that declare non-extraordinary dividends must
usually provide notice to the regulators ten or fifteen days in advance of the intended distribution date of the
non-extraordinary dividend. The aggregate amounts our health plan subsidiaries could have paid us at
December 31, 2011, 2010, and 2009 without approval of the regulatory authorities were approximately
$17.6 million, $18.8 million, and $9.0 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 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
Economic 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 now mandatory, 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.

While we currently expend significant resources and implemented solutions, processes and procedures to

protect against cyber attacks and security breaches and have no evidence to suggest that such attacks have
resulted in a breach of our systems, we may need to expend additional significant resources in the future to
continue to protect against potential security breaches or to address problems caused by such attacks or any
breach of our systems. Because the techniques used to circumvent security systems can be highly sophisticated
and change frequently, often are not recognized until launched against a target and may originate from less
regulated and remote areas around the world, we may be unable to proactively address these techniques or to
implement adequate preventive measures.

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,
divert management’s time and energy and have a material adverse effect on our business, financial condition,
cash flows, or results of operations.

Risks Related to the Operation of Our Molina Medicaid Solutions 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. In the event Molina
Medicaid Solutions is unsuccessful in correcting all of the identified problems, the Idaho Department of
Administration 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. In addition, the state of Maine, in order to

balance its budget, has requested that we renegotiate our contract with the state under terms which would reduce

the amount of payments made under the life of the contract. 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 West Virginia during 2012, 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, in 2011, the government contract of Molina Medicaid Solutions in Louisiana was

subject to competitive bidding, and we were unsuccessful in being awarded a new contract. During 2012, the

state MMIS contract of West Virginia will be 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 West Virginia 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.

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

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.

While we currently expend significant resources and implemented solutions, processes and procedures to

protect against cyber attacks and security breaches and have no evidence to suggest that such attacks have

resulted in a breach of our systems, we may need to expend additional significant resources in the future to

continue to protect against potential security breaches or to address problems caused by such attacks or any

breach of our systems. Because the techniques used to circumvent security systems can be highly sophisticated

and change frequently, often are not recognized until launched against a target and may originate from less

regulated and remote areas around the world, we may be unable to proactively address these techniques or to

implement adequate preventive measures.

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,

divert management’s time and energy and have a material adverse effect on our business, financial condition,

cash flows, or results of operations.

Risks Related to the Operation of Our Molina Medicaid Solutions 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. In the event Molina

Medicaid Solutions is unsuccessful in correcting all of the identified problems, the Idaho Department of

Administration 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. In addition, the state of Maine, in order to
balance its budget, has requested that we renegotiate our contract with the state under terms which would reduce
the amount of payments made under the life of the contract. 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 West Virginia during 2012, 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, in 2011, the government contract of Molina Medicaid Solutions in Louisiana was
subject to competitive bidding, and we were unsuccessful in being awarded a new contract. During 2012, the
state MMIS contract of West Virginia will be 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 West Virginia 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.

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

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

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.

Inherent in the government contracting process are various risks which may materially and adversely affect

our business and profitability.

We are subject to the risks inherent in the government contracting process. These risks include government

audits of billable contract costs and reimbursable expenses and compliance with government reporting

requirements. In the event we are found to be out of compliance with government contracting requirements, our

reputation may be adversely impacted and our relationship with the government agencies we work with may be

damaged, resulting in a material and adverse effect on our profitability.

Our performance 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.

On September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility with

various lenders and U.S. Bank National Association. The credit facility imposes numerous restrictions and

covenants, including, but not limited to, prescribed consolidated leverage and fixed charge coverage ratios, net

worth requirements, and acquisition and disposition limitations that restrict our financial and operating

flexibility, including our ability to make certain acquisitions above specified values and declare dividends and

other distributions without lender approval. Our ability to comply with these covenants may be affected by

events beyond our control. As a result of the restrictions and covenants imposed under our credit facility, our

growth strategy may be negatively impacted by our inability to react to market conditions, finance our

operations, engage in strategic acquisitions or disposals, act with complete flexibility, or to use our credit facility

in the manner intended. In addition, our credit facility matures in September 2016. 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, and if the default is not cured or waived, 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.

operations.

Ineffective management of our growth may negatively affect our business, financial condition, or results of

Depending on acquisitions and other opportunities, we expect to continue to grow our membership and to

expand into other markets. In fiscal year 2007, we had total premium revenue of $2.5 billion. In fiscal year 2011,

we had total premium revenue of $4.6 billion, an increase of 87% 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.

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

misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns.

Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious

software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In

addition, sophisticated hardware and operating system software and applications that we produce or procure from

third parties may contain defects in design or manufacture, including “bugs” and other problems that could

unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security

problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant,

and the efforts to address these problems could result in interruptions, delays, cessation of service, and loss of

existing or potential government customers.

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.

Inherent in the government contracting process are various risks which may materially and adversely affect
our business and profitability.

We are subject to the risks inherent in the government contracting process. These risks include government

audits of billable contract costs and reimbursable expenses and compliance with government reporting
requirements. In the event we are found to be out of compliance with government contracting requirements, our
reputation may be adversely impacted and our relationship with the government agencies we work with may be
damaged, resulting in a material and adverse effect on our profitability.

Our performance 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.

On September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility with

various lenders and U.S. Bank National Association. The credit facility imposes numerous restrictions and
covenants, including, but not limited to, prescribed consolidated leverage and fixed charge coverage ratios, net
worth requirements, and acquisition and disposition limitations that restrict our financial and operating
flexibility, including our ability to make certain acquisitions above specified values and declare dividends and
other distributions without lender approval. Our ability to comply with these covenants may be affected by
events beyond our control. As a result of the restrictions and covenants imposed under our credit facility, our
growth strategy may be negatively impacted by our inability to react to market conditions, finance our
operations, engage in strategic acquisitions or disposals, act with complete flexibility, or to use our credit facility
in the manner intended. In addition, our credit facility matures in September 2016. 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, and if the default is not cured or waived, 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 2007, we had total premium revenue of $2.5 billion. In fiscal year 2011,
we had total premium revenue of $4.6 billion, an increase of 87% 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 members and the public. For instance, some states mandate minimum medical expense levels as a
percentage of premium revenues. These laws and regulations, and their interpretations, are subject to frequent
change. The interpretation of certain contract provisions by our governmental regulators may also change.
Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations,
could reduce our profitability by imposing additional capital requirements, increasing our liability, increasing our
administrative and other costs, increasing mandated benefits, forcing us to restructure our relationships with
providers, or requiring us to implement additional or different programs and systems. Changes in the
interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a prior
interpretation.

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

Our business is dependent on effective and secure information systems that assist us in, among other things,

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

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

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

Because our corporate headquarters are located in Southern California, our business operations may be

significantly disrupted as a result of a major earthquake.

Our corporate headquarters is located in Long Beach, California. In addition, the claims of our health plans

are also processed in Long Beach. Southern California is exposed to a statistically greater risk of a major

earthquake than most other parts of the United States. If a major earthquake were to strike the Los Angeles area,

our corporate functions and claims processing could be significantly impaired for a substantial period of time.

Although we have established a disaster recovery and business resumption plan with back-up operating sites to

be deployed in the case of such a major disruptive event, there can be no assurances that the disaster recovery

plan will be successful or that the business operations of all our health plans, including those that are remote from

any such event, would not be substantially impacted by a major Southern California earthquake.

We face claims related to litigation which could result in substantial monetary damages.

We are subject to a variety of legal actions, including medical malpractice actions, provider disputes,

employment related disputes, and breach of contract actions. In the event we incur liability materially in excess

of the amount for which we have insurance coverage, our profitability would suffer. In addition, our providers

involved in medical care decisions are exposed to the risk of medical malpractice claims. As an employer of

physicians and ancillary 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 in an amount which we believe to be

reasonable in light of our experience to date. However, given the significant amount of some medical malpractice

awards and settlements, this insurance may not be sufficient or available at a reasonable cost to protect us from

damage awards or other liabilities. Even if any claims brought against us 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

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

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

operating results.

Our business is extensively regulated by the federal government and the states in which we operate. The

laws and regulations governing our operations are generally intended to benefit and protect health plan members

and providers rather than managed care organizations. The government agencies administering these laws and

regulations have broad latitude in interpreting and applying them. These laws and regulations, along with the

terms of our government contracts, regulate how we do business, what services we offer, and how we interact

with members and the public. For instance, some states mandate minimum medical expense levels as a

percentage of premium revenues. These laws and regulations, and their interpretations, are subject to frequent

change. The interpretation of certain contract provisions by our governmental regulators may also change.

Changes in existing laws or regulations, or their interpretations, or the enactment of new laws or regulations,

could reduce our profitability by imposing additional capital requirements, increasing our liability, increasing our

administrative and other costs, increasing mandated benefits, forcing us to restructure our relationships with

providers, or requiring us to implement additional or different programs and systems. Changes in the

interpretation of our contracts could also reduce our profitability if we have detrimentally relied on a prior

interpretation.

operations.

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

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.

Our corporate headquarters is located in Long Beach, California. In addition, the claims of our health plans

are also processed in Long Beach. Southern California is exposed to a statistically greater risk of a major
earthquake than most other parts of the United States. If a major earthquake were to strike the Los Angeles area,
our corporate functions and claims processing could be significantly impaired for a substantial period of time.
Although we have established a disaster recovery and business resumption plan with back-up operating sites to
be deployed in the case of such a major disruptive event, there can be no assurances that the disaster recovery
plan will be successful or that the business operations of all our health plans, including those that are remote from
any such event, would not be substantially impacted by a major Southern California earthquake.

We face claims related to litigation which could result in substantial monetary damages.

We are subject to a variety of legal actions, including medical malpractice actions, provider disputes,
employment related disputes, and breach of contract actions. In the event we incur liability materially in excess
of the amount for which we have insurance coverage, our profitability would suffer. In addition, our providers
involved in medical care decisions are exposed to the risk of medical malpractice claims. As an employer of
physicians and ancillary 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 in an amount which we believe to be
reasonable in light of our experience to date. However, given the significant amount of some medical malpractice
awards and settlements, this insurance may not be sufficient or available at a reasonable cost to protect us from
damage awards or other liabilities. Even if any claims brought against us 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 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

interpretations can be highly complex and involve subjective judgments. Changes in these rules or their
interpretation, or the adoption of new pronouncements could significantly affect our stated results of operations.

The value of our investments is influenced by varying economic and market conditions, and a decrease in
value could have an adverse effect on our results of operations, liquidity, and financial condition.

Our investments consist 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.

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 examinations, 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. It is critical that we recruit, manage, enable and retain talent to successfully

execute our strategic objections which requires aligned policies, a positive work environment and a robust

succession and talent development process. Further, particularly in light of the changing healthcare environment,

we must focus on building employee capabilities to help ensure that we can meet upcoming challenges and

opportunities. If we are unsuccessful in recruiting, retaining, managing and enabling such personnel and are

unable to meet upcoming challenges and opportunities, our operations could be negatively impacted.

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with independent third party vendors and service providers who provide services to us and our

subsidiaries or to whom we delegate selected functions. Our arrangements with third party vendors and service

providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,

including their obligations to maintain and protect the security and confidentiality of our information and data. In

addition, we may have disagreements with third party vendors and service providers regarding relative

responsibilities for any such failures under applicable business associate agreements or other applicable

outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the

terms and conditions of our contracts with third party vendors and service providers. Our outsourcing

arrangements could be adversely impacted by changes in the vendors’ or service provider’s operations or

financial condition or other matters outside of our control. If we fail to adequately monitor and regulate the

performance of our third party vendors and service providers, we could be subject to additional risk. Violations

of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms

by third party vendors and service providers could increase our exposure to liability to our members, providers or

other third parties, or sanctions and/or fines from the regulators that oversee our business. In turn, this could

increase the costs associated with the operation of our business or have an adverse impact on our business and

reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may

not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur

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 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

interpretations can be highly complex and involve subjective judgments. Changes in these rules or their

interpretation, or the adoption of new pronouncements could significantly affect our stated results of operations.

The value of our investments is influenced by varying economic and market conditions, and a decrease in

value could have an adverse effect on our results of operations, liquidity, and financial condition.

Our investments consist 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.

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 examinations, 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. It is critical that we recruit, manage, enable and retain talent to successfully
execute our strategic objections which requires aligned policies, a positive work environment and a robust
succession and talent development process. Further, particularly in light of the changing healthcare environment,
we must focus on building employee capabilities to help ensure that we can meet upcoming challenges and
opportunities. If we are unsuccessful in recruiting, retaining, managing and enabling such personnel and are
unable to meet upcoming challenges and opportunities, our operations could be negatively impacted.

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with independent third party vendors and service providers who provide services to us and our
subsidiaries or to whom we delegate selected functions. Our arrangements with third party vendors and service
providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,
including their obligations to maintain and protect the security and confidentiality of our information and data. In
addition, we may have disagreements with third party vendors and service providers regarding relative
responsibilities for any such failures under applicable business associate agreements or other applicable
outsourcing agreements. Further, we may not be adequately indemnified against all possible losses through the
terms and conditions of our contracts with third party vendors and service providers. Our outsourcing
arrangements could be adversely impacted by changes in the vendors’ or service provider’s operations or
financial condition or other matters outside of our control. If we fail to adequately monitor and regulate the
performance of our third party vendors and service providers, we could be subject to additional risk. Violations
of, or noncompliance with, laws and/or regulations governing our business or noncompliance with contract terms
by third party vendors and service providers could increase our exposure to liability to our members, providers or
other third parties, or sanctions and/or fines from the regulators that oversee our business. In turn, this could
increase the costs associated with the operation of our business or have an adverse impact on our business and
reputation. Moreover, if these vendor and service provider relationships were terminated for any reason, we may
not be able to find alternative partners in a timely manner or on acceptable financial terms, and may incur

significant costs in connection with any such vendor or service provider transition. As a result, we may not be
able to meet the full demands of our customers and, in turn, our business, financial condition and results of
operations may be harmed. In addition, we may not fully realize the anticipated economic and other benefits
from our outsourcing projects or other relationships we enter into with third party vendors and service providers,
as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the
third party, vendor or service provider noncompliance with contract terms or violations of laws and/or
regulations, or otherwise. This could result in substantial costs or other operational or financial problems that
could adversely impact our business, financial condition and results of operations.

An impairment charge with respect to our recorded goodwill or indefinite-lived intangible assets could have
a material impact on our financial results.

We conduct formal impairment tests on material long-lived assets, such as goodwill and indefinite-lived

intangible assets, and intangible assets, net, at least annually; additionally, we continually evaluate whether
events or changes in business conditions suggest potential impairment of such assets. Our judgments regarding
the existence of impairment indicators are based on legal factors, market conditions, and operational
performance. For example, our health plan subsidiaries have generally been successful in obtaining the renewal
by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can
be no assurance that these contracts will continue to be renewed. The non-renewal of such a contract would be an
indicator of impairment.

As of December 31, 2011, the balance of goodwill and indefinite-lived intangible assets was $154.0 million.

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. As of December 31, 2011, the balance of intangible assets, net,
was $101.8 million. Intangible assets are amortized generally on a straight-line basis over their estimated useful
lives. The determination of the value of goodwill and indefinite-lived intangible assets, and intangible assets, net,
requires us to make estimates and assumptions about estimated asset lives, future business trends, and growth.
Such evaluation is significantly impacted by estimates and assumptions of future revenues, costs and expenses,
and other factors.

If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing
the value of our goodwill and indefinite-lived intangible assets, and intangible assets, net, such revision could
result in a non-cash impairment charge that could have a material impact on our financial results.

We are subject to the risks of owning real property.

We own an approximately 460,000 square foot office building housing our principal executive offices,
which we purchased in a transaction that closed on December 7, 2011. Accordingly, we are subject to all of the
risks generally associated with owning and leasing real estate, which includes, but is not limited to: the
possibility of environmental contamination, the costs associated with fixing any environmental problems and the
risk of damages resulting from such contamination; adverse changes in the value of the property due to interest
rate changes, changes in the neighborhood in which the property is located or other factors; ongoing maintenance
expenses and costs of improvements; the possible need for structural improvements in order to comply with
changes in zoning, seismic, disability act, or other requirements; inability to renew or enter into leases for space
not utilized by the Company on commercially acceptable terms or at all; and possible disputes with neighboring
owners or other individuals and entities.

Because we have guaranteed one of our subsidiary’s obligations under a loan agreement, if this subsidiary
fails to meet its obligations under the loan agreement, we may be required to satisfy such obligations, and
such an undertaking could have an adverse affect on our financial condition.

On December 7, 2011, Molina Center LLC, a wholly owned subsidiary of the Company, entered into a

Term Loan Agreement with various lenders and East West Bank, as Administrative Agent, to borrow the

shares.

aggregate principal amount of $48.6 million to finance a portion of the $81 million purchase price for the

acquisition of the office building housing our corporate headquarters. While all amounts due under the Term

Loan Agreement and related loan documents are secured by a security interest in the office building in favor of

and for the benefit of the Administrative Agent and the other lenders under the Term Loan Agreement, the

Company has additionally guaranteed Molina Center’s obligations of payment and performance under the Term

Loan Agreement, certain promissory notes executed in connection therewith, and other loan documents. The

maximum amount of the promissory notes for which the Company is liable under the Guaranty will in no event

exceed $20 million, but there is no cap on the Company’s total liability under the Guaranty. Furthermore, Molina

Center and the Company also entered into an Environmental Indemnity in favor of the Administrative Agent and

the other lenders pursuant to which the Company, jointly and severally with Molina Center, has agreed to

indemnify and hold harmless the Administrative Agent and each of the other lenders under the Term Loan

Agreement from and against any loss, damage, cost, expense, claim, or liability directly or indirectly arising out

of or attributable to the use, generation, storage, release, discharge or disposal, or presence of certain hazardous

materials on or about the office building. Neither the Company’s nor Molina Center’s liability under the

Environmental Indemnity is limited by a maximum dollar amount. If Molina Center is unable to comply with the

various customary financial covenants of the Term Loan Agreement, if it defaults under the Term Loan

Agreement or if there are major environmental liabilities attributed to hazardous materials, such events could

have an adverse effect on our business, financial condition, cash flows, or results of 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

$10.75 (on a split-adjusted basis) to a high of $36.83. 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

significant costs in connection with any such vendor or service provider transition. As a result, we may not be

able to meet the full demands of our customers and, in turn, our business, financial condition and results of

operations may be harmed. In addition, we may not fully realize the anticipated economic and other benefits

from our outsourcing projects or other relationships we enter into with third party vendors and service providers,

as a result of regulatory restrictions on outsourcing, unanticipated delays in transitioning our operations to the

third party, vendor or service provider noncompliance with contract terms or violations of laws and/or

regulations, or otherwise. This could result in substantial costs or other operational or financial problems that

could adversely impact our business, financial condition and results of operations.

An impairment charge with respect to our recorded goodwill or indefinite-lived intangible assets could have

a material impact on our financial results.

We conduct formal impairment tests on material long-lived assets, such as goodwill and indefinite-lived

intangible assets, and intangible assets, net, at least annually; additionally, we continually evaluate whether

events or changes in business conditions suggest potential impairment of such assets. Our judgments regarding

the existence of impairment indicators are based on legal factors, market conditions, and operational

performance. For example, our health plan subsidiaries have generally been successful in obtaining the renewal

by amendment of their contracts in each state prior to the actual expiration of their contracts. However, there can

be no assurance that these contracts will continue to be renewed. The non-renewal of such a contract would be an

indicator of impairment.

As of December 31, 2011, the balance of goodwill and indefinite-lived intangible assets was $154.0 million.

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. As of December 31, 2011, the balance of intangible assets, net,

was $101.8 million. Intangible assets are amortized generally on a straight-line basis over their estimated useful

lives. The determination of the value of goodwill and indefinite-lived intangible assets, and intangible assets, net,

requires us to make estimates and assumptions about estimated asset lives, future business trends, and growth.

Such evaluation is significantly impacted by estimates and assumptions of future revenues, costs and expenses,

and other factors.

If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing

the value of our goodwill and indefinite-lived intangible assets, and intangible assets, net, such revision could

result in a non-cash impairment charge that could have a material impact on our financial results.

We are subject to the risks of owning real property.

We own an approximately 460,000 square foot office building housing our principal executive offices,

which we purchased in a transaction that closed on December 7, 2011. Accordingly, we are subject to all of the

risks generally associated with owning and leasing real estate, which includes, but is not limited to: the

possibility of environmental contamination, the costs associated with fixing any environmental problems and the

risk of damages resulting from such contamination; adverse changes in the value of the property due to interest

rate changes, changes in the neighborhood in which the property is located or other factors; ongoing maintenance

expenses and costs of improvements; the possible need for structural improvements in order to comply with

changes in zoning, seismic, disability act, or other requirements; inability to renew or enter into leases for space

not utilized by the Company on commercially acceptable terms or at all; and possible disputes with neighboring

owners or other individuals and entities.

Because we have guaranteed one of our subsidiary’s obligations under a loan agreement, if this subsidiary

fails to meet its obligations under the loan agreement, we may be required to satisfy such obligations, and

such an undertaking could have an adverse affect on our financial condition.

On December 7, 2011, Molina Center LLC, a wholly owned subsidiary of the Company, entered into a

Term Loan Agreement with various lenders and East West Bank, as Administrative Agent, to borrow the

aggregate principal amount of $48.6 million to finance a portion of the $81 million purchase price for the
acquisition of the office building housing our corporate headquarters. While all amounts due under the Term
Loan Agreement and related loan documents are secured by a security interest in the office building in favor of
and for the benefit of the Administrative Agent and the other lenders under the Term Loan Agreement, the
Company has additionally guaranteed Molina Center’s obligations of payment and performance under the Term
Loan Agreement, certain promissory notes executed in connection therewith, and other loan documents. The
maximum amount of the promissory notes for which the Company is liable under the Guaranty will in no event
exceed $20 million, but there is no cap on the Company’s total liability under the Guaranty. Furthermore, Molina
Center and the Company also entered into an Environmental Indemnity in favor of the Administrative Agent and
the other lenders pursuant to which the Company, jointly and severally with Molina Center, has agreed to
indemnify and hold harmless the Administrative Agent and each of the other lenders under the Term Loan
Agreement from and against any loss, damage, cost, expense, claim, or liability directly or indirectly arising out
of or attributable to the use, generation, storage, release, discharge or disposal, or presence of certain hazardous
materials on or about the office building. Neither the Company’s nor Molina Center’s liability under the
Environmental Indemnity is limited by a maximum dollar amount. If Molina Center is unable to comply with the
various customary financial covenants of the Term Loan Agreement, if it defaults under the Term Loan
Agreement or if there are major environmental liabilities attributed to hazardous materials, such events could
have an adverse effect on our business, financial condition, cash flows, or results of 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
$10.75 (on a split-adjusted basis) to a high of $36.83. 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 40% of our capital stock. Our
president and chief executive officer, as well as our chief financial officer, are members of the Molina family,
and they are also on our board of directors. Because of the amount of their shareholdings, Molina family
members, if they were to act as a group with the trustees of their family trusts, have the ability to significantly
influence all matters submitted to stockholders for approval, including the election and removal of directors,
amendments to our charter, and any merger, consolidation, or sale of our Company. A significant concentration
of share ownership can also adversely affect the trading price for our common stock because investors often
discount the value of stock in companies that have controlling stockholders. Furthermore, the concentration of
share ownership in the Molina family could delay or prevent a merger or consolidation, takeover, or other
business combination that could be favorable to our stockholders. Finally, the interests and objectives of the
Molina family may be different from those of our company or our other stockholders, and they may vote their
common stock in a manner that is contrary to the vote of our other stockholders.

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, 2011, 45,815,392 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.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

We lease a total of 68 facilities. We own a 460,000 square foot office building housing our corporate

headquarters in Long Beach, California, and we also own a nearby 32,000 square-foot office building in Long

Beach, California, a 26,000 square-foot data center in Albuquerque, New Mexico, and a community clinic in

Pomona, California. While we believe our current facilities are adequate to meet our operational needs for the

foreseeable future, we are continuing to periodically evaluate our employee and operations growth prospects to

determine if additional space is required.

Item 3: Legal Proceedings

The health care industry is subject to numerous laws and regulations of federal, state, and local

governments. Compliance with these laws and regulations can be subject to government review and

interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with

violations of these laws and regulations include significant fines, exclusion from participating in publicly-funded

programs, and the repayment of previously billed and collected revenues.

We are involved in various legal actions in the normal course of business, some of which seek monetary

damages, including claims for punitive damages, which are not covered by insurance. Based upon the evaluation

of information currently available, we believe that these actions, when finally concluded and determined, are not

likely to have a material adverse effect on our business, financial condition, cash flows, or results of operations.

Item 4: Mine Safety Disclosures

None.

Members of the Molina family own a majority of our capital stock, decreasing the influence of other

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

stockholders on stockholder decisions.

approval.

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 40% of our capital stock. Our

president and chief executive officer, as well as our chief financial officer, are members of the Molina family,

and they are also on our board of directors. Because of the amount of their shareholdings, Molina family

members, if they were to act as a group with the trustees of their family trusts, have the ability to significantly

influence all matters submitted to stockholders for approval, including the election and removal of directors,

amendments to our charter, and any merger, consolidation, or sale of our Company. A significant concentration

of share ownership can also adversely affect the trading price for our common stock because investors often

discount the value of stock in companies that have controlling stockholders. Furthermore, the concentration of

share ownership in the Molina family could delay or prevent a merger or consolidation, takeover, or other

business combination that could be favorable to our stockholders. Finally, the interests and objectives of the

Molina family may be different from those of our company or our other stockholders, and they may vote their

common stock in a manner that is contrary to the vote of our other stockholders.

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, 2011, 45,815,392 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.

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.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

We lease a total of 68 facilities. We own a 460,000 square foot office building housing our corporate
headquarters in Long Beach, California, and we also own a nearby 32,000 square-foot office building in Long
Beach, California, a 26,000 square-foot data center in Albuquerque, New Mexico, and a community clinic in
Pomona, California. While we believe our current facilities are adequate to meet our operational needs for the
foreseeable future, we are continuing to periodically evaluate our employee and operations growth prospects to
determine if additional space is required.

Item 3: Legal Proceedings

The health care industry is subject to numerous laws and regulations of federal, state, and local
governments. Compliance with these laws and regulations can be subject to government review and
interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with
violations of these laws and regulations include significant fines, exclusion from participating in publicly-funded
programs, and the repayment of previously billed and collected revenues.

We are involved in various legal actions in the normal course of business, some of which seek monetary
damages, including claims for punitive damages, which are not covered by insurance. Based upon the evaluation
of information currently available, we believe that these actions, when finally concluded and determined, are not
likely to have a material adverse effect on our business, financial condition, cash flows, or results of operations.

Item 4: Mine Safety Disclosures

None.

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

below:

Our common stock is listed on the New York Stock Exchange under the trading symbol “MOH.” As of
February 15, 2012, there were 131 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

2011

First Quarter(1)
Second Quarter(1)
Third Quarter
Fourth Quarter

2010(1)

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$26.86
$29.03
$28.21
$26.31

$17.59
$20.80
$21.20
$18.85

$17.77
$24.72
$14.82
$13.93

$13.35
$16.67
$16.85
$16.43

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

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.

Stock Repurchase Program

Purchases of common stock made by or on behalf of the Company during the quarter ended December 31,

2011, including shares withheld by the Company to satisfy our employees’ income tax obligations, are set forth

October 1 — October 31

November 1 — November 30

December 1 — December 31

Total

Total Number

of Shares

Purchased(a)

Average Price

Paid per Share

2,431(d)

2,150(d)

1,213(d)

5,794(d)

$15.44

$20.53

$21.82

$18.66

—

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs(b)(c)

Maximum Number (or

Approximate Dollar Value)

of Shares That May Yet Be

Purchased Under the Plans

or Programs(b)(c)

$75,000,000

(a) During the three months ended December 31, 2011, we did not repurchase any shares of our common stock

outside of our publicly announced stock repurchase program except 5,794 shares of common stock withheld

to settle our employees’ income tax obligations.

(b) On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used

to purchase shares of our common stock under a Rule 10b5-1 trading plan. Our repurchases under this

program were completed in August 2011.

aggregate of either our common stock or our convertible senior notes due 2014. The repurchase program

extends through October 25, 2012, but the Company reserves the right to suspend or discontinue the

program at any time. No repurchases have been made by the Company pursuant to this repurchase plan

during the quarter ended December 31, 2011.

(d)

Includes shares withheld by the Company to satisfy our employees’ income tax withholdings.

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2011)

Plan Category

Equity compensation plans approved by

security holders

Number of Securities to be

Issued Upon Exercise of

Outstanding Options,

Warrants and Rights

Weighted Average

Exercise Price of

Outstanding Options,

Warrants and Rights

(a)

(b)

Number of Securities

Remaining Available for

Future Issuance

Under Equity Compensation

Plans (Excluding Securities

Reflected in Column (a))

(c)

553,049

$20.91

7,377,188(2)

(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 2002 Equity

Incentive Plan have been suspended.

(2)

Includes only shares remaining available to issue under the 2011 Equity Incentive Plan (the “2011 Incentive

Plan”), and the 2011 Employee Stock Purchase Plan (the “ESPP”). Further grants under the 2002 Equity

On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used

Incentive Plan and the 2002 Employee Stock Purchase Plan have been suspended.

Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in
aggregate of either our common stock or our convertible senior notes due 2014. The repurchase program will be
funded with working capital or draws under our credit facility, and repurchases may be made from time to time
on the open market or through privately negotiated transactions. The repurchase program extends through
October 25, 2012, but the Company reserves the right to suspend or discontinue the program at any time. No
securities were purchased under this program in 2011.

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, 2012, there were 131 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

2011

2010(1)

First Quarter(1)

Second Quarter(1)

Third Quarter

Fourth Quarter

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

Low

$26.86

$29.03

$28.21

$26.31

$17.59

$20.80

$21.20

$18.85

$17.77

$24.72

$14.82

$13.93

$13.35

$16.67

$16.85

$16.43

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

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.

Stock Repurchase Program

On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used

to purchase shares of our common stock under a Rule 10b5-1 trading plan. Under this program, we purchased

approximately 400,000 shares of our common stock for $7 million (average cost of approximately $17.47 per

share) during August 2011. This repurchase program was funded with working capital.

Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in

aggregate of either our common stock or our convertible senior notes due 2014. The repurchase program will be

funded with working capital or draws under our credit facility, and repurchases may be made from time to time

on the open market or through privately negotiated transactions. The repurchase program extends through

October 25, 2012, but the Company reserves the right to suspend or discontinue the program at any time. No

securities were purchased under this program in 2011.

Purchases of common stock made by or on behalf of the Company during the quarter ended December 31,
2011, including shares withheld by the Company to satisfy our employees’ income tax obligations, are set forth
below:

October 1 — October 31
November 1 — November 30
December 1 — December 31

Total

Total Number
of Shares
Purchased(a)

Average Price
Paid per Share

2,431(d)
2,150(d)
1,213(d)

5,794(d)

$15.44
$20.53
$21.82

$18.66

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(b)(c)

Maximum Number (or
Approximate Dollar Value)
of Shares That May Yet Be
Purchased Under the Plans
or Programs(b)(c)

—
—
—

—

$75,000,000
$75,000,000
$75,000,000

(a) During the three months ended December 31, 2011, we did not repurchase any shares of our common stock
outside of our publicly announced stock repurchase program except 5,794 shares of common stock withheld
to settle our employees’ income tax obligations.

(b) On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used
to purchase shares of our common stock under a Rule 10b5-1 trading plan. Our repurchases under this
program were completed in August 2011.

aggregate of either our common stock or our convertible senior notes due 2014. The repurchase program
extends through October 25, 2012, but the Company reserves the right to suspend or discontinue the
program at any time. No repurchases have been made by the Company pursuant to this repurchase plan
during the quarter ended December 31, 2011.
Includes shares withheld by the Company to satisfy our employees’ income tax withholdings.

(d)

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2011)

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)

553,049

$20.91

7,377,188(2)

(1) Options to purchase shares of our common stock issued under the 2000 Omnibus Stock and Incentive Plan,

(2)

and the 2002 Equity Incentive Plan. Further grants under the 2000 Omnibus Stock and 2002 Equity
Incentive Plan have been suspended.
Includes only shares remaining available to issue under the 2011 Equity Incentive Plan (the “2011 Incentive
Plan”), and the 2011 Employee Stock Purchase Plan (the “ESPP”). Further grants under the 2002 Equity
Incentive Plan and the 2002 Employee Stock Purchase Plan have been suspended.

STOCK PERFORMANCE GRAPH

Item 6. Selected Financial Data

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, 2006 to December 31, 2011. 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

$140

$120

$100

$80

$60

$40

$20

12/06

12/07

12/08

12/09

12/10

12/11

Molina Healthcare, Inc.

S&P 500

Peer Group

$100 invested on 12/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending
December 31.

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, 2011 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.

2011

2010(1)

2009

2008

2007

Year Ended December 31,

Total expenses

4,625,192

3,980,976

3,618,954

3,004,811

2,394,127

$ 4,603,407 $ 3,989,909 $ 3,660,207 $ 3,091,240 $ 2,462,369

160,447

5,539

547

89,809

6,259

—

9,149

—

21,126

—

30,085

4,769,940

4,085,977

3,669,356

3,112,366

2,492,454

3,859,994

3,370,857

3,176,236

2,621,312

2,080,083

143,987

415,932

154,589

50,690

(64,575)

—

80,173

15,519

64,654

43,836

78,647

345,993

139,775

45,704

—

105,001

15,509

89,492

34,522

—

276,027

128,581

38,110

—

1,532

51,934

13,777

38,157

7,289

—

249,646

100,165

33,688

—

107,555

13,231

94,324

34,726

20,818 $

54,970 $

30,868 $

59,598 $

—

205,057

81,020

27,967

—

98,327

5,605

92,722

34,996

57,726

0.45 $

1.34 $

1.32 $

0.80 $

0.79 $

1.44 $

1.43 $

1.36

1.35

Statements of Income Data:

Revenue:

Premium revenue

Service revenue(1)

Investment income

Rental income

Total revenue

Expenses:

Medical care costs

Cost of service revenue(1)

General and administrative expenses

Premium tax expenses

Depreciation and amortization

Impairment of goodwill and intangible

Gain on purchase of convertible senior

assets(2)

notes

Operating income

Interest expense

Income before income taxes

Provision for income taxes

Net income

Net income per share(3):

Basic

Diluted

Weighted average number of common

shares and potential dilutive common

General and administrative expense

Operating Statistics:

Medical care ratio(4)

ratio(5)

Premium tax ratio(6)

Members(7)

shares outstanding(3)

45,756,000

41,174,000

38,765,000

41,514,000

42,412,500

shares outstanding(3)

46,425,000

41,631,000

38,976,000

41,658,000

42,628,500

83.9%

84.5%

86.8%

84.8%

84.5%

8.5%

3.5%

7.5%

3.5%

8.0%

3.2%

8.2%

3.3%

1,697,000

1,613,000

1,455,000

1,256,000

1,149,000

8.7%

3.4%

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, 2006 to December 31, 2011. 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

$140

$120

$100

$80

$60

$40

$20

12/06

12/07

12/08

12/09

12/10

12/11

Molina Healthcare, Inc.

S&P 500

Peer Group

$100 invested on 12/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending

December 31.

STOCK PERFORMANCE GRAPH

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, 2011 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.

2011

2010(1)

2009

2008

2007

Year Ended December 31,

Statements of Income Data:
Revenue:
Premium revenue
Service revenue(1)
Investment income
Rental income

Total revenue

Expenses:
Medical care costs
Cost of service revenue(1)
General and administrative expenses
Premium tax expenses
Depreciation and amortization

$ 4,603,407 $ 3,989,909 $ 3,660,207 $ 3,091,240 $ 2,462,369
—
30,085

—
21,126

160,447
5,539
547

89,809
6,259
—

—
9,149
—

4,769,940

4,085,977

3,669,356

3,112,366

2,492,454

3,859,994
143,987
415,932
154,589
50,690

3,370,857
78,647
345,993
139,775
45,704

3,176,236

2,621,312

2,080,083

—

276,027
128,581
38,110

—

249,646
100,165
33,688

—

205,057
81,020
27,967

Total expenses

4,625,192

3,980,976

3,618,954

3,004,811

2,394,127

Impairment of goodwill and intangible

assets(2)

Gain on purchase of convertible senior

notes

Operating income
Interest expense

Income before income taxes
Provision for income taxes

Net income

Net income per share(3):

Basic

Diluted

(64,575)

—

80,173
15,519

64,654
43,836

—

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

20,818 $

54,970 $

30,868 $

59,598 $

—

98,327
5,605

92,722
34,996

57,726

0.45 $

1.34 $

1.32 $

0.80 $

0.79 $

1.44 $

1.43 $

1.36

1.35

Weighted average number of common

shares outstanding(3)

45,756,000

41,174,000

38,765,000

41,514,000

42,412,500

Weighted average number of common

shares and potential dilutive common
shares outstanding(3)

Operating Statistics:
Medical care ratio(4)
General and administrative expense

ratio(5)

Premium tax ratio(6)
Members(7)

46,425,000

41,631,000

38,976,000

41,658,000

42,628,500

83.9%

84.5%

86.8%

84.8%

84.5%

8.7%
3.4%

8.5%
3.5%

7.5%
3.5%

8.0%
3.2%

8.2%
3.3%

1,697,000

1,613,000

1,455,000

1,256,000

1,149,000

1,148,068

1,509,214

2011

2010(1)

2009

2008

2007(9)

Year Ended December 31,

$ 493,827 $ 455,886 $ 469,501 $ 387,162 $ 459,064
1,170,016
1,244,035
1,652,146

218,126
897,073
755,073

164,014
790,157
719,057

158,900
701,297
542,738

164,873
616,306
531,762

160,166
655,640
514,376

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

maturities)
Total liabilities
Stockholders’ equity

(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) On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that
our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request
for Proposal; therefore, our Missouri health plan’s existing contract with the state will expire without
renewal on June 30, 2012. In connection with this notification, we recorded a non-cash impairment charge
of approximately $64.6 million in the fourth quarter of 2011.

(3) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

(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, contract changes, 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.

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.

Adjustments

Overview

We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the

three-for-two stock split in the form of a stock dividend that was effective May 20, 2011.

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

organizations serving Medicaid populations in ten states, and our Molina Medicaid Solutions segment, which

provides design, development, implementation, and business process outsourcing solutions to Medicaid agencies

in an additional five states. We also have a direct delivery business that currently consists of primary care

community clinics in California and Washington; additionally, we manage three county-owned primary care

clinics under a contract with Fairfax County, Virginia.

We report our financial performance based on the following two reportable segments: Health Plans; and

Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico,

Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. This segment served

approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health

care programs for low-income families and individuals as of December 31, 2011. 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.

On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that

our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for

Proposal; therefore, our Missouri health plan’s existing contract with the state will expire without renewal on

June 30, 2012. In connection with this notification, we recorded a non-cash impairment charge of approximately

$64.6 million, or $1.34 per diluted share. Most of the impairment charge is not tax deductible, resulting in a

disproportionate impact to net income. For the year ended December 31, 2011, our Missouri health plan

contributed premium revenue of $229.6 million, or 5% of total premium revenue, and comprised 79,000

members, or 4.7% of total Health Plans segment membership.

On May 1, 2010, we acquired a health information management business which we operate under the name,

Molina Medicaid Solutions. Our Molina Medicaid Solutions segment provides design, development,

implementation, and business process outsourcing solutions to state governments for their Medicaid Management

Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and

other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the

states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate

administration services for the Florida Medicaid program.

On June 9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state

intends to award the contract for a replacement Medicaid Management Information System, or MMIS, to another

Balance Sheet Data:

Cash and cash equivalents

Total assets

Long-term debt (including current

maturities)

Total liabilities

Stockholders’ equity

2011

2010(1)

2009

2008

2007(9)

Year Ended December 31,

$ 493,827 $ 455,886

$ 469,501

$ 387,162

$ 459,064

1,652,146

1,509,214

1,244,035

1,148,068

1,170,016

218,126

897,073

755,073

164,014

790,157

719,057

158,900

701,297

542,738

164,873

616,306

531,762

160,166

655,640

514,376

(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) On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that

our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request

for Proposal; therefore, our Missouri health plan’s existing contract with the state will expire without

renewal on June 30, 2012. In connection with this notification, we recorded a non-cash impairment charge

of approximately $64.6 million in the fourth quarter of 2011.

(3) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

(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, contract changes, 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.

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.

Adjustments

We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the

three-for-two stock split in the form of a stock dividend that was effective May 20, 2011.

Overview

Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health

care needs of low-income families and individuals, and to assist state agencies in their administration of the
Medicaid program. Our business comprises our Health Plans segment, consisting of licensed health maintenance
organizations serving Medicaid populations in ten states, and our Molina Medicaid Solutions segment, which
provides design, development, implementation, and business process outsourcing solutions to Medicaid agencies
in an additional five states. We also have a direct delivery business that currently consists of primary care
community clinics in California and Washington; additionally, we manage three county-owned primary care
clinics under a contract with Fairfax County, Virginia.

We report our financial performance based on the following two reportable segments: Health Plans; and

Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico,
Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. This segment served
approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health
care programs for low-income families and individuals as of December 31, 2011. 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.

On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that

our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for
Proposal; therefore, our Missouri health plan’s existing contract with the state will expire without renewal on
June 30, 2012. In connection with this notification, we recorded a non-cash impairment charge of approximately
$64.6 million, or $1.34 per diluted share. Most of the impairment charge is not tax deductible, resulting in a
disproportionate impact to net income. For the year ended December 31, 2011, our Missouri health plan
contributed premium revenue of $229.6 million, or 5% of total premium revenue, and comprised 79,000
members, or 4.7% of total Health Plans segment membership.

On May 1, 2010, we acquired a health information management business which we operate under the name,

Molina Medicaid Solutions. 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.

firm. Our revenue under the Louisiana MMIS contract from May 1, 2010, the date we acquired Molina Medicaid
Solutions, through December 31, 2010, was approximately $32 million. For the year ended December 31, 2011,
our revenue under the Louisiana MMIS contract was approximately $57 million. We expect that we will continue
to perform under this contract through implementation and acceptance of the successor MMIS. Based upon our
past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and
acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and
acceptance of the successor MMIS we expect to recognize between $45 million and $50 million in revenue
annually under our Louisiana MMIS contract.

Composition of Revenue and Membership

Health Plans Segment

Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts
with the states in which our health plans operate. Premium revenue is fixed in advance of the periods covered
and, except as described in “Critical Accounting Policies” below, is not generally subject to significant
accounting estimates. For the year ended December 31, 2011, we received approximately 94% of our premium
revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state
agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services, 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.

For the year ended December 31, 2011, 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. Premiums PMPM for the Children’s Health Insurance Program, or CHIP, members are
generally among our lowest, with rates as low as approximately $70 PMPM in California. Premium revenues for
Medicaid members are generally higher. Among the Temporary Assistance for Needy Families, or TANF,
Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums
range between approximately $110 in California to $250 in Missouri. Among our Medicaid Aged, Blind or
Disabled, or ABD, membership, PMPM premiums range from approximately $330 in Utah to $1,400 in Ohio.
Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain
benefits from the managed care contract (most often pharmacy, inpatient, behavioral health and catastrophic case
benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest
average PMPM premiums, at approximately $1,200 PMPM.

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

Total Ending Membership by Health Plan:

indicated:

California

Florida

Michigan

Missouri

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(1)

Total

California

Florida

Michigan

New Mexico

Ohio

Texas

Utah

Total

Washington

California

Florida

Michigan

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(1)

Total

Total Ending Membership by State for our Medicare Advantage Plans(1):

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

As of December 31,

2011

2010

2009

355,000

69,000

222,000

79,000

88,000

248,000

155,000

84,000

355,000

42,000

344,000

61,000

227,000

81,000

91,000

94,000

79,000

355,000

36,000

351,000

50,000

223,000

78,000

94,000

40,000

69,000

334,000

—

245,000

216,000

1,697,000 1,613,000 1,455,000

6,900

800

8,200

800

200

700

8,400

5,000

4,900

500

6,300

600

—

700

8,900

2,600

2,100

—

3,300

400

—

500

4,000

1,300

31,000

24,500

11,600

As of December 31,

2011

2010

2009

31,500

10,400

37,500

5,600

29,100

63,700

8,500

4,800

1,700

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

—

192,800 122,200 111,500

(1) We acquired the Wisconsin health plan on September 1, 2010. As of December 31, 2011, the Wisconsin

health plan had approximately 2,000 Medicare Advantage members covered under a reinsurance contract

with a third party; these members are not included in the membership tables herein.

Molina Medicaid Solutions Segment

The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the

performance of multiple services. The first of these is the design, development and implementation, or DDI, of a

firm. Our revenue under the Louisiana MMIS contract from May 1, 2010, the date we acquired Molina Medicaid

Solutions, through December 31, 2010, was approximately $32 million. For the year ended December 31, 2011,

our revenue under the Louisiana MMIS contract was approximately $57 million. We expect that we will continue

to perform under this contract through implementation and acceptance of the successor MMIS. Based upon our

past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and

acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and

acceptance of the successor MMIS we expect to recognize between $45 million and $50 million in revenue

annually under our Louisiana MMIS contract.

Composition of Revenue and Membership

Health Plans Segment

Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts

with the states in which our health plans operate. Premium revenue is fixed in advance of the periods covered

and, except as described in “Critical Accounting Policies” below, is not generally subject to significant

accounting estimates. For the year ended December 31, 2011, we received approximately 94% of our premium

revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state

agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services, 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.

For the year ended December 31, 2011, 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. Premiums PMPM for the Children’s Health Insurance Program, or CHIP, members are

generally among our lowest, with rates as low as approximately $70 PMPM in California. Premium revenues for

Medicaid members are generally higher. Among the Temporary Assistance for Needy Families, or TANF,

Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums

range between approximately $110 in California to $250 in Missouri. Among our Medicaid Aged, Blind or

Disabled, or ABD, membership, PMPM premiums range from approximately $330 in Utah to $1,400 in Ohio.

Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain

benefits from the managed care contract (most often pharmacy, inpatient, behavioral health and catastrophic case

benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest

average PMPM premiums, at approximately $1,200 PMPM.

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)

Total

Total Ending Membership by State for our Medicare Advantage Plans(1):
California
Florida
Michigan
New Mexico
Ohio
Texas
Utah
Washington

Total

As of December 31,

2011

2010

2009

355,000
69,000
222,000
79,000
88,000
248,000
155,000
84,000
355,000
42,000

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
—

1,697,000 1,613,000 1,455,000

6,900
800
8,200
800
200
700
8,400
5,000

4,900
500
6,300
600
—
700
8,900
2,600

2,100
—
3,300
400
—
500
4,000
1,300

31,000

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)

Total

As of December 31,

2011

2010

2009

31,500
10,400
37,500
5,600
29,100
63,700
8,500
4,800
1,700

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
—

192,800 122,200 111,500

(1) We acquired the Wisconsin health plan on September 1, 2010. As of December 31, 2011, the Wisconsin
health plan had approximately 2,000 Medicare Advantage members covered under a reinsurance contract
with a third party; these members are not included in the membership tables herein.

Molina Medicaid Solutions Segment

Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is
the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO
services (which include claims payment and eligibility processing) we also provide the state with other services
including both hosting and support and maintenance. Because we have determined the services provided under
our Molina Medicaid Solutions contracts represent a single unit of accounting, we recognize revenue associated
with such contracts on a straight-line basis over the period during which BPO, hosting, and support and
maintenance services are delivered.

Composition of Expenses

Health Plans Segment

Operating expenses for the Health Plans segment include expenses related to the provision of medical care

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

• Fee-for-service: 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 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 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 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, 2011,
2010, and 2009, medically related administrative costs were approximately $102.3 million,
$85.5 million, and $74.6 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 Idaho, Louisiana, Maine, New Jersey, West Virginia, and

Florida. General and administrative costs consist primarily of indirect administrative costs and business

development costs.

In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware,

and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are

amortized on a straight-line basis over the remaining original contract term, consistent with the revenue

recognition period. We began to recognize deferred contract 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 contract costs in 2012, in a manner consistent with our anticipated recognition of revenue.

2011 Financial Performance Summary

The following table and narrative briefly summarizes our financial and operating performance for the years

ended December 31, 2011, 2010, and 2009. 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.

Earnings per diluted share

Total ending membership

Premium revenue

Service revenue

Operating income

Net income

Premium revenue

Service revenue

Investment income

Total revenue

Medical care ratio

Premium tax ratio

Operating income

Net income

Effective tax rate

General and administrative expense ratio

Year Ended December 31,

2011

2010

2009

(Dollar amounts in thousands, except per-share data)

1.32

0.79

$3,989,909

$3,660,207

0.45

$4,603,407

$ 160,447

80,173

20,818

1,697,000

89,809

$ 105,001

54,970

1,613,000

—

51,934

30,868

1,455,000

100.0%

96.5%

3.4%

0.1%

83.9%

8.7%

3.4%

1.7%

0.4%

67.8%

97.6%

2.2%

0.2%

84.5%

8.5%

3.5%

2.6%

1.3%

38.6%

99.8%

—

0.2%

86.8%

7.5%

3.5%

1.4%

0.8%

19.1%

Year Ended December 31, 2011 Compared with the Year Ended December 31, 2010

Fiscal Year 2011 Overview and Highlights

For the year, our net income was $20.8 million, or $0.45 per diluted share, a decrease of 66% over 2010. As

described above, we recorded a non-cash impairment charge of approximately $64.6 million, or $1.34 per diluted

share, in connection with the expiration of our Missouri health plan’s contract with the state of Missouri effective

June 30, 2012. Absent this impairment charge, improved performance of the Health Plans segment drove our

improved performance overall for the year ended December 31, 2011.

Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is

the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO

services (which include claims payment and eligibility processing) we also provide the state with other services

including both hosting and support and maintenance. Because we have determined the services provided under

our Molina Medicaid Solutions contracts represent a single unit of accounting, we recognize revenue associated

with such contracts on a straight-line basis over the period during which BPO, hosting, and support and

maintenance services are delivered.

Composition of Expenses

Health Plans Segment

Operating expenses for the Health Plans segment include expenses related to the provision of medical care

services, G&A expenses, and premium tax expenses. Our results of operations are impacted by our ability to

effectively manage expenses related to medical care services and to accurately estimate medical costs incurred.

Expenses related to medical care services are captured in the following four categories:

• Fee-for-service: 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 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 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 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, 2011,

2010, and 2009, medically related administrative costs were approximately $102.3 million,

$85.5 million, and $74.6 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 Idaho, Louisiana, Maine, New Jersey, West Virginia, and
Florida. General and administrative costs consist primarily of indirect administrative costs and business
development costs.

In some circumstances we may defer recognition of incremental direct costs (such as direct labor, hardware,
and software) associated with a contract if revenue recognition is also deferred. Such deferred contract costs are
amortized on a straight-line basis over the remaining original contract term, consistent with the revenue
recognition period. We began to recognize deferred contract 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 contract costs in 2012, in a manner consistent with our anticipated recognition of revenue.

2011 Financial Performance Summary

The following table and narrative briefly summarizes our financial and operating performance for the years

ended December 31, 2011, 2010, and 2009. 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.

Year Ended December 31,

2011

2010

2009

Earnings per diluted share
Premium revenue
Service revenue
Operating income
Net income
Total ending membership
Premium revenue
Service revenue
Investment income

Total revenue

Medical care ratio
General and administrative expense ratio
Premium tax ratio
Operating income
Net income
Effective tax rate

(Dollar amounts in thousands, except per-share data)
$
$
0.79
0.45
$3,660,207
$4,603,407
$
$ 160,447
$
80,173
$
20,818
$
$
1,697,000

$
1.32
$3,989,909
$
89,809
$ 105,001
54,970
$
1,613,000

—
51,934
30,868
1,455,000

96.5%
3.4%
0.1%

97.6%
2.2%
0.2%

99.8%
—
0.2%

100.0%

83.9%
8.7%
3.4%
1.7%
0.4%
67.8%

84.5%
8.5%
3.5%
2.6%
1.3%
38.6%

86.8%
7.5%
3.5%
1.4%
0.8%
19.1%

Year Ended December 31, 2011 Compared with the Year Ended December 31, 2010

Fiscal Year 2011 Overview and Highlights

For the year, our net income was $20.8 million, or $0.45 per diluted share, a decrease of 66% over 2010. As
described above, we recorded a non-cash impairment charge of approximately $64.6 million, or $1.34 per diluted
share, in connection with the expiration of our Missouri health plan’s contract with the state of Missouri effective
June 30, 2012. Absent this impairment charge, improved performance of the Health Plans segment drove our
improved performance overall for the year ended December 31, 2011.

We earned premium revenues of $4.6 billion, up 15.4% over the previous year. Meanwhile, we achieved a

medical care ratio of 83.9%, compared with a medical care ratio of 84.5% for fiscal year 2010. We have
continued to lay the foundation for further growth, achieving certification of our Medicaid management
information system in Maine, winning large contract awards in Texas, serving more of the ABD population in
California, and preparing to serve dual-eligible members in many of our states.

During 2011, we continued to pursue the expansion of our Health Plans segment; membership grew 8.4%

on a member-month basis over 2010. We have expanded our growing presence in Texas, where new contracts in
2010 and 2011 have led to the addition of approximately 61,000 members in 2011, which includes nearly 45,000
new ABD members. This membership growth not only provides increased scale for leveraging our resources in
Texas, it makes us 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.

Our Texas and Wisconsin health plans continue to face challenges. We have undertaken a number of
measures — focused on both utilization and unit cost reductions — to improve the profitability of these health
plans.

We remain concerned about state budget deficits, which are not expected to improve in 2012. Accordingly,

the rate environment for our health plans remains uncertain, and we have received several rate reductions in
2011, including a 2.5% reduction in New Mexico effective July 1, 2011, a 2% reduction in Utah effective July 1,
2011, a 2% rate reduction in Texas effective September 1, 2011, and a 1% reduction in California effective
October 1, 2011. Additionally, we have received a proposed rate reduction in California that we believe will
translate into a premium reduction of approximately 3.5% retroactive to July 1, 2011. However, we have also
received rate increases, including a 5% rate increase at our Missouri health plan effective July 1, 2011, a 7.5%
rate increase at our Florida plan effective September 1, 2011, and a 1% rate increase at our Michigan plan
effective October 1, 2011.

With respect to our Molina Medicaid Solutions business, our MMIS in Maine received full certification

from CMS in December 2011. The state of Idaho has sent their formal request for system certification to CMS,
and we anticipate certification review in early 2012, with formal certification in the second half of 2012.

Health Plans Segment

Premium Revenue

In the year ended December 31, 2011, compared with the year ended December 31, 2010, premium revenue

increased 15.4% due to a membership increase of approximately 8.4% (on a member-month basis), and PMPM
revenue increase of approximately 6.4%. Premium revenues were impacted by the following in 2011:

•

In the fourth quarter of 2011, our New Mexico health plan entered into a contract amendment that more
closely aligns the calculation of revenue with the methodology adopted under the Affordable Care Act.
The contract amendment changed the calculation of the amount of revenue that may be recognized
relative to medical costs, and resulted in the recognition of approximately $5.6 million of premium
revenue which all related to periods prior to 2011.

• Also in the fourth quarter of 2011, the addition of pharmacy benefits at our Ohio health plan effective

October 1, 2011, increased premium revenue.

Absent the adjustment to New Mexico premium revenue and the addition of the pharmacy benefit in Ohio,

premium revenue PMPM increased approximately 4.4%, from $218 in 2010 to $227 in 2011. Increased
enrollment among the ABD and Medicare populations contributed to the higher premium revenue PMPM.
Medicare premium revenue was $388.2 million for the year ended December 31, 2011, compared with $265.2
million for the year ended December 31, 2010.

Medical Care Costs

in thousands except PMPM amounts):

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

Fee for service

Capitation

Pharmacy

Other

Total

Year Ended December 31,

2011

2010

Amount

PMPM

Amount

PMPM

$2,764,309 $139.02

71.6% $2,360,858

$128.73

518,835

418,007

158,843

26.09

21.02

8.00

555,487

325,935

128,577

30.29

17.77

7.01

% of

Total

13.4

10.8

4.2

% of

Total

70.0%

16.5

9.7

3.8

$3,859,994 $194.13 100.0% $3,370,857

$183.80

100.0%

The medical care ratio decreased to 83.9% for the year ended December 31, 2011, compared with 84.5% for

the year ended December 31, 2010. Absent that portion of the adjustment to New Mexico premium revenue that

related to 2010, the medical care ratio was 84.0% for the year ended December 31, 2011. Total medical care

costs increased less than 6% PMPM.

•

Pharmacy costs (excluding the addition of pharmacy benefits at our Ohio health plan effective

October 1, 2011) increased approximately 7% PMPM. Approximately two-thirds of the increase in

pharmacy costs was attributable to higher unit costs, with the remainder due to increased utilization.

• Capitation costs decreased approximately 14% PMPM, primarily due to the transition of members in

Michigan and Washington into fee-for-service networks.

•

Fee-for-service costs increased approximately 8% PMPM, partially due to the transition of members

from capitated provider networks into fee-for-service networks.

Fee-for-service and capitation costs combined increased approximately 4% PMPM. Excluding the

Texas health plan, fee-for-service and capitation costs combined increased approximately 2% PMPM.

• Hospital utilization decreased approximately 5%.

The medical care ratio of the California health plan increased to 85.8% for the year ended December 31,

2011, from 83.5% for the year ended December 31, 2010. The California health plan received premium

reductions of approximately 3% and 1% effective July 1, 2011, and October 1, 2011, respectively. In the second

half of 2011, the California health plan added approximately 14,500 new ABD members with average premium

revenue of approximately $385 PMPM.

The medical care ratio of the Florida health plan decreased to 91.9% for the year ended December 31, 2011,

from 95.4% for the year ended December 31, 2010, primarily due to initiatives that have reduced pharmacy and

behavioural health costs, and a premium rate increase of approximately 7.5% effective September 1, 2011.

The medical care ratio of the Michigan health plan decreased to 81.2% for the year ended December 31,

2011, from 83.7% for the year ended December 31, 2010, primarily due to improved Medicare performance and

lower inpatient facility costs. The Michigan health plan received a premium rate increase of approximately 1%

effective October 1, 2011.

The medical care ratio of the Missouri health plan decreased to 85.3% for the year ended December 31,

2011, from 85.5% for the year ended December 31, 2010. The health plan received a premium rate increase of

approximately 5% effective July 1, 2011.

We earned premium revenues of $4.6 billion, up 15.4% over the previous year. Meanwhile, we achieved a

medical care ratio of 83.9%, compared with a medical care ratio of 84.5% for fiscal year 2010. We have

continued to lay the foundation for further growth, achieving certification of our Medicaid management

information system in Maine, winning large contract awards in Texas, serving more of the ABD population in

California, and preparing to serve dual-eligible members in many of our states.

During 2011, we continued to pursue the expansion of our Health Plans segment; membership grew 8.4%

on a member-month basis over 2010. We have expanded our growing presence in Texas, where new contracts in

2010 and 2011 have led to the addition of approximately 61,000 members in 2011, which includes nearly 45,000

new ABD members. This membership growth not only provides increased scale for leveraging our resources in

Texas, it makes us 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.

Our Texas and Wisconsin health plans continue to face challenges. We have undertaken a number of

measures — focused on both utilization and unit cost reductions — to improve the profitability of these health

plans.

We remain concerned about state budget deficits, which are not expected to improve in 2012. Accordingly,

the rate environment for our health plans remains uncertain, and we have received several rate reductions in

2011, including a 2.5% reduction in New Mexico effective July 1, 2011, a 2% reduction in Utah effective July 1,

2011, a 2% rate reduction in Texas effective September 1, 2011, and a 1% reduction in California effective

October 1, 2011. Additionally, we have received a proposed rate reduction in California that we believe will

translate into a premium reduction of approximately 3.5% retroactive to July 1, 2011. However, we have also

received rate increases, including a 5% rate increase at our Missouri health plan effective July 1, 2011, a 7.5%

rate increase at our Florida plan effective September 1, 2011, and a 1% rate increase at our Michigan plan

effective October 1, 2011.

With respect to our Molina Medicaid Solutions business, our MMIS in Maine received full certification

from CMS in December 2011. The state of Idaho has sent their formal request for system certification to CMS,

and we anticipate certification review in early 2012, with formal certification in the second half of 2012.

Health Plans Segment

Premium Revenue

In the year ended December 31, 2011, compared with the year ended December 31, 2010, premium revenue

increased 15.4% due to a membership increase of approximately 8.4% (on a member-month basis), and PMPM

revenue increase of approximately 6.4%. Premium revenues were impacted by the following in 2011:

•

In the fourth quarter of 2011, our New Mexico health plan entered into a contract amendment that more

closely aligns the calculation of revenue with the methodology adopted under the Affordable Care Act.

The contract amendment changed the calculation of the amount of revenue that may be recognized

relative to medical costs, and resulted in the recognition of approximately $5.6 million of premium

revenue which all related to periods prior to 2011.

• Also in the fourth quarter of 2011, the addition of pharmacy benefits at our Ohio health plan effective

October 1, 2011, increased premium revenue.

Absent the adjustment to New Mexico premium revenue and the addition of the pharmacy benefit in Ohio,

premium revenue PMPM increased approximately 4.4%, from $218 in 2010 to $227 in 2011. Increased

enrollment among the ABD and Medicare populations contributed to the higher premium revenue PMPM.

Medicare premium revenue was $388.2 million for the year ended December 31, 2011, compared with $265.2

million for the year ended December 31, 2010.

Medical Care Costs

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

in thousands except PMPM amounts):

Fee for service
Capitation
Pharmacy
Other

Total

Year Ended December 31,

2011

2010

Amount

PMPM

$2,764,309 $139.02
26.09
21.02
8.00

518,835
418,007
158,843

% of
Total

Amount

PMPM

71.6% $2,360,858 $128.73
30.29
555,487
13.4
17.77
325,935
10.8
7.01
128,577
4.2

% of
Total

70.0%
16.5
9.7
3.8

$3,859,994 $194.13 100.0% $3,370,857 $183.80 100.0%

The medical care ratio decreased to 83.9% for the year ended December 31, 2011, compared with 84.5% for
the year ended December 31, 2010. Absent that portion of the adjustment to New Mexico premium revenue that
related to 2010, the medical care ratio was 84.0% for the year ended December 31, 2011. Total medical care
costs increased less than 6% PMPM.

•

Pharmacy costs (excluding the addition of pharmacy benefits at our Ohio health plan effective
October 1, 2011) increased approximately 7% PMPM. Approximately two-thirds of the increase in
pharmacy costs was attributable to higher unit costs, with the remainder due to increased utilization.

• Capitation costs decreased approximately 14% PMPM, primarily due to the transition of members in

Michigan and Washington into fee-for-service networks.

•

Fee-for-service costs increased approximately 8% PMPM, partially due to the transition of members
from capitated provider networks into fee-for-service networks.

Fee-for-service and capitation costs combined increased approximately 4% PMPM. Excluding the
Texas health plan, fee-for-service and capitation costs combined increased approximately 2% PMPM.

• Hospital utilization decreased approximately 5%.

The medical care ratio of the California health plan increased to 85.8% for the year ended December 31,

2011, from 83.5% for the year ended December 31, 2010. The California health plan received premium
reductions of approximately 3% and 1% effective July 1, 2011, and October 1, 2011, respectively. In the second
half of 2011, the California health plan added approximately 14,500 new ABD members with average premium
revenue of approximately $385 PMPM.

The medical care ratio of the Florida health plan decreased to 91.9% for the year ended December 31, 2011,

from 95.4% for the year ended December 31, 2010, primarily due to initiatives that have reduced pharmacy and
behavioural health costs, and a premium rate increase of approximately 7.5% effective September 1, 2011.

The medical care ratio of the Michigan health plan decreased to 81.2% for the year ended December 31,
2011, from 83.7% for the year ended December 31, 2010, primarily due to improved Medicare performance and
lower inpatient facility costs. The Michigan health plan received a premium rate increase of approximately 1%
effective October 1, 2011.

The medical care ratio of the Missouri health plan decreased to 85.3% for the year ended December 31,

2011, from 85.5% for the year ended December 31, 2010. The health plan received a premium rate increase of
approximately 5% effective July 1, 2011.

The medical care ratio of the New Mexico health plan decreased to 80.2% for the year ended December 31,
2011, from 80.6 % for the year ended December 31, 2010. The New Mexico health plan received a premium rate
reduction of approximately 2.5% effective July 1, 2011. As discussed above, the New Mexico health plan entered
into a contract amendment changed the calculation of the amount of revenue that may be recognized relative to
medical costs in the fourth quarter of 2011. Consequently, premium revenue recognized in the year ended
December 31, 2011, includes $5.6 million related to periods prior to 2011.

The medical care ratio of the Ohio health plan decreased to 77.6% for the year ended December 31, 2011,

from 79.1% for the year ended December 31, 2010, due to an increase in Medicaid premium PMPM of
approximately 4.5% effective January 1, 2011, and relatively flat fee-for-service costs. The pharmacy benefit was
restored to all managed care plans in Ohio effective October 1, 2011.

The medical care ratio of the Texas health plan increased to 93.4% for the year ended December 31, 2011,
from 86.2% for the year ended December 31, 2010. Effective February 1, 2011, we added approximately 30,000
ABD members in the Dallas-Fort Worth area and effective September 1, 2011, we added approximately 8,000
ABD members and 3,000 TANF members in the Jefferson Service area. Medical costs in the Dallas-Fort Worth
area were well in excess of premium revenue. Excluding the ABD population in the Dallas-Fort Worth region,
the medical care ratio of the Texas health plan was 85.7% for the year ended December 31, 2011.

The medical care ratio of the Utah health plan decreased to 78.1% for the year ended December 31, 2011,

from 91.3% for the year ended December 31, 2010, primarily due to reduced fee-for-service inpatient and
physician costs and an increase in Medicaid premiums PMPM. Effective July 1, 2010, the Utah health plan
received a premium rate increase of approximately 7%. Lower fee-for-service costs were the result of both lower
unit costs and lower utilization. During the second quarter of 2011 we settled certain claims with the state
regarding the savings share provision of our contract in effect from 2003 through June of 2009. We settled for the
contract years 2006 through 2009 and recognized $6.9 million in premium revenue without any corresponding
charge to expense. The Utah health plan received a premium rate reduction of approximately 2% effective July 1,
2011.

The medical care ratio of the Washington health plan remained flat at 83.9% for the year ended

December 31, 2011 compared with the year ended December 31, 2010. Higher fee-for-service and pharmacy
costs were offset by lower capitation costs.

The medical care ratio of the Wisconsin health plan (acquired September 1, 2010) was 92.5% for the year

ended December 31, 2011. The state of Wisconsin reduced capitation rates by 11% on January 1, 2011. We have
undertaken a number of measures — focused on both utilization and unit cost reductions — to improve the
profitability of the Wisconsin health plan. Significant improvements in inpatient utilization were realized in the
second half of 2011.

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, 2011

Member

Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical

Care

Ratio

Premium

Tax Expense

$ 575,176

$137.27 $ 493,419

$117.75

85.8% $

7,499

California

Florida

Michigan

Missouri

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(2)

Other(3)

California

Florida

Michigan

Missouri

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(2)

Other(3)

4,190

788

2,660

959

1,074

2,966

1,616

972

4,171

488

—

4,197

664

2,708

946

1,104

2,817

708

921

4,141

134

—

19,884

$4,603,407 $231.51 $3,859,994

$194.13

83.9% $154,589

Year Ended December 31, 2010

Member

Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical

Care

Ratio

Premium

Tax Expense

$ 506,871

$120.77 $ 423,021

$100.79

83.5% $

6,912

203,945

662,127

229,584

345,732

988,896

409,295

287,290

823,323

69,596

8,443

258.70

248.91

239.38

321.94

333.40

253.40

295.51

197.42

142.56

—

187,358

537,779

195,832

277,338

766,949

382,390

224,513

690,513

64,346

39,557

237.66

202.16

204.19

258.25

258.57

236.74

230.94

165.57

131.81

—

170,683

630,134

210,852

366,784

860,324

188,716

258,076

758,849

30,033

8,587

256.87

232.66

222.98

332.02

305.42

266.72

280.27

183.27

224.75

—

162,839

527,596

180,291

295,633

680,802

162,714

235,576

636,617

27,574

38,194

245.07

194.80

190.66

267.61

241.69

229.97

255.84

153.75

206.35

—

91.9

81.2

85.3

80.2

77.6

93.4

78.1

83.9

92.5

—

95.4

83.7

85.5

80.6

79.1

86.2

91.3

83.9

91.8

—

38,733

—

9,285

76,677

7,117

—

14,865

328

39,187

—

9,300

67,358

3,251

—

13,513

—

253

18,340

$3,989,909 $217.56 $3,370,857

$183.80

84.5% $139,775

(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 of the parent company.

Days in Medical Claims and Benefits Payable

The days in medical claims and benefits payable 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 thousands)

December 31,

2011

2010

2009

40 days

111,100

42 days

143,600

44 days

93,100

$207,600

$218,900

$131,400

The medical care ratio of the New Mexico health plan decreased to 80.2% for the year ended December 31,

2011, from 80.6 % for the year ended December 31, 2010. The New Mexico health plan received a premium rate

reduction of approximately 2.5% effective July 1, 2011. As discussed above, the New Mexico health plan entered

into a contract amendment changed the calculation of the amount of revenue that may be recognized relative to

medical costs in the fourth quarter of 2011. Consequently, premium revenue recognized in the year ended

December 31, 2011, includes $5.6 million related to periods prior to 2011.

The medical care ratio of the Ohio health plan decreased to 77.6% for the year ended December 31, 2011,

from 79.1% for the year ended December 31, 2010, due to an increase in Medicaid premium PMPM of

approximately 4.5% effective January 1, 2011, and relatively flat fee-for-service costs. The pharmacy benefit was

restored to all managed care plans in Ohio effective October 1, 2011.

The medical care ratio of the Texas health plan increased to 93.4% for the year ended December 31, 2011,

from 86.2% for the year ended December 31, 2010. Effective February 1, 2011, we added approximately 30,000

ABD members in the Dallas-Fort Worth area and effective September 1, 2011, we added approximately 8,000

ABD members and 3,000 TANF members in the Jefferson Service area. Medical costs in the Dallas-Fort Worth

area were well in excess of premium revenue. Excluding the ABD population in the Dallas-Fort Worth region,

the medical care ratio of the Texas health plan was 85.7% for the year ended December 31, 2011.

The medical care ratio of the Utah health plan decreased to 78.1% for the year ended December 31, 2011,

from 91.3% for the year ended December 31, 2010, primarily due to reduced fee-for-service inpatient and

physician costs and an increase in Medicaid premiums PMPM. Effective July 1, 2010, the Utah health plan

received a premium rate increase of approximately 7%. Lower fee-for-service costs were the result of both lower

unit costs and lower utilization. During the second quarter of 2011 we settled certain claims with the state

regarding the savings share provision of our contract in effect from 2003 through June of 2009. We settled for the

contract years 2006 through 2009 and recognized $6.9 million in premium revenue without any corresponding

charge to expense. The Utah health plan received a premium rate reduction of approximately 2% effective July 1,

2011.

The medical care ratio of the Washington health plan remained flat at 83.9% for the year ended

December 31, 2011 compared with the year ended December 31, 2010. Higher fee-for-service and pharmacy

costs were offset by lower capitation costs.

The medical care ratio of the Wisconsin health plan (acquired September 1, 2010) was 92.5% for the year

ended December 31, 2011. The state of Wisconsin reduced capitation rates by 11% on January 1, 2011. We have

undertaken a number of measures — focused on both utilization and unit cost reductions — to improve the

profitability of the Wisconsin health plan. Significant improvements in inpatient utilization were realized in the

second half of 2011.

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, 2011

Member
Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical
Care
Ratio

Premium
Tax Expense

California
Florida
Michigan
Missouri
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin(2)
Other(3)

4,190
788
2,660
959
1,074
2,966
1,616
972
4,171
488
—

$ 575,176 $137.27 $ 493,419 $117.75
237.66
202.16
204.19
258.25
258.57
236.74
230.94
165.57
131.81
—

203,945
662,127
229,584
345,732
988,896
409,295
287,290
823,323
69,596
8,443

187,358
537,779
195,832
277,338
766,949
382,390
224,513
690,513
64,346
39,557

258.70
248.91
239.38
321.94
333.40
253.40
295.51
197.42
142.56
—

85.8% $ 7,499
41
91.9
38,733
81.2
—
85.3
9,285
80.2
76,677
77.6
7,117
93.4
—
78.1
14,865
83.9
44
92.5
328
—

19,884

$4,603,407 $231.51 $3,859,994 $194.13

83.9% $154,589

Year Ended December 31, 2010

Member
Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical
Care
Ratio

Premium
Tax Expense

4,197
664
2,708
946
1,104
2,817
708
921
4,141
134
—

$ 506,871 $120.77 $ 423,021 $100.79
245.07
194.80
190.66
267.61
241.69
229.97
255.84
153.75
206.35
—

170,683
630,134
210,852
366,784
860,324
188,716
258,076
758,849
30,033
8,587

162,839
527,596
180,291
295,633
680,802
162,714
235,576
636,617
27,574
38,194

256.87
232.66
222.98
332.02
305.42
266.72
280.27
183.27
224.75
—

83.5% $ 6,912
1
95.4
39,187
83.7
—
85.5
9,300
80.6
67,358
79.1
3,251
86.2
—
91.3
13,513
83.9
—
91.8
253
—

18,340

$3,989,909 $217.56 $3,370,857 $183.80

84.5% $139,775

(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 of the parent company.

Days in Medical Claims and Benefits Payable

The days in medical claims and benefits payable 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 thousands)

December 31,

2011

2010

2009

44 days
42 days
40 days
111,100
93,100
143,600
$207,600 $218,900 $131,400

Molina Medicaid Solutions Segment

We acquired Molina Medicaid Solutions on May 1, 2010; therefore, the year ended December 31, 2010
includes only eight months of operating results for this segment. Performance of the Molina Medicaid Solutions
segment was as follows:

Service revenue before amortization
Amortization recorded as reduction of service revenue

Service revenue
Cost of service revenue
General and administrative costs
Amortization of customer relationship intangibles recorded as

amortization

Operating income

Twelve Months Ended
December 31, 2011

Eight Months Ended
December 31, 2010

(In thousands)

$167,269
(6,822)

160,447
143,987
9,270

5,127

$ 2,063

$98,125
(8,316)

89,809
78,647
5,135

3,418

$ 2,609

We are currently deferring recognition of all revenue as well as all direct costs (to the extent that such costs

are estimated to be recoverable) in Idaho until the MMIS in that state receives certification from CMS. For the
year ended December 31, 2011, cost of service revenue includes $11.5 million of direct costs associated with the
Idaho contract that would otherwise have been recorded as deferred contract costs. In assessing the recoverability
of the deferred contract costs associated with the Idaho contract during 2011, we determined that these costs
should be expensed as a period cost. In December 2011, our MMIS in Maine received full certification from
CMS.

Consolidated Expenses and Other

General and Administrative Expenses

General and administrative expenses were $415.9 million, or 8.7% of total revenue, for the year ended
December 31, 2011, compared with $346.0 million, or 8.5% of total revenue, for the year ended December 31,
2010.

Premium Tax Expense

Premium tax expense decreased to 3.4% of premium revenue, for the year ended December 31, 2011, from

3.5% for the year ended December 31, 2010.

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. Amortization related to our Molina Medicaid Solutions
segment is recorded within three different headings in the consolidated statements of income as follows:

• Amortization of purchased intangibles relating to customer relationships is reported as amortization

within the heading “Depreciation and Amortization;”

• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of

“Service Revenue;” and

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 service revenue,

or as cost of service revenue.

Depreciation, and amortization of capitalized software

Amortization of intangible assets

Depreciation and amortization reported as such in the consolidated

statements of income

Amortization recorded as reduction of service revenue

Amortization of capitalized software recorded as cost of service revenue

Total

Year Ended December 31,

2011

% of Total

2010

% of Total

Revenue

Amount

Revenue Amount

(Dollar amounts in thousands)

$30,864

19,826

0.7% $27,230

0.4

18,474

0.7%

0.4

50,690

6,822

16,871

1.1

0.1

0.4

45,704

8,316

6,745

1.1

0.2

$74,383

1.6% $60,765

1.5%

Impairment of Goodwill and Intangible Assets

We recorded a non-cash impairment charge of approximately $64.6 million, or $1.34 per diluted share, in

connection with the expiration of our Missouri health plan’s contract with the state of Missouri effective June 30,

2012. Of the total charge, $58.5 million is not tax deductible, resulting in a disproportionate impact to net

income.

Interest Expense

Income Taxes

Health Plans Segment

Premium Revenue

Interest expense was $15.5 million for the years ended December 31, 2011 and 2010. Interest expense

includes non-cash interest expense relating to our convertible senior notes, which amounted to $5.5 million and

$5.1 million for the years ended December 31, 2011 and 2010, respectively.

Income tax expense is recorded at an effective rate of 67.8% for the year ended December 31, 2011,

compared with 38.6% for the year ended December 31, 2010. The effective rate for the year ended December 31,

2011 reflects the non-deductible nature of the majority of the Missouri impairment charge, discrete tax benefits

of $1.7 million recognized for statute closures, prior year tax return to provision reconciliations, and certain

non-recurring income that is not subject to income tax. Excluding the impact from the Missouri impairment

charge and discrete tax benefits, the effective tax rate for the year ended December 31, 2011 was 37.9%.

Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009

In the year ended December 31, 2010, compared with the year ended December 31, 2009, premium revenue

increased 9.0% due to a membership increase of approximately 10.9% (on a member-month basis). 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

• Amortization of capitalized software is recorded within the heading “Cost of Service Revenue.”

$135.9 million for the year ended December 31, 2009.

Molina Medicaid Solutions Segment

We acquired Molina Medicaid Solutions on May 1, 2010; therefore, the year ended December 31, 2010

includes only eight months of operating results for this segment. Performance of the Molina Medicaid Solutions

segment was as follows:

Service revenue before amortization

Amortization recorded as reduction of service revenue

Service revenue

Cost of service revenue

General and administrative costs

amortization

Operating income

Amortization of customer relationship intangibles recorded as

Twelve Months Ended

December 31, 2011

Eight Months Ended

December 31, 2010

(In thousands)

$167,269

(6,822)

160,447

143,987

9,270

5,127

2,063

$98,125

(8,316)

89,809

78,647

5,135

3,418

$ 2,609

We are currently deferring recognition of all revenue as well as all direct costs (to the extent that such costs

are estimated to be recoverable) in Idaho until the MMIS in that state receives certification from CMS. For the

year ended December 31, 2011, cost of service revenue includes $11.5 million of direct costs associated with the

Idaho contract that would otherwise have been recorded as deferred contract costs. In assessing the recoverability

of the deferred contract costs associated with the Idaho contract during 2011, we determined that these costs

should be expensed as a period cost. In December 2011, our MMIS in Maine received full certification from

Consolidated Expenses and Other

General and Administrative Expenses

CMS.

2010.

Premium Tax Expense

Depreciation and Amortization

General and administrative expenses were $415.9 million, or 8.7% of total revenue, for the year ended

December 31, 2011, compared with $346.0 million, or 8.5% of total revenue, for the year ended December 31,

Premium tax expense decreased to 3.4% of premium revenue, for the year ended December 31, 2011, from

3.5% for the year ended December 31, 2010.

Depreciation and amortization related to our Health Plans segment is all recorded in “Depreciation and

Amortization” in the consolidated statements of income. Amortization related to our Molina Medicaid Solutions

segment is recorded within three different headings in the consolidated statements of income as follows:

• Amortization of purchased intangibles relating to customer relationships is reported as amortization

within the heading “Depreciation and Amortization;”

• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of

“Service Revenue;” and

• Amortization of capitalized software is recorded within the heading “Cost of Service Revenue.”

The following table presents all depreciation and amortization recorded in our consolidated statements of

income, regardless of whether the item appears as depreciation and amortization, a reduction of service revenue,
or as cost of service revenue.

Depreciation, and amortization of capitalized software
Amortization of intangible assets

Depreciation and amortization reported as such in the consolidated

statements of income

Amortization recorded as reduction of service revenue
Amortization of capitalized software recorded as cost of service revenue

Total

Year Ended December 31,

2011

2010

Amount

% of Total
Revenue Amount

% of Total
Revenue

(Dollar amounts in thousands)
0.7% $27,230
18,474
0.4

$30,864
19,826

0.7%
0.4

50,690
6,822
16,871

1.1
0.1
0.4

45,704
8,316
6,745

1.1
0.2
0.2

$74,383

1.6% $60,765

1.5%

Impairment of Goodwill and Intangible Assets

We recorded a non-cash impairment charge of approximately $64.6 million, or $1.34 per diluted share, in
connection with the expiration of our Missouri health plan’s contract with the state of Missouri effective June 30,
2012. Of the total charge, $58.5 million is not tax deductible, resulting in a disproportionate impact to net
income.

Interest Expense

Interest expense was $15.5 million for the years ended December 31, 2011 and 2010. Interest expense
includes non-cash interest expense relating to our convertible senior notes, which amounted to $5.5 million and
$5.1 million for the years ended December 31, 2011 and 2010, respectively.

Income Taxes

Income tax expense is recorded at an effective rate of 67.8% for the year ended December 31, 2011,

compared with 38.6% for the year ended December 31, 2010. The effective rate for the year ended December 31,
2011 reflects the non-deductible nature of the majority of the Missouri impairment charge, discrete tax benefits
of $1.7 million recognized for statute closures, prior year tax return to provision reconciliations, and certain
non-recurring income that is not subject to income tax. Excluding the impact from the Missouri impairment
charge and discrete tax benefits, the effective tax rate for the year ended December 31, 2011 was 37.9%.

Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009

Health Plans Segment

Premium Revenue

In the year ended December 31, 2010, compared with the year ended December 31, 2009, premium revenue
increased 9.0% due to a membership increase of approximately 10.9% (on a member-month basis). 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.

Medical Care Costs

Health Plans Segment Operating Data

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

in thousands except PMPM amounts):

Fee for service
Capitation
Pharmacy
Other

Total

Year Ended December 31,

2010

2009

Amount

PMPM

$2,360,858 $128.73
30.29
17.77
7.01

555,487
325,935
128,577

% of
Total

Amount

PMPM

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

% of
Total

65.4%
17.6
13.1
3.9

$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, from 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.

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

Member

Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical

Care

Ratio

Premium

Tax Expense

$ 506,871

$120.77 $ 423,021

$100.79

83.5% $

6,912

California

Florida

Michigan

Missouri

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(2)

Other(3)

California

Florida

Michigan

Missouri

New Mexico

Ohio

Texas

Utah

Washington

Wisconsin(2)

Other(3)(4)

4,197

664

2,708

946

1,104

2,817

708

921

4,141

134

—

4,135

386

2,523

927

1,042

2,411

402

793

3,847

—

18,340

$3,989,909 $217.56 $3,370,857

$183.80

84.5% $139,775

Year Ended December 31, 2009

Member

Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical

Care

Ratio

Premium

Tax Expense

$ 481,717

$116.49 $ 443,892

$107.34

92.2% $ 16,446

170,683

630,134

210,852

366,784

860,324

188,716

258,076

758,849

30,033

8,587

256.87

232.66

222.98

332.02

305.42

266.72

280.27

183.27

224.75

—

162,839

527,596

180,291

295,633

680,802

162,714

235,576

636,617

27,574

38,194

245.07

194.80

190.66

267.61

241.69

229.97

255.84

153.75

206.35

—

102,232

557,421

230,222

404,026

803,521

134,860

207,297

726,137

—

12,774

264.94

220.94

248.25

387.67

333.33

335.69

261.43

188.77

—

95,936

454,431

191,585

346,044

691,402

110,794

190,319

613,876

—

37,957

248.62

180.12

206.59

332.03

286.82

275.78

240.02

159.58

—

95.4

83.7

85.5

80.6

79.1

86.2

91.3

83.9

91.8

—

93.8

81.5

83.2

85.7

86.1

82.2

91.8

84.5

—

39,187

—

9,300

67,358

3,251

—

13,513

—

253

36,482

—

11,043

47,849

2,513

—

14,175

—

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.”

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.

Medical Care Costs

in thousands except PMPM amounts):

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

Fee for service

Capitation

Pharmacy

Other

Total

Year Ended December 31,

2010

2009

Amount

PMPM

Amount

PMPM

$2,360,858 $128.73

70.0% $2,077,489

$126.14

65.4%

555,487

325,935

128,577

30.29

17.77

7.01

558,538

414,785

125,424

33.91

25.18

7.62

% of

Total

17.6

13.1

3.9

% of

Total

16.5

9.7

3.8

$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, from 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.

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

Member
Months(1)

Premium Revenue

Medical Care Costs

Total

PMPM

Total

PMPM

Medical
Care
Ratio

Premium
Tax Expense

California
Florida
Michigan
Missouri
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin(2)
Other(3)

California
Florida
Michigan
Missouri
New Mexico
Ohio
Texas
Utah
Washington
Wisconsin(2)
Other(3)(4)

4,197
664
2,708
946
1,104
2,817
708
921
4,141
134
—

$ 506,871 $120.77 $ 423,021 $100.79
245.07
194.80
190.66
267.61
241.69
229.97
255.84
153.75
206.35
—

170,683
630,134
210,852
366,784
860,324
188,716
258,076
758,849
30,033
8,587

162,839
527,596
180,291
295,633
680,802
162,714
235,576
636,617
27,574
38,194

256.87
232.66
222.98
332.02
305.42
266.72
280.27
183.27
224.75
—

83.5% $ 6,912
1
95.4
39,187
83.7
—
85.5
9,300
80.6
67,358
79.1
3,251
86.2
—
91.3
13,513
83.9
—
91.8
253
—

18,340

$3,989,909 $217.56 $3,370,857 $183.80

84.5% $139,775

Year Ended December 31, 2009

Member
Months(1)

Premium Revenue
Total

PMPM

Medical Care Costs
Total

PMPM

Medical
Care
Ratio

Premium
Tax Expense

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

102,232
557,421
230,222
404,026
803,521
134,860
207,297
726,137

$ 481,717 $116.49 $ 443,892 $107.34
248.62
180.12
206.59
332.03
286.82
275.78
240.02
159.58
—
—

264.94
220.94
248.25
387.67
333.33
335.69
261.43
188.77
—
—

95,936
454,431
191,585
346,044
691,402
110,794
190,319
613,876

—
12,774

—
37,957

92.2% $ 16,446
16
93.8
36,482
81.5
—
83.2
11,043
85.7
47,849
86.1
2,513
82.2
—
91.8
14,175
84.5
—
—
57
—

16,466

$3,660,207 $222.24 $3,176,236 $192.85

86.8% $128,581

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

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
Amortization recorded as reduction of service revenue

Service revenue
Cost of service revenue
General and administrative costs
Amortization of customer relationship intangibles recorded as amortization

Operating income

Consolidated Expenses and Other

General and Administrative Expenses

(In thousands)

$98,125
(8,316)

89,809
78,647
5,135
3,418

$ 2,609

General and administrative 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.

Premium Tax Expense

Premium tax expense relating to Health Plans segment premium revenue was 3.5% of revenue for both

Liquidity and Capital Resources

years ended December 31, 2010, and 2009.

Depreciation and Amortization

The following table presents all depreciation and amortization recorded in our consolidated statements of

income, regardless of whether the item appears as depreciation and amortization, a reduction of service revenue,
or as cost of service revenue.

Depreciation, and amortization of capitalized software
Amortization of intangible assets

Depreciation and amortization reported as such in the consolidated

statements of income

Amortization recorded as reduction of service revenue
Amortization of capitalized software recorded as cost of service

revenue

Total

Interest Expense

Year Ended December 31,

2010

2009

Amount

% of Total
Revenue

Amount

% of Total
Revenue

$27,230
18,474

(Dollar amounts in thousands)
0.7% $25,172
12,938
0.4

0.7%
0.3

45,704
8,316

6,745

1.1
0.2

0.2

38,110
—

1.0
—

—

$60,765

1.5% $38,110

1.0%

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 amounted to $5.1 million and $4.8 million for the years ended December 31, 2010 and 2009, respectively.

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

Income Taxes

estimated tax credits.

Acquisitions

Molina Center. On December 7, 2011, our wholly owned subsidiary Molina Center LLC closed on its

acquisition of the 460,000 square foot office building located in Long Beach, California. The building, or Molina

Center, consists of two conjoined fourteen-story office towers on approximately five acres of land. For the last

several years we have leased approximately 155,000 square feet of the Molina Center for use as our corporate

headquarters and also for use by our California health plan subsidiary. The final purchase price was $81 million,

which amount was paid with a combination of cash on hand and bank financing under a term loan agreement. We

acquired this business primarily to facilitate space needs for the projected future growth of the Company.

Molina Medicaid Solutions. On May 1, 2010, we acquired a health information management business which

we operate under the name, Molina Medicaid SolutionsSM as described in Overview, above.

We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our

business while maintaining liquidity and financial flexibility. We forecast, analyze, and monitor our cash flows to

enable prudent investment management and financing within the confines of our financial strategy.

Our regulated subsidiaries generate significant cash flows from premium revenue. Such cash flows are our

primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our

liquidity. We generally receive premium revenue 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, 2011, 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 restricted investments, and 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 $5.5 million for the year ended December 31, 2011, compared with $6.3

million for the year ended December 31, 2010. Our annualized portfolio yields for the years ended December 31,

2011, 2010, and 2009 were 0.6%, 0.7%, and 1.2%, respectively.

Performance of the Molina Medicaid Solutions segment for the year ended December 31, 2010 was as

follows:

Amortization of customer relationship intangibles recorded as amortization

Service revenue before amortization

Amortization recorded as reduction of service revenue

Service revenue

Cost of service revenue

General and administrative costs

Operating income

Consolidated Expenses and Other

General and Administrative Expenses

(In thousands)

$98,125

(8,316)

89,809

78,647

5,135

3,418

$ 2,609

General and administrative 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.

Premium Tax Expense

years ended December 31, 2010, and 2009.

Depreciation and Amortization

The following table presents all depreciation and amortization recorded in our consolidated statements of

income, regardless of whether the item appears as depreciation and amortization, a reduction of service revenue,

or as cost of service revenue.

Depreciation, and amortization of capitalized software

Amortization of intangible assets

Depreciation and amortization reported as such in the consolidated

statements of income

Amortization recorded as reduction of service revenue

Amortization of capitalized software recorded as cost of service

revenue

Total

Interest Expense

Year Ended December 31,

2010

2009

Amount

% of Total

Revenue

Amount

% of Total

Revenue

(Dollar amounts in thousands)

0.7% $25,172

$27,230

18,474

45,704

8,316

6,745

0.4

1.1

0.2

12,938

38,110

—

0.7%

0.3

1.0

—

$60,765

1.5% $38,110

1.0%

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 amounted to $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.

Acquisitions

Molina Center. On December 7, 2011, our wholly owned subsidiary Molina Center LLC closed on its
acquisition of the 460,000 square foot office building located in Long Beach, California. The building, or Molina
Center, consists of two conjoined fourteen-story office towers on approximately five acres of land. For the last
several years we have leased approximately 155,000 square feet of the Molina Center for use as our corporate
headquarters and also for use by our California health plan subsidiary. The final purchase price was $81 million,
which amount was paid with a combination of cash on hand and bank financing under a term loan agreement. We
acquired this business primarily to facilitate space needs for the projected future growth of the Company.

Molina Medicaid Solutions. On May 1, 2010, we acquired a health information management business which

we operate under the name, Molina Medicaid SolutionsSM as described in Overview, above.

Premium tax expense relating to Health Plans segment premium revenue was 3.5% of revenue for both

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. Such cash flows are our

primary source of liquidity. Thus, any future decline in our profitability may have a negative impact on our
liquidity. We generally receive premium revenue in advance of the payment of claims for the related health care
services. A majority of the assets held by our regulated subsidiaries are in the form of cash, cash equivalents, and
investments. After considering expected cash flows from operating activities, we generally invest cash of
regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade,
marketable debt securities to improve our overall investment return. These investments are made pursuant to
board approved investment policies which conform to applicable state laws and regulations. Our investment
policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets, all in a
manner consistent with state requirements that prescribe the types of instruments in which our subsidiaries may
invest. These investment policies require that our investments have final maturities of 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, 2011, 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 restricted investments, and 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 $5.5 million for the year ended December 31, 2011, compared with $6.3
million for the year ended December 31, 2010. Our annualized portfolio yields for the years ended December 31,
2011, 2010, and 2009 were 0.6%, 0.7%, and 1.2%, 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. Declines in interest rates over
time will reduce our investment income.

Cash in excess of the capital needs of our regulated health plans is generally paid to our non-regulated
parent company in the form of dividends, when and as permitted by applicable regulations, for general corporate
use.

Cash provided by operating activities for the year ended December 31, 2011 was $225.4 million compared

with $161.4 million for the year ended December 31, 2010, an increase of $64.0 million. This increase was
primarily due to the change in deferred revenue. In 2011, deferred revenue was a use of cash amounting to $8.2
million, compared with $41.9 million in 2010.

Cash provided by financing activities decreased due to $111.1 million of net proceeds from our common

stock offering in the third quarter of 2010, offset by the $48.6 million borrowed under a term loan used to
purchase the Molina Center in 2011.

Reconciliation of Non-GAAP(1) to GAAP Financial Measures

EBITDA(2)

Net income
Add back:
Depreciation and amortization reported in the consolidated statements of cash flows
Interest expense
Provision for income taxes

EBITDA

Year Ended
December 31,

2011

2010

(In thousands)
$ 20,818 $ 54,970

74,383
15,519
43,836

60,765
15,509
34,522

$154,556 $165,766

(1) GAAP stands for U.S. generally accepted accounting principles.
(2) 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, 2011, the parent company — Molina Healthcare, Inc. — held cash and investments of

approximately $23.6 million, compared with approximately $65.1 million of cash and investments at
December 31, 2010. This decline was primarily due to a capital contribution to our Texas health plan in the
fourth quarter of 2011 and cash paid to acquire the Molina Center.

On a consolidated basis, at December 31, 2011, we had working capital of $446.2 million compared with
$392.4 million at December 31, 2010. At December 31, 2011 we had cash and investments of $893.0 million,
compared with $813.8 million of cash and investments at December 31, 2010.

Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in

aggregate of either our common stock or our convertible senior notes due 2014 (see discussion of “Convertible

Senior Notes” below). The repurchase program will be funded with working capital or draws under our credit

facility (see discussion of “Credit Facility” below).

On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used

to purchase shares of our common stock under a Rule 10b5-1 trading plan. Under this program, we purchased

approximately 400,000 shares of our common stock for $7 million (average cost of approximately $17.47 per

share) during August 2011. These purchases did not materially impact diluted earnings per share for the year

ended December 31, 2011. Subsequently, we retired the $7.0 million of treasury shares purchased, which reduced

additional paid-in capital as of December 31, 2011.

We believe that our cash resources, Credit Facility, and internally generated funds will be sufficient to

support our operations, regulatory requirements, and capital expenditures for at least the next 12 months.

Credit Facility

On September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility (the

“Credit Facility”) with various lenders and U.S. Bank National Association, as LC Issuer, Swing Line Lender,

and Administrative Agent. The Credit Facility will be used for general corporate purposes.

The Credit Facility has a term of five years under which all amounts outstanding will be due and payable on

September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other

specified conditions, we may increase the Credit Facility to up to $195 million. As of December 31, 2011, there

was no outstanding principal balance under the Credit Facility. However, as of December 31, 2011, our lenders

had issued two letters of credit in the aggregate principal amount of $10.3 million as required under the Molina

Medicaid Solutions contracts with the states of Maine and Idaho, which reduced the amount available under the

Credit Facility by $10.3 million.

Borrowings under the Credit Facility will bear interest based, at our election, on the base rate plus an

applicable margin or the Eurodollar rate. The base rate is, for any day, a rate of interest per annum equal to the

highest of (i) the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sum of the

federal funds rate for such day plus 0.50% per annum and (iii) the Eurodollar rate (without giving effect to the

applicable margin) for a one month interest period on such day (or if such day is not a business day, the

immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which

Eurodollar deposits are offered in the interbank Eurodollar market plus an applicable margin. In addition to

interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility,

we are required to pay a quarterly commitment fee of 0.25% to 0.50% (based upon our leverage ratio) of the

unused amount of the lenders’ commitments under the Credit Facility. The initial commitment fee shall be set at

0.35% until our delivery of its financials for the year ended December 31, 2011. The applicable margins range

between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon

our leverage ratio.

Our obligations under the Credit Facility are secured by a lien on substantially all of our assets, with the

exception of certain of our real estate assets, and by a pledge of the capital stock or membership interests of our

operating subsidiaries and health plans (with the exception of the California health plan).

The Credit Facility includes usual and customary covenants for credit facilities of this type, including

covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other

distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain a ratio of

total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 as of the end of each fiscal

quarter and a fixed charge coverage ratio of not less than 1.75 to 1.00. At December 31, 2011, we were in

compliance with all financial covenants under the Credit Facility.

Investments and restricted investments are subject to interest rate risk and will decrease in value if market

rates increase. We have the ability to hold our restricted investments until maturity. Declines in interest rates over

time will reduce our investment income.

Cash in excess of the capital needs of our regulated health plans is generally paid to our non-regulated

parent company in the form of dividends, when and as permitted by applicable regulations, for general corporate

use.

Cash provided by operating activities for the year ended December 31, 2011 was $225.4 million compared

with $161.4 million for the year ended December 31, 2010, an increase of $64.0 million. This increase was

primarily due to the change in deferred revenue. In 2011, deferred revenue was a use of cash amounting to $8.2

million, compared with $41.9 million in 2010.

Cash provided by financing activities decreased due to $111.1 million of net proceeds from our common

stock offering in the third quarter of 2010, offset by the $48.6 million borrowed under a term loan used to

purchase the Molina Center in 2011.

Reconciliation of Non-GAAP(1) to GAAP Financial Measures

EBITDA(2)

Net income

Add back:

Interest expense

Provision for income taxes

EBITDA

Year Ended

December 31,

2011

2010

(In thousands)

$ 20,818

$ 54,970

74,383

15,519

43,836

60,765

15,509

34,522

$154,556

$165,766

Depreciation and amortization reported in the consolidated statements of cash flows

(1) GAAP stands for U.S. generally accepted accounting principles.

(2) 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, 2011, the parent company — Molina Healthcare, Inc. — held cash and investments of

approximately $23.6 million, compared with approximately $65.1 million of cash and investments at

December 31, 2010. This decline was primarily due to a capital contribution to our Texas health plan in the

fourth quarter of 2011 and cash paid to acquire the Molina Center.

On a consolidated basis, at December 31, 2011, we had working capital of $446.2 million compared with

$392.4 million at December 31, 2010. At December 31, 2011 we had cash and investments of $893.0 million,

compared with $813.8 million of cash and investments at December 31, 2010.

Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in
aggregate of either our common stock or our convertible senior notes due 2014 (see discussion of “Convertible
Senior Notes” below). The repurchase program will be funded with working capital or draws under our credit
facility (see discussion of “Credit Facility” below).

On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used

to purchase shares of our common stock under a Rule 10b5-1 trading plan. Under this program, we purchased
approximately 400,000 shares of our common stock for $7 million (average cost of approximately $17.47 per
share) during August 2011. These purchases did not materially impact diluted earnings per share for the year
ended December 31, 2011. Subsequently, we retired the $7.0 million of treasury shares purchased, which reduced
additional paid-in capital as of December 31, 2011.

We believe that our cash resources, Credit Facility, and internally generated funds will be sufficient to

support our operations, regulatory requirements, and capital expenditures for at least the next 12 months.

Credit Facility

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

The Credit Facility has a term of five years under which all amounts outstanding will be due and payable on

September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other
specified conditions, we may increase the Credit Facility to up to $195 million. As of December 31, 2011, there
was no outstanding principal balance under the Credit Facility. However, as of December 31, 2011, our lenders
had issued two letters of credit in the aggregate principal amount of $10.3 million as required under the Molina
Medicaid Solutions contracts with the states of Maine and Idaho, which reduced the amount available under the
Credit Facility by $10.3 million.

Borrowings under the Credit Facility will bear interest based, at our election, on the base rate plus an
applicable margin or the Eurodollar rate. The base rate is, for any day, a rate of interest per annum equal to the
highest of (i) the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sum of the
federal funds rate for such day plus 0.50% per annum and (iii) the Eurodollar rate (without giving effect to the
applicable margin) for a one month interest period on such day (or if such day is not a business day, the
immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which
Eurodollar deposits are offered in the interbank Eurodollar market plus an applicable margin. In addition to
interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility,
we are required to pay a quarterly commitment fee of 0.25% to 0.50% (based upon our leverage ratio) of the
unused amount of the lenders’ commitments under the Credit Facility. The initial commitment fee shall be set at
0.35% until our delivery of its financials for the year ended December 31, 2011. The applicable margins range
between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon
our leverage ratio.

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

The Credit Facility includes usual and customary covenants for credit facilities of this type, including
covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other
distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain a ratio of
total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 as of the end of each fiscal
quarter and a fixed charge coverage ratio of not less than 1.75 to 1.00. At December 31, 2011, we were in
compliance with all financial covenants under the Credit Facility.

In the event of a default, including cross-defaults relating to specified other debt in excess of $20 million,

the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding,
including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and
all rights and remedies created under the Credit Facility or applicable law.

In connection with our entrance into the Credit Facility, on September 9, 2011, we terminated our existing

credit agreement with Bank of America, dated March 9, 2005, as amended to date, which had provided us with a
$150 million revolving credit facility.

Convertible Senior Notes

As of December 31, 2011, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior
Notes due 2014 (the “Notes”) were outstanding. The Notes rank equally in right of payment with our existing and
future senior indebtedness. The Notes are convertible into cash and, under certain circumstances, shares of our
common stock. The initial conversion rate is 31.9601 shares of our common stock per $1,000 principal amount of
the Notes. This represents an initial conversion price of approximately $31.29 per share of our common stock. In
addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will
increase the conversion rate in certain circumstances.

Term Loan

On December 7, 2011, our wholly owned subsidiary, Molina Center LLC, entered into a Term Loan
Agreement, dated as of December 1, 2011, with various lenders and East West Bank, as Administrative Agent
(the “Administrative Agent”). Pursuant to the terms of the Term Loan Agreement, Molina Center LLC borrowed
the aggregate principal amount of $48.6 million to finance a portion of the $81 million purchase price for the
acquisition of the approximately 460,000 square foot office building, now named “Molina Center,” located in
Long Beach, California.

The outstanding principal amount under the Term Loan Agreement bears interest at the rate of 4.25% per
annum from the date of the closing of the loan through December 31, 2011, and at the Eurodollar rate for each
Interest Period (as defined below) commencing January 1, 2012. The Eurodollar rate is a per annum rate of
interest equal to the greater of (a) the rate that is published in the Wall Street Journal as the London interbank
offered rate for deposits in United States dollars, for a period of one month, two business days prior to the
commencement of an Interest Period, multiplied by a statutory reserve rate established by the Board of
Governors of the Federal Reserve System, or (b) 4.25%. The loan matures on November 30, 2018, and is subject
to a 25-year amortization schedule that commences on January 1, 2012.

The Term Loan Agreement contains customary representations, warranties, and financial covenants. In the

event of a default as described in the Term Loan Agreement, the outstanding principal amount under the Term
Loan Agreement will bear interest at a rate 5.00% per annum higher than the otherwise applicable rate. We have
agreed to pay to the Administrative Agent a loan fee in the amount of $486,000 and an agency fee of $50,000.
All amounts due under the Term Loan Agreement and related loan documents are secured by a security interest
in the Molina Center in favor of and for the benefit of the Administrative Agent and the other lenders under the
Term Loan Agreement.

Regulatory Capital and Dividend Restrictions

Our health plans are subject to state laws and regulations that, among other things, require the maintenance of

minimum levels of statutory capital, as defined by each state, and restrict the timing, payment, and amount of
dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must
comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in
these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans,
advances, or cash dividends was $492.4 million at December 31, 2011, and $397.8 million at December 31, 2010.

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, or 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, 2011, our health plans had aggregate statutory capital and surplus of approximately

$509.9 million compared with the required minimum aggregate statutory capital and surplus of approximately

$265.7 million. All of our health plans were in compliance with the minimum capital requirements at

December 31, 2011. 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.

Critical Accounting Policies

accounting policies relate to:

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

• Health plan contractual provisions that may limit revenue based upon the costs incurred or the profits

realized under a specific contract;

• Health plan quality incentives that allow us to recognize incremental revenue if certain quality

• The recognition of revenue and costs associated with contracts held by our Molina Medicaid Solutions

standards are met;

segment; and;

• The determination of medical claims and benefits payable.

Revenue Recognition — Health Plans Segment

Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally

subject to significant accounting estimates. Premium revenues are recognized in the month that members are

entitled to receive health care services.

Certain components of premium revenue are subject to accounting estimates. The components of premium

revenue subject to estimation fall into two categories:

Contractual provisions that may limit revenue based upon the costs incurred or the profits realized under a

specific contract. These are contractual provisions that require the health plan to return premiums to the extent that

certain thresholds are not met. In some instances premiums are returned when medical costs fall below a certain

percentage of gross premiums; or when administrative costs or profits exceed a certain percentage of gross

premiums. In other instances, premiums are partially determined by the acuity of care provided to members (risk

adjustment). To the extent that our expenses and profits change from the amounts previously reported (due to

changes in estimates) our revenue earned for those periods will also change. In all of these instances our revenue is

only subject to estimate due to the fact that the thresholds themselves contain elements (expense or profit) that are

subject to estimate. While we have adequate experience and data to make sound estimates of our expenses or

profits, changes to those estimates may be necessary, which in turn will lead to changes in our estimates of revenue.

In general, a change in estimate relating to expense or profit would offset any related change in estimate to

premium, resulting in no or small impact to net income. The following contractual provisions fall into this category:

• California Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by

our California health plan may be returned to the state if certain minimum amounts are not spent on

defined medical care costs. At December 31, 2011, we recorded a liability of $1.0 million under the

terms of these contract provisions.

In the event of a default, including cross-defaults relating to specified other debt in excess of $20 million,

the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding,

including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and

all rights and remedies created under the Credit Facility or applicable law.

In connection with our entrance into the Credit Facility, on September 9, 2011, we terminated our existing

credit agreement with Bank of America, dated March 9, 2005, as amended to date, which had provided us with a

$150 million revolving credit facility.

Convertible Senior Notes

As of December 31, 2011, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior

Notes due 2014 (the “Notes”) were outstanding. The Notes rank equally in right of payment with our existing and

future senior indebtedness. The Notes are convertible into cash and, under certain circumstances, shares of our

common stock. The initial conversion rate is 31.9601 shares of our common stock per $1,000 principal amount of

the Notes. This represents an initial conversion price of approximately $31.29 per share of our common stock. In

addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will

increase the conversion rate in certain circumstances.

Term Loan

On December 7, 2011, our wholly owned subsidiary, Molina Center LLC, entered into a Term Loan

Agreement, dated as of December 1, 2011, with various lenders and East West Bank, as Administrative Agent

(the “Administrative Agent”). Pursuant to the terms of the Term Loan Agreement, Molina Center LLC borrowed

the aggregate principal amount of $48.6 million to finance a portion of the $81 million purchase price for the

acquisition of the approximately 460,000 square foot office building, now named “Molina Center,” located in

Long Beach, California.

The outstanding principal amount under the Term Loan Agreement bears interest at the rate of 4.25% per

annum from the date of the closing of the loan through December 31, 2011, and at the Eurodollar rate for each

Interest Period (as defined below) commencing January 1, 2012. The Eurodollar rate is a per annum rate of

interest equal to the greater of (a) the rate that is published in the Wall Street Journal as the London interbank

offered rate for deposits in United States dollars, for a period of one month, two business days prior to the

commencement of an Interest Period, multiplied by a statutory reserve rate established by the Board of

Governors of the Federal Reserve System, or (b) 4.25%. The loan matures on November 30, 2018, and is subject

to a 25-year amortization schedule that commences on January 1, 2012.

The Term Loan Agreement contains customary representations, warranties, and financial covenants. In the

event of a default as described in the Term Loan Agreement, the outstanding principal amount under the Term

Loan Agreement will bear interest at a rate 5.00% per annum higher than the otherwise applicable rate. We have

agreed to pay to the Administrative Agent a loan fee in the amount of $486,000 and an agency fee of $50,000.

All amounts due under the Term Loan Agreement and related loan documents are secured by a security interest

in the Molina Center in favor of and for the benefit of the Administrative Agent and the other lenders under the

Term Loan Agreement.

Regulatory Capital and Dividend Restrictions

Our health plans are subject to state laws and regulations that, among other things, require the maintenance of

minimum levels of statutory capital, as defined by each state, and restrict the timing, payment, and amount of

dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must

comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in

these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans,

advances, or cash dividends was $492.4 million at December 31, 2011, and $397.8 million at December 31, 2010.

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, or 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, 2011, our health plans had aggregate statutory capital and surplus of approximately
$509.9 million compared with the required minimum aggregate statutory capital and surplus of approximately
$265.7 million. All of our health plans were in compliance with the minimum capital requirements at
December 31, 2011. 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.

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:

• Health plan contractual provisions that may limit revenue based upon the costs incurred or the profits

realized under a specific contract;

• Health plan quality incentives that allow us to recognize incremental revenue if certain quality

standards are met;

• The recognition 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

Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally

subject to significant accounting estimates. Premium revenues are recognized in the month that members are
entitled to receive health care services.

Certain components of premium revenue are subject to accounting estimates. The components of premium

revenue subject to estimation fall into two categories:

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

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

• Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health: A portion of premiums

received by our Florida health plan may be returned to the state if certain minimum amounts are not spent
on defined behavioral health care costs. At December 31, 2011, we had not recorded any liability under the
terms of this contract provision since behavioral health expenses are not less than the contractual floor.

• New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit
Ceilings (Maximums): A portion of premiums received by our New Mexico health plan may be
returned to the state if certain minimum amounts are not spent on defined medical care costs, or if
administrative costs or profit (as defined) exceed certain amounts. 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). The New Mexico health plan contract also contains
certain limits on the amount our New Mexico health plan can: (a) expend on administrative costs; and
(b) retain as profit. At December 31, 2011, we had not recorded any liability under the terms of these
contract provisions. In the fourth quarter of 2011, our New Mexico health plan entered into a contract
amendment that more closely aligns the calculation of revenue with the methodology adopted under the
Affordable Care Act. The contract amendment changed the calculation of the amount of revenue that
may be recognized relative to medical costs, and resulted in the recognition of approximately $5.6
million of premium revenue which all related to periods prior to 2011.

•

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

• Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to CMS, our
Medicare premiums are subject to retroactive adjustment for both member risk scores and member
pharmacy cost experience for up to two years after the original year of service. This adjustment takes
into account the acuity of each member’s medical needs relative to what was anticipated when
premiums were originally set for that member. In the event that a member requires less acute medical
care than was anticipated by the original premium amount, CMS may recover premium from us. In the
event that a member requires more acute medical care than was anticipated by the original premium
amount, CMS may pay us additional retroactive premium. A similar retroactive reconciliation is
undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of
Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of
our members’ heath care utilization patterns and CMS practices. Based on our knowledge of member
health care utilization patterns and expenses we have recorded a receivable of approximately $5.0
million for anticipated Medicare risk adjustment premiums at December 31, 2011.

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

New Mexico Health Plan Quality Incentive Premiums: Under our contract with the state of New Mexico,

incremental revenue of up to 0.75% of our total premium is earned if certain performance measures are met.
These performance measures are generally linked to various quality-of-care and administrative measures dictated
by the state.

Ohio Health Plan Quality Incentive Premiums: Under our contract with the state of Ohio, incremental

revenue of up to 1% of our total premium is earned if certain performance measures are met. Effective

February 1, 2010 through June 30, 2011, we were eligible to earn additional incremental revenue of up to 0.25%

of our total premium if we met certain pharmacy specific performance measures. These performance measures

are generally linked to various quality-of-care measures dictated by the state.

Texas Health Plan Quality Incentive Premiums: Under our contract with the state of Texas, incremental

revenue of up to 1% of our total premium may be earned if certain performance measures are met. These

performance measures are generally linked to various quality-of-care measures established by the state. The time

period for the assessment of these performance measures previously followed the state’s fiscal year, but effective

January 1, 2011, it follows the calendar year. However, during 2011 the state of Texas notified us that it had

discontinued the program for the 2011 calendar year. We anticipate that the program will be reinstituted in 2012.

Wisconsin Health Plan Quality Incentive Premiums: Under our contract with the state of Wisconsin,

effective beginning in 2011, up to 3.25% of the premium is withheld by the state. The withheld premiums can be

earned by the health plan by meeting certain performance measures. These performance measures are generally

linked to various quality-of-care measures dictated by the state.

The following table quantifies the quality incentive premium revenue recognized for the periods presented,

including the amounts earned in the period presented and prior periods. Although the reasonably possible effects

of a change in estimate related to quality incentive premium revenue as of December 31, 2011 are not known, we

have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future

changes in our estimates as of December 31, 2011.

Year Ended December 31, 2011

Maximum

Available Quality

Incentive

Premium –

Current Year

Amount of

Current Year

Quality Incentive

Premium Revenue

Recognized

$ 2,271

10,212

—

1,705

$14,188

$ 1,558

8,363

—

542

Amount of

Quality Incentive

Premium Revenue

Recognized from

Prior Year

(In thousands)

$ 378

3,501

—

Total Quality

Incentive

Premium Revenue

Total Revenue

Recognized

$ 1,936

11,864

—

542

$ 345,732

988,896

409,295

69,596

$10,463

$3,879

$14,342

$1,813,519

Year Ended December 31, 2010

Maximum

Available Quality

Incentive

Premium –

Current Year

Amount of

Current Year

Quality Incentive

Premium Revenue

Recognized

$ 2,581

9,881

1,771

$14,233

$1,311

3,114

1,771

$6,196

Amount of

Quality Incentive

Premium Revenue

Recognized from

Prior Year

(In thousands)

579

(1,248)

—

$ (669)

Total Quality

Incentive

Premium Revenue

Total Revenue

Recognized

$1,890

1,866

1,771

$5,527

$ 366,784

860,324

188,716

$1,415,824

New Mexico

Ohio

Texas

Wisconsin

New Mexico

Ohio

Texas

• Florida Health Plan Medical Cost Floor (Minimum) for Behavioral Health: A portion of premiums

received by our Florida health plan may be returned to the state if certain minimum amounts are not spent

on defined behavioral health care costs. At December 31, 2011, we had not recorded any liability under the

terms of this contract provision since behavioral health expenses are not less than the contractual floor.

• New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit

Ceilings (Maximums): A portion of premiums received by our New Mexico health plan may be

returned to the state if certain minimum amounts are not spent on defined medical care costs, or if

administrative costs or profit (as defined) exceed certain amounts. 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). The New Mexico health plan contract also contains

certain limits on the amount our New Mexico health plan can: (a) expend on administrative costs; and

(b) retain as profit. At December 31, 2011, we had not recorded any liability under the terms of these

contract provisions. In the fourth quarter of 2011, our New Mexico health plan entered into a contract

amendment that more closely aligns the calculation of revenue with the methodology adopted under the

Affordable Care Act. The contract amendment changed the calculation of the amount of revenue that

may be recognized relative to medical costs, and resulted in the recognition of approximately $5.6

million of premium revenue which all related to periods prior to 2011.

•

Texas Health Plan Profit Sharing: Under our contract with the state of Texas, there is a profit-sharing

agreement under which we pay a rebate to the state of Texas if our Texas health plan generates pretax

income, as defined in the contract, above a certain specified percentage, as determined in accordance

with a tiered rebate schedule. The rebates, if any, are calculated separately for the TANF/CHIP and

ABD products. We are limited in the amount of administrative costs that we may deduct in calculating

the rebate, if any. As a result of profits in excess of the amount we are allowed to fully retain, we had

an aggregate liability of approximately $0.7 million accrued pursuant to our profit-sharing agreement

with the state of Texas at December 31, 2011.

• Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to CMS, our

Medicare premiums are subject to retroactive adjustment for both member risk scores and member

pharmacy cost experience for up to two years after the original year of service. This adjustment takes

into account the acuity of each member’s medical needs relative to what was anticipated when

premiums were originally set for that member. In the event that a member requires less acute medical

care than was anticipated by the original premium amount, CMS may recover premium from us. In the

event that a member requires more acute medical care than was anticipated by the original premium

amount, CMS may pay us additional retroactive premium. A similar retroactive reconciliation is

undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of

Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of

our members’ heath care utilization patterns and CMS practices. Based on our knowledge of member

health care utilization patterns and expenses we have recorded a receivable of approximately $5.0

million for anticipated Medicare risk adjustment premiums at December 31, 2011.

Quality incentives that allow us to recognize incremental revenue if certain quality standards are met.

These are contract provisions that allow us to earn additional premium revenue in certain states if we achieve

certain quality-of-care or administrative measures. We estimate the amount of revenue that will ultimately be

realized for the periods presented based on our experience and expertise in meeting the quality and administrative

measures as well as our ongoing and current monitoring of our progress in meeting those measures. The amount

of the revenue that we will realize under these contractual provisions is determinable based upon that experience.

The following contractual provisions fall into this category:

New Mexico Health Plan Quality Incentive Premiums: Under our contract with the state of New Mexico,

incremental revenue of up to 0.75% of our total premium is earned if certain performance measures are met.

These performance measures are generally linked to various quality-of-care and administrative measures dictated

by the state.

Ohio Health Plan Quality Incentive Premiums: Under our contract with the state of Ohio, incremental

revenue of up to 1% of our total premium is earned if certain performance measures are met. Effective
February 1, 2010 through June 30, 2011, we were eligible to earn additional incremental revenue of up to 0.25%
of our total premium if we met certain pharmacy specific performance measures. These performance measures
are generally linked to various quality-of-care measures dictated by the state.

Texas Health Plan Quality Incentive Premiums: Under our contract with the state of Texas, incremental

revenue of up to 1% of our total premium may be earned if certain performance measures are met. These
performance measures are generally linked to various quality-of-care measures established by the state. The time
period for the assessment of these performance measures previously followed the state’s fiscal year, but effective
January 1, 2011, it follows the calendar year. However, during 2011 the state of Texas notified us that it had
discontinued the program for the 2011 calendar year. We anticipate that the program will be reinstituted in 2012.

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

The following table quantifies the quality incentive premium revenue recognized for the periods presented,
including the amounts earned in the period presented and prior periods. Although the reasonably possible effects
of a change in estimate related to quality incentive premium revenue as of December 31, 2011 are not known, we
have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future
changes in our estimates as of December 31, 2011.

Year Ended December 31, 2011

Maximum
Available Quality
Incentive
Premium –
Current Year

Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized

Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year

(In thousands)

Total Quality
Incentive
Premium Revenue
Recognized

$ 2,271
10,212
—
1,705

$14,188

$ 1,558
8,363
—
542

$10,463

$ 378
3,501
—
—

$3,879

$ 1,936
11,864
—
542

$14,342

Year Ended December 31, 2010

Maximum
Available Quality
Incentive
Premium –
Current Year

Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized

Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year

Total Quality
Incentive
Premium Revenue
Recognized

$ 2,581
9,881
1,771

$14,233

$1,311
3,114
1,771

$6,196

(In thousands)
$
579
(1,248)
—

$ (669)

$1,890
1,866
1,771

$5,527

Total Revenue
Recognized

$ 345,732
988,896
409,295
69,596

$1,813,519

Total Revenue
Recognized

$ 366,784
860,324
188,716

$1,415,824

New Mexico
Ohio
Texas
Wisconsin

New Mexico
Ohio
Texas

Year Ended December 31, 2009

Maximum
Available Quality
Incentive
Premium –
Current Year

Amount of
Current Year
Quality Incentive
Premium Revenue
Recognized

Amount of
Quality Incentive
Premium Revenue
Recognized from
Prior Year

(In thousands)

Total Quality
Incentive Premium
Revenue
Recognized

$ 2,378
7,040
1,322

$10,740

$1,097
5,715
1,322

$8,134

$(171)
937
—

$ 766

$ 926
6,652
1,322

$8,900

Total Revenue
Recognized

$ 404,026
803,521
134,860

$1,342,407

New Mexico
Ohio
Texas

Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment

The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the
performance of multiple services. The first of these is the design, development and implementation, or DDI, of a
Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is
the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO
services (which include claims payment and eligibility processing) we also provide the state with other services
including both hosting and support and maintenance. We have evaluated our Molina Medicaid Solutions
contracts to determine if such arrangements include a software element. Based on this evaluation, we have
concluded that these arrangements do not include a software element. As such, we have concluded that our
Molina Medicaid Solutions contracts are multiple-element service arrangements under the scope of FASB
Accounting Standards Codification Subtopic 605-25, Revenue Recognition — Multiple–Element Arrangements,
and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition.

Effective January 1, 2011, we adopted a new accounting standard that amends the guidance on the

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

We have concluded that the various service elements in our Molina Medicaid Solutions contracts represent a

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

• Each contract calls for the provision of its own specific set of services. While all contracts support the

system of record for state MMIS, the actual services we provide vary significantly between
contracts; and

• The nature of the MMIS installed varies significantly between our older contracts (proprietary

mainframe systems) and our new contracts (commercial off-the-shelf technology solutions).

Because we have determined the services provided under our Molina Medicaid Solutions contracts represent

a single unit of accounting and because we are unable to determine a pattern of performance of services during

the contract period, we recognize revenue associated with such contracts on a straight-line basis over the period

during which BPO, hosting, and support and maintenance services are delivered.

Provisions specific to each contract may, however, lead us to modify this general principle. In those

circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to

compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right

of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any

contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the

contingency has been removed. These types of contingency features are present in our Maine and Idaho

contracts. We began to recognize revenue associated with our Maine contract upon state acceptance in September

2010. In Idaho, we will begin recognition of revenue upon state acceptance.

Costs associated with our Molina Medicaid Solutions contracts include software related costs and other

costs. With respect to software related costs, we apply the guidance for internal-use software and capitalize

external direct costs of materials and services consumed in developing or obtaining the software, and payroll and

payroll-related costs associated with employees who are directly associated with and who devote time to the

computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless

corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service

elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition,

in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:

• Transaction processing costs

• Employee costs incurred in performing transaction services

• Vendor costs incurred in performing transaction services

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

• Costs incurred in maintaining and processing member and provider eligibility

• Costs incurred in communicating with members and providers

The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic

basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such

undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred

contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after

reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for

impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-

lived assets exceeds the fair value of those assets.

We are currently deferring recognition of all revenue as well as all direct costs (to the extent that such costs

are estimated to be recoverable) in Idaho until the MMIS in that state receives certification from CMS. For the

year ended December 31, 2011, cost of service revenue includes $11.5 million of direct costs associated with the

Idaho contract that would otherwise have been recorded as deferred contract costs. In assessing the recoverability

of the deferred contract costs associated with the Idaho contract during 2011, we determined that these costs

should be expensed as a period cost.

Year Ended December 31, 2009

Maximum

Available Quality

Incentive

Premium –

Current Year

Amount of

Current Year

Quality Incentive

Premium Revenue

Recognized

$ 2,378

7,040

1,322

$10,740

$1,097

5,715

1,322

$8,134

Amount of

Quality Incentive

Premium Revenue

Recognized from

Prior Year

(In thousands)

$(171)

937

—

$ 766

Total Quality

Incentive Premium

Revenue

Recognized

Total Revenue

Recognized

$ 926

6,652

1,322

$8,900

$ 404,026

803,521

134,860

$1,342,407

New Mexico

Ohio

Texas

Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment

The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the

performance of multiple services. The first of these is the design, development and implementation, or DDI, of a

Medicaid Management Information System, or MMIS. An additional service, following completion of DDI, is

the operation of the MMIS under a business process outsourcing, or BPO arrangement. While providing BPO

services (which include claims payment and eligibility processing) we also provide the state with other services

including both hosting and support and maintenance. We have evaluated our Molina Medicaid Solutions

contracts to determine if such arrangements include a software element. Based on this evaluation, we have

concluded that these arrangements do not include a software element. As such, we have concluded that our

Molina Medicaid Solutions contracts are multiple-element service arrangements under the scope of FASB

Accounting Standards Codification Subtopic 605-25, Revenue Recognition — Multiple–Element Arrangements,

and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition.

Effective January 1, 2011, we adopted a new accounting standard that amends the guidance on the

accounting for multiple-element arrangements. Pursuant to the new standard, each required deliverable is

evaluated to determine whether it qualifies as a separate unit of accounting which is generally based on whether

the deliverable has standalone value to the customer. In addition to standalone value, previous guidance also

required objective and reliable evidence of fair value of a deliverable in order to treat the deliverable as a

separate unit of accounting. The arrangement’s consideration that is fixed or determinable is then allocated to

each separate unit of accounting based on the relative selling price of each deliverable. In general, the

consideration allocated to each unit of accounting is recognized as the related goods or services are delivered,

limited to the consideration that is not contingent. We have adopted this guidance on a prospective basis for all

new or materially modified revenue arrangements with multiple deliverables entered into on or after January 1,

2011. Our adoption of this guidance has not impacted the timing or pattern of our revenue recognition in 2011.

Also, there would have been no change in revenue recognized relating to multiple-element arrangements if we

had adopted this guidance retrospectively for contracts entered into prior to January 1, 2011.

We have concluded that the various service elements in our Molina Medicaid Solutions contracts represent a

single unit of accounting due to the fact that DDI, which is the only service performed in advance of the other

services (all other services are performed over an identical period), does not have standalone value because our

DDI services are not sold separately by any vendor and the customer could not resell our DDI services. Further,

we have no objective and reliable evidence of fair value for any of the individual elements in these contracts, and

at no point in the contract will we have objective and reliable evidence of fair value for the undelivered elements

in the contracts. For contracts entered into prior to January 1, 2011, objective and reliable evidence of fair value

would be required, in addition to DDI standalone value which we do not have, in order to treat DDI as a separate

unit of accounting. We lack objective and reliable evidence of the fair value of the individual elements of our

Molina Medicaid Solutions contracts for the following reasons:

• Each contract calls for the provision of its own specific set of services. While all contracts support the

system of record for state MMIS, the actual services we provide vary significantly between

contracts; and

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

Because we have determined the services provided under our Molina Medicaid Solutions contracts represent

a single unit of accounting and because we are unable to determine a pattern of performance of services during
the contract period, we recognize revenue associated with such contracts on a straight-line basis over the period
during which BPO, hosting, and support and maintenance services are delivered.

Provisions specific to each contract may, however, lead us to modify this general principle. In those

circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to
compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right
of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any
contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the
contingency has been removed. These types of contingency features are present in our Maine and Idaho
contracts. We began to recognize revenue associated with our Maine contract upon state acceptance in September
2010. In Idaho, we will begin recognition of revenue upon state acceptance.

Costs associated with our Molina Medicaid Solutions contracts include software related costs and other

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

• Transaction processing costs

• Employee costs incurred in performing transaction services

• Vendor costs incurred in performing transaction services

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

• Costs incurred in maintaining and processing member and provider eligibility

• Costs incurred in communicating with members and providers

The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic

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

We are currently deferring recognition of all revenue as well as all direct costs (to the extent that such costs

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)
Capitation payable
Pharmacy
Other

2011

$301,020
53,532
26,178
21,746

December 31,

2010
(In thousands)
$275,259
49,598
14,649
14,850

2009

$246,508
39,995
20,609
8,204

$402,476

$354,356

$315,316

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 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 $301.0 million of our total medical claims and benefits payable of $402.5
million as of December 31, 2011. 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, 2011, was $294.9 million.

The factors we consider when estimating our IBNP include, without limitation, claims receipt and payment

experience (and variations in that experience), changes in membership, provider billing practices, health care
service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit
changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract
changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our
assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring
point through the calculation of a base estimate of IBNP, a further reserve for adverse claims development, and
an estimate of the administrative costs of settling all claims incurred through the reporting date. The base
estimate of IBNP is derived through application of claims payment completion factors and trended PMPM cost
estimates.

For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims

liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to
measure the cumulative percentage of claims expense that will have been paid for a given month of service as of
the reporting date, based on historical payment patterns.

The following table reflects the change in our estimate of claims liability as of December 31, 2011 that

would have resulted had we changed our completion factors for the fifth through the twelfth months preceding

December 31, 2011, 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

(6%)

(4%)

(2%)

(6%)

(4%)

(2%)

Increase (Decrease) in

Medical Claims and

Benefits Payable

$ 119,317

79,598

39,799

(39,799)

(79,598)

(119,317)

Increase (Decrease) in

Medical Claims and

Benefits Payable

$(69,169)

(46,113)

(23,056)

23,056

46,113

69,169

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, 2011 that would have resulted had we altered our trend factors by the

percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar

amounts are in thousands.

(Decrease) Increase in Trended Per member Per Month Cost Estimates

The following per-share amounts are based on a combined federal and state statutory tax rate of 37.5%, and

46.4 million diluted shares outstanding for the year ended December 31, 2011. Assuming a hypothetical 1%

change in completion factors from those used in our calculation of IBNP at December 31, 2011, net income for

the year ended December 31, 2011 would increase or decrease by approximately $12.4 million, or $0.27 per

diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of

IBNP at December 31, 2011, net income for the year ended December 31, 2011 would increase or decrease by

approximately $7.2 million, or $0.16 per diluted share. The corresponding figures for a 5% change in completion

factors and PMPM cost estimates would be $62.2 million, or $1.34 per diluted share, and $36.0 million, or $0.78

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 $12.4 million, it is likely that trended PMPM costs would be

underestimated, resulting in an additional overstatement of net income.

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)

$301,020

$275,259

$246,508

Capitation payable

Pharmacy

Other

2011

2010

2009

December 31,

(In thousands)

53,532

26,178

21,746

49,598

14,649

14,850

39,995

20,609

8,204

$402,476

$354,356

$315,316

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 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 $301.0 million of our total medical claims and benefits payable of $402.5

million as of December 31, 2011. 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, 2011, was $294.9 million.

The factors we consider when estimating our IBNP include, without limitation, claims receipt and payment

experience (and variations in that experience), changes in membership, provider billing practices, health care

service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit

changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract

changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our

assessment of these factors is then translated into an estimate of our IBNP liability at the relevant measuring

point through the calculation of a base estimate of IBNP, a further reserve for adverse claims development, and

an estimate of the administrative costs of settling all claims incurred through the reporting date. The base

estimate of IBNP is derived through application of claims payment completion factors and trended PMPM cost

estimates.

For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims

liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to

measure the cumulative percentage of claims expense that will have been paid for a given month of service as of

the reporting date, based on historical payment patterns.

The following table reflects the change in our estimate of claims liability as of December 31, 2011 that
would have resulted had we changed our completion factors for the fifth through the twelfth months preceding
December 31, 2011, 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

(6%)
(4%)
(2%)
2%
4%
6%

Increase (Decrease) in
Medical Claims and
Benefits Payable

$ 119,317
79,598
39,799
(39,799)
(79,598)
(119,317)

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, 2011 that would have resulted had we altered our trend factors by the
percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Dollar
amounts are in thousands.

(Decrease) Increase in Trended Per member Per Month Cost Estimates

(6%)
(4%)
(2%)
2%
4%
6%

Increase (Decrease) in
Medical Claims and
Benefits Payable

$(69,169)
(46,113)
(23,056)
23,056
46,113
69,169

The following per-share amounts are based on a combined federal and state statutory tax rate of 37.5%, and

46.4 million diluted shares outstanding for the year ended December 31, 2011. Assuming a hypothetical 1%
change in completion factors from those used in our calculation of IBNP at December 31, 2011, net income for
the year ended December 31, 2011 would increase or decrease by approximately $12.4 million, or $0.27 per
diluted share. Assuming a hypothetical 1% change in PMPM cost estimates from those used in our calculation of
IBNP at December 31, 2011, net income for the year ended December 31, 2011 would increase or decrease by
approximately $7.2 million, or $0.16 per diluted share. The corresponding figures for a 5% change in completion
factors and PMPM cost estimates would be $62.2 million, or $1.34 per diluted share, and $36.0 million, or $0.78
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 $12.4 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 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, 2011, 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 14.6%.

As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities in fiscal
years 2010 and 2011 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.

our initial estimate of medical claims and benefits payable at December 31, 2010 exceeded the amount that will

ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at December 31, 2010

was due primarily to the following factors:

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

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

• We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule

reduction in New Mexico effective November 2010, partially offsetting the impact of the two items

above.

following factors:

•

We recognized a benefit from prior period claims development in the amount of $49.4 million for the year

ended 2010. This was primarily caused by the overestimation of our liability for claims and medical benefits

payable at December 31, 2009. The overestimation of claims liability at December 31, 2009 was the result of the

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.

In estimating our claims liability at December 31, 2011, 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 increasing amount of claims recoveries in Texas.

• Recent increases in inpatient utilization in Missouri, as well as a substantial increase in inpatient claims

inventory.

state.

• A significant reduction to our outstanding claims recoveries in Ohio.

• An increase to our ABD membership in California.

• Late enrollment of newborns, and hence late claims payments, in Michigan due to issues with the

state’s administration system, which has disrupted the normal completion pattern for claims in that

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

2010 and 2011, 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.

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 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, 2011, 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 14.6%.

As shown in greater detail in the table below, the amounts ultimately paid out on our liabilities in fiscal

years 2010 and 2011 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.

We recognized a benefit from prior period claims development in the amount of $51.8 million for the year

ended December 31, 2011. This amount represents our estimate as of December 31, 2011 of the extent to which

our initial estimate of medical claims and benefits payable at December 31, 2010 exceeded the amount that will
ultimately be paid out in satisfaction of that liability. The overestimation of claims liability at December 31, 2010
was due primarily to the following factors:

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

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

• We underestimated the reduction in outpatient facility claims costs as a result of a fee schedule

reduction in New Mexico effective November 2010, partially offsetting the impact of the two items
above.

We recognized a benefit from prior period claims development in the amount of $49.4 million for the year

ended 2010. This was primarily caused by the overestimation of our liability for claims and medical benefits
payable at December 31, 2009. 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.

In estimating our claims liability at December 31, 2011, 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 increasing amount of claims recoveries in Texas.

• Recent increases in inpatient utilization in Missouri, as well as a substantial increase in inpatient claims

inventory.

• A significant reduction to our outstanding claims recoveries in Ohio.

• An increase to our ABD membership in California.

• Late enrollment of newborns, and hence late claims payments, in Michigan due to issues with the

state’s administration system, which has disrupted the normal completion pattern for claims in that
state.

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
2010 and 2011, 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.

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
year” 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 period
Balance of acquired subsidiary
Components of medical care costs related to:

Current year
Prior year

Total medical care costs

Payments for medical care costs related to:

Current year
Prior year

Total paid

Balances at end of year

Benefit from prior years as a percentage of:

Balance at beginning of year
Premium revenue
Total medical care costs

Claims Data (1):
Days in claims payable, fee for service
Number of members at end of period
Number of claims in inventory at end of period
Billed charges of claims in inventory at end of period
Claims in inventory per member at end of period
Billed charges of claims in inventory per member end of period
Number of claims received during the period
Billed charges of claims received during the period

Year ended December 31,

2011

2010

(Dollars in thousands, except
per-member amounts)
354,356 $
—

315,316
3,228

3,911,803
(51,809)

3,420,235
(49,378)

3,859,994

3,370,857

3,516,994
294,880

3,085,388
249,657

3,811,874

3,335,045

402,476 $

354,356

14.6%
1.1%
1.3%

15.7%
1.2%
1.5%

40
1,697,000
111,100
207,600 $
0.07
122.33 $

42
1,613,000
143,600
218,900
0.09
$
135.71
14,554,800
17,207,500
$14,306,500 $11,686,100

(1) “Claims Data” for the year ended December 31, 2010 does not include our Wisconsin health plan acquired

September 1, 2010.

Commitments and Contingencies

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, 2011.

Inflation

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2011. 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.

Medical claims and benefits payable

Principal amount of long-term debt(1)

Operating leases

Interest on long-term debt

Purchase commitments

Total

2012

2013-2014

2015-2016

2017 and Beyond

$402,476 $402,476

$ — $ —

$ —

235,600

101,424

32,527

33,595

1,197

25,553

9,061

19,845

189,361

40,936

16,267

12,142

2,568

22,338

3,788

1,608

42,474

12,597

3,411

—

Total contractual obligations

$805,622 $458,132

$258,706

$30,302

$58,482

(1) Represents the principal amount due on our 3.75% Convertible Senior Notes due 2014, and our term loan

due 2018.

As of December 31, 2011, we have recorded approximately $10.7 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, 2011 for further information.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and

cash equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash

in the PFM Fund Prime Series — Institutional Class, and the PFM Fund Government Series. These funds

represent a portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC

(PFM), a Virginia business trust registered as an open-end management investment fund. Our investments and a

portion of our cash equivalents are managed by professional portfolio managers operating under documented

investment guidelines. No investment that is in a loss position can be sold by our managers without our prior

approval. Our investments consist solely of investment grade debt securities with a maximum maturity of five

years and an average duration of two years or less. Restricted investments are invested principally in certificates

of deposit and U.S. treasury securities. Concentration of credit risk with respect to accounts receivable is limited

due to payors consisting principally of the governments of each state in which our Health Plans segment and our

Molina Medicaid Solutions segment operate.

We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our

health plans try to control medical and hospital costs through contracts with independent providers of health care

services. Through these contracted providers, our health plans emphasize preventive health care and appropriate

use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health

care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product

introductions, demands from health care providers and customers, applicable regulations, or other factors may

affect our ability to control health care costs.

1,197
25,553
9,061
19,845

189,361
40,936
16,267
12,142

$ —
42,474
12,597
3,411
—

$58,482

Total contractual obligations

$805,622 $458,132 $258,706

$30,302

Medical claims and benefits payable
Principal amount of long-term debt(1)
Operating leases
Interest on long-term debt
Purchase commitments

$402,476 $402,476 $ — $ —
2,568
235,600
22,338
101,424
3,788
32,527
1,608
33,595

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

year” 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.

Contractual Obligations

In the table below, we present our contractual obligations as of December 31, 2011. 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

2012

2013-2014

2015-2016

2017 and Beyond

Year ended December 31,

2011

2010

(Dollars in thousands, except

per-member amounts)

354,356

315,316

—

3,228

3,911,803

3,420,235

(51,809)

(49,378)

3,859,994

3,370,857

3,516,994

294,880

3,085,388

249,657

3,811,874

3,335,045

402,476

354,356

14.6%

1.1%

1.3%

15.7%

1.2%

1.5%

1,697,000

1,613,000

111,100

207,600

0.07

122.33

143,600

218,900

0.09

135.71

17,207,500

14,554,800

$14,306,500

$11,686,100

Balances at beginning of period

Balance of acquired subsidiary

Components of medical care costs related to:

Current year

Prior year

Total medical care costs

Current year

Prior year

Total paid

Balances at end of year

Benefit from prior years as a percentage of:

Balance at beginning of year

Premium revenue

Total medical care costs

Claims Data (1):

Days in claims payable, fee for service

Number of members at end of period

Number of claims in inventory at end of period

Billed charges of claims in inventory at end of period

Claims in inventory per member at end of period

Billed charges of claims in inventory per member end of period

Number of claims received during the period

Billed charges of claims received during the period

September 1, 2010.

Commitments and Contingencies

(1) “Claims Data” for the year ended December 31, 2010 does not include our Wisconsin health plan acquired

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, 2011.

Payments for medical care costs related to:

(1) Represents the principal amount due on our 3.75% Convertible Senior Notes due 2014, and our term loan

due 2018.

As of December 31, 2011, we have recorded approximately $10.7 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, 2011 for further information.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and
cash equivalents, investments, receivables, and restricted investments. We invest a substantial portion of our cash
in the PFM Fund Prime Series — Institutional Class, and the PFM Fund Government Series. These funds
represent a portfolio of highly liquid money market securities that are managed by PFM Asset Management LLC
(PFM), a Virginia business trust registered as an open-end management investment fund. Our investments and a
portion of our cash equivalents are managed by professional portfolio managers operating under documented
investment guidelines. No investment that is in a loss position can be sold by our managers without our prior
approval. Our investments consist solely of investment grade debt securities with a maximum maturity of five
years and an average duration of two years or less. Restricted investments are invested principally in certificates
of deposit and U.S. treasury securities. Concentration of credit risk with respect to accounts receivable is limited
due to payors consisting principally of the governments of each state in which our Health Plans segment and our
Molina Medicaid Solutions segment operate.

Inflation

We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our
health plans try to control medical and hospital costs through contracts with independent providers of health care
services. Through these contracted providers, our health plans emphasize preventive health care and appropriate
use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health
care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product
introductions, demands from health care providers and customers, applicable regulations, or other factors may
affect our ability to control health care costs.

Compliance Costs

Our health plans are regulated by both state and federal government agencies. Regulation of managed care

products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction.
Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules.
Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to
additional costs related to the implementation of additional systems, procedures and programs that we have not
yet identified.

Item 8. Financial Statements and Supplementary Data

MOLINA HEALTHCARE, INC.

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

Compliance Costs

Our health plans are regulated by both state and federal government agencies. Regulation of managed care

products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction.

Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules.

Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to

additional costs related to the implementation of additional systems, procedures and programs that we have not

yet identified.

Item 8. Financial Statements and Supplementary Data

MOLINA HEALTHCARE, INC.

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

74
75
76
77
78
80

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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, 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, 2011,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an
unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 29, 2012

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

ASSETS

Current assets:

Cash and cash equivalents

Investments

Receivables

Income tax refundable

Deferred income taxes

Prepaid expenses and other current assets

Total current assets

Property, equipment, and capitalized software, net

Deferred contract costs

Intangible assets, net

Auction rate securities

Restricted investments

Other assets

Goodwill and indefinite-lived intangible assets

Receivable for ceded life and annuity contracts

Current liabilities:

Medical claims and benefits payable

Accounts payable and accrued liabilities

Deferred revenue

Income taxes payable

Current maturities of long-term debt

Total current liabilities

Liability for ceded life and annuity contracts

Long-term debt

Deferred income taxes

Other long-term liabilities

Total liabilities

Stockholders’ equity(1):

outstanding

Additional paid-in capital

Accumulated other comprehensive loss

Retained earnings

Total stockholders’ equity

Common stock, $0.001 par value; 80,000 shares authorized; outstanding:

45,815 shares at December 31, 2011 and 45,463 shares at December 31, 2010

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

December 31,

2011

2010

(Amounts in thousands,

except per-share data)

$ 493,827 $ 455,886

1,048,082

336,916

167,898

11,679

18,327

19,435

190,934

54,582

101,796

153,954

16,134

46,164

23,401

17,099

295,375

168,190

—

15,716

25,050

960,217

100,537

28,444

105,500

212,228

20,449

42,100

24,649

15,090

$1,652,146 $1,509,214

$ 402,476 $ 354,356

147,214

50,947

—

1,197

601,834

216,929

33,127

23,401

21,782

137,930

60,086

13,176

—

565,548

164,014

16,235

24,649

19,711

897,073

790,157

—

266,022

(1,405)

490,410

251,612

(2,192)

469,592

755,073

719,057

$1,652,146 $1,509,214

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

See accompanying notes.

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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and

cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the consolidated

results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, 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, 2011,

based on criteria established in Internal Control — Integrated Framework issued by the Committee of

Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an

unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California

February 29, 2012

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:

Cash and cash equivalents
Investments
Receivables
Income tax refundable
Deferred income taxes
Prepaid expenses and other current assets

Total current assets

Property, equipment, and capitalized software, net
Deferred contract costs
Intangible assets, net
Goodwill and indefinite-lived intangible assets
Auction rate securities
Restricted investments
Receivable for ceded life and annuity contracts
Other assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Medical claims and benefits payable
Accounts payable and accrued liabilities
Deferred revenue
Income taxes payable
Current maturities of long-term debt

Total current liabilities

Long-term debt
Deferred income taxes
Liability for ceded life and annuity contracts
Other long-term liabilities

Total liabilities

Stockholders’ equity(1):

Common stock, $0.001 par value; 80,000 shares authorized; outstanding:

45,815 shares at December 31, 2011 and 45,463 shares at December 31, 2010

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

December 31,

2011

2010

(Amounts in thousands,
except per-share data)

$ 493,827 $ 455,886
295,375
168,190
—
15,716
25,050

336,916
167,898
11,679
18,327
19,435

1,048,082
190,934
54,582
101,796
153,954
16,134
46,164
23,401
17,099

960,217
100,537
28,444
105,500
212,228
20,449
42,100
24,649
15,090

$1,652,146 $1,509,214

$ 402,476 $ 354,356
137,930
60,086
13,176
—

147,214
50,947
—
1,197

601,834
216,929
33,127
23,401
21,782

565,548
164,014
16,235
24,649
19,711

897,073

790,157

—

266,022
(1,405)
490,410

251,612
(2,192)
469,592

755,073

719,057

$1,652,146 $1,509,214

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Revenue:

Premium revenue
Service revenue
Investment income
Rental income

Total revenue

Expenses:

Medical care costs
Cost of service revenue
General and administrative expenses
Premium tax expenses
Depreciation and amortization

Total operating costs and expenses

Impairment of goodwill and intangible assets
Gain on purchase of convertible senior notes

Operating income
Interest expense

Income before income taxes
Provision for income taxes

Net income

Net income per share(1):

Basic

Diluted

Weighted average shares outstanding(1):

Basic

Diluted

Year Ended December 31,

2011

2010

2009

(In thousands, except per-share data)

Common Stock(1)

Additional

Paid-in

Accumulated

Other

Outstanding Amount

Capital(1)

Comprehensive Loss

Retained

Earnings

Treasury

Stock

Total

(In thousands)

Balance at January 1, 2009

40,087

$ 40 $170,668

$(2,310)

$383,754 $(20,390) $531,762

$4,603,407 $3,989,909 $3,660,207
—
9,149
—

160,447
5,539
547

89,809
6,259
—

4,769,940

4,085,977

3,669,356

3,859,994
143,987
415,932
154,589
50,690

3,370,857
78,647
345,993
139,775
45,704

3,176,236
—
276,027
128,581
38,110

4,625,192

3,980,976

3,618,954

(64,575)
—

80,173
15,519

64,654
43,836

—
—

105,001
15,509

89,492
34,522

—
1,532

51,934
13,777

38,157
7,289

20,818 $

54,970 $

30,868

0.45 $

1.34 $

0.45

1.32

0.80

0.79

45,756

46,425

41,174

41,631

38,765

38,976

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

See accompanying notes.

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

(2,028)

(2)

(48,100)

(476)

employee stock plan purchases

351 —

8,516

Tax deficiency from employee

stock compensation

—

(718)

Balance at December 31, 2009

38,410

129,890

(1,812)

414,622

— 542,738

—

30,868

—

30,868

— (27,712)

48,102

54,970

—

54,970

(380)

54,970

—

498

31,366

(27,712)

—

(476)

8,516

(718)

(380)

54,590

11,271

(673)

787

21,605

(7,000)

—

20,474

937

20,818

—

20,818

(7,000)

7,000

498

—

787

—

752

—

(400) —

(7,000)

20,473

—

937

See accompanying notes.

Comprehensive income:

Net income

Other comprehensive loss, net of

tax:

Unrealized loss on investments

Total comprehensive income

Common stock issued, net of

issuance costs

Employee stock grants and

Tax deficiency from employee

stock compensation

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

Employee stock grants and

employee stock plan purchases

Tax benefit from employee stock

compensation

6,525

111,124

— 111,131

employee stock plan purchases

528 —

11,271

—

(673)

Balance at December 31, 2010

45,463

251,612

(2,192)

469,592

— 719,057

Balance at December 31, 2011

45,815

$ 46 $266,022

$(1,405)

$490,410 $ — $755,073

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

Revenue:

Premium revenue

Service revenue

Investment income

Rental income

Total revenue

Expenses:

Medical care costs

Cost of service revenue

General and administrative expenses

Premium tax expenses

Depreciation and amortization

Impairment of goodwill and intangible assets

Gain on purchase of convertible senior notes

Operating income

Interest expense

Income before income taxes

Provision for income taxes

Net income

Net income per share(1):

Basic

Diluted

Basic

Diluted

Year Ended December 31,

2011

2010

2009

(In thousands, except per-share data)

$4,603,407

$3,989,909

$3,660,207

160,447

5,539

547

89,809

6,259

—

9,149

—

4,769,940

4,085,977

3,669,356

3,859,994

3,370,857

3,176,236

143,987

415,932

154,589

50,690

(64,575)

—

80,173

15,519

64,654

43,836

20,818

78,647

345,993

139,775

45,704

—

105,001

15,509

89,492

34,522

54,970

0.45

1.34

1.32

—

276,027

128,581

38,110

—

1,532

51,934

13,777

38,157

7,289

30,868

0.80

0.79

45,756

46,425

41,174

41,631

38,765

38,976

Total operating costs and expenses

4,625,192

3,980,976

3,618,954

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock(1)

Outstanding Amount

Additional
Paid-in
Capital(1)

Accumulated
Other
Comprehensive Loss

Retained
Earnings

Treasury
Stock

Total

Balance at January 1, 2009

40,087

$ 40 $170,668

(In thousands)
$(2,310)

$383,754 $(20,390) $531,762

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

—

—
—
(2,028)
—

—

—
—

(2)

—

—
—
(48,100)
(476)

employee stock plan purchases

351 —

8,516

Tax deficiency from employee

stock compensation

—

(718)

—

30,868

—

30,868

498

498
—
—
—

—

30,868

—

— (27,712)
48,102
—
—
—

—

498

31,366
(27,712)
—
(476)

8,516

(718)

Balance at December 31, 2009

38,410

129,890

(1,812)

414,622

— 542,738

Comprehensive income:
Net income
Other comprehensive loss, net of

tax:

Unrealized loss on investments

Total comprehensive income
Common stock issued, net of

issuance costs

Employee stock grants and

—

6,525

111,124

employee stock plan purchases

528 —

11,271

Tax deficiency from employee

stock compensation

—

(673)

—

54,970

—

54,970

(380)

—

54,970

—

(380)

54,590

—

— 111,131

—

11,271

(673)

Weighted average shares outstanding(1):

Balance at December 31, 2010

45,463

251,612

(2,192)

469,592

— 719,057

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
Employee stock grants and

employee stock plan purchases
Tax benefit from employee stock

compensation

—

—
—
(400) —

—
(7,000)

752

—

20,473

—

937

—

20,818

—

20,818

787

787
—
—

—

20,818
—
—

—

(7,000)
7,000

—

787

21,605
(7,000)
—

20,474

937

Balance at December 31, 2011

45,815

$ 46 $266,022

$(1,405)

$490,410 $ — $755,073

(1) All applicable share and per-share amounts reflect the retroactive effects of the three-for-two common stock

split in the form of a stock dividend that was effective May 20, 2011.

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

Supplemental cash flow information:

Cash paid during the period for:

Income taxes

Interest

Schedule of non-cash investing and financing activities:

Retirement of treasury stock

Details of business combinations:

Increase in fair value of assets acquired

(Decrease) increase in fair value of liabilities assumed

Release of deposit

(Decrease) increase in payable to seller

Net cash paid in business combinations

See accompanying notes.

Year Ended December 31,

2011

2010

2009

(In thousands)

$ 54,663

$ 18,299

$ 23,480

$ 11,399

$ 10,951

$ 8,205

$ 7,000

—

$ 48,102

$(81,256)

$(159,916)

$(34,594)

(1,045)

—

(1,952)

24,450

—

4,723

—

18,000

5,300

$(84,253)

$(130,743)

$(11,294)

Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating

activities:

Depreciation and amortization
Deferred income taxes
Stock-based compensation
Non-cash interest on convertible senior notes
Impairment of goodwill and intangible assets
Gain on purchase of convertible senior notes
Amortization of premium/discount on investments
Amortization of deferred financing costs
Gain on acquisition
Unrealized gain on trading securities
Loss on rights agreement
Tax deficiency from employee stock compensation
Changes in operating assets and liabilities:

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:
Amount borrowed under term loan
Amount borrowed under credit facility
Proceeds from common stock offering, net of issuance costs
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Year Ended December 31,

2011

2010

2009

(In thousands)

$ 20,818

$ 54,970

$ 30,868

74,383
13,836
17,052
5,512
64,575
—
7,242
2,818
(1,676)
—
—
(714)

352
3,308
48,120
2,778
(8,154)
(24,855)
225,395

(60,581)
(345,968)
302,667
(84,253)
(42,830)
(4,064)
(1,898)
(236,927)

60,765
(4,092)
9,531
5,114
—
—
2,029
1,780
—
(4,170)
3,807
(968)

(7,539)
(12,034)
34,363
40,482
(41,899)
19,258
161,397

(48,538)
(302,842)
223,077
(130,743)
(29,319)
(5,566)
5,108
(288,823)

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

48,600
—
—
—
(7,000)
—
(1,125)
7,347
1,651
49,473
37,941
455,886
$ 493,827

—
105,000
111,131
(105,000)

—
—
(1,671)
4,056
295
113,811
(13,615)
469,501
$ 455,886

—
—
—
—
(27,712)
(9,653)
—
2,015
31
(35,319)
82,339
387,162
$ 469,501

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

Supplemental cash flow information:
Cash paid during the period for:

Income taxes

Interest

Schedule of non-cash investing and financing activities:
Retirement of treasury stock

Details of business combinations:

Increase in fair value of assets acquired
(Decrease) increase in fair value of liabilities assumed
Release of deposit
(Decrease) increase in payable to seller

Net cash paid in business combinations

See accompanying notes.

Year Ended December 31,

2011

2010

2009

(In thousands)

$ 54,663

$ 18,299

$ 23,480

$ 11,399

$ 10,951

$ 8,205

$ 7,000

—

$ 48,102

$(81,256)
(1,045)
—
(1,952)

$(159,916)
24,450
—
4,723

$(34,594)

—
18,000
5,300

$(84,253)

$(130,743)

$(11,294)

Adjustments to reconcile net income to net cash provided by operating

Operating activities:

Net income

activities:

Depreciation and amortization

Deferred income taxes

Stock-based compensation

Non-cash interest on convertible senior notes

Impairment of goodwill and intangible assets

Gain on purchase of convertible senior notes

Amortization of premium/discount on investments

Amortization of deferred financing costs

Gain on acquisition

Unrealized gain on trading securities

Loss on rights agreement

Tax deficiency from employee stock compensation

Changes in operating assets and liabilities:

Receivables

Prepaid expenses and other current assets

Medical claims and benefits payable

Accounts payable and accrued liabilities

Deferred revenue

Income taxes

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:

Amount borrowed under term loan

Amount borrowed under credit facility

Proceeds from common stock offering, net of issuance costs

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 increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Year Ended December 31,

2011

2010

2009

(In thousands)

$ 20,818

$ 54,970

$ 30,868

74,383

13,836

17,052

5,512

64,575

—

7,242

2,818

(1,676)

—

(714)

352

3,308

48,120

2,778

(8,154)

(24,855)

(60,581)

(345,968)

302,667

(84,253)

(42,830)

(4,064)

(1,898)

48,600

—

(7,000)

(1,125)

7,347

1,651

49,473

37,941

455,886

60,765

(4,092)

9,531

5,114

—

2,029

1,780

—

(4,170)

3,807

(968)

(7,539)

(12,034)

34,363

40,482

(41,899)

19,258

(48,538)

(302,842)

223,077

(130,743)

(29,319)

(5,566)

5,108

—

105,000

111,131

(105,000)

—

(1,671)

4,056

295

113,811

(13,615)

469,501

38,110

(1)

7,485

4,782

(1,532)

—

1,872

(3,394)

3,100

(749)

(8,092)

383

22,874

(26,467)

88,181

(2,049)

(35,870)

(186,764)

204,365

(11,294)

—

1,928

(10,078)

(37,713)

—

(27,712)

(9,653)

—

2,015

(35,319)

82,339

387,162

(236,927)

(288,823)

$ 493,827

$ 455,886

$ 469,501

Net cash provided by operating activities

225,395

161,397

155,371

See accompanying notes.

MOLINA HEALTHCARE, INC.

Use of Estimates

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. As of December 31, 2011, these health plans served
approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health
care programs for low-income families and individuals. The health plans are operated by our respective wholly
owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO.

On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that

Our Molina Medicaid Solutions segment, which we acquired during the second quarter of 2010, provides
business processing and information technology development and administrative services to Medicaid agencies
in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.

On June 9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state
intends to award the contract for a replacement Medicaid Management Information System, or MMIS, to another
firm. Our revenue under the Louisiana MMIS contract from May 1, 2010, the date we acquired Molina Medicaid
Solutions, through December 31, 2010, was approximately $32 million. For the year ended December 31, 2011,
our revenue under the Louisiana MMIS contract was approximately $57 million. We expect that we will continue
to perform under this contract through implementation and acceptance of the successor MMIS. Based upon our
past experience and our knowledge of the Louisiana MMIS bid process, we believe that implementation and
acceptance of the successor MMIS will not occur until 2014 at the earliest. Through implementation and
acceptance of the successor MMIS we expect to recognize between $45 million and $50 million in revenue
annually under our Louisiana MMIS contract.

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:

• Health plan contractual provisions that may limit revenue based upon the costs incurred or the profits

realized under a specific contract;

• Health plan quality incentives that allow us to recognize incremental revenue if certain quality standards are

met;

• 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;

• 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.

Adjustments and Reclassifications

We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the

three-for-two stock split in the form of a stock dividend that was effective May 20, 2011.

We have reclassified certain prior year balance sheet amounts to conform to the 2011 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.

Consolidation and Presentation

Investments

The consolidated financial statements include the accounts of Molina Healthcare, Inc. and all majority

owned subsidiaries. See Note 18, “Commitments and Contingencies,” for the discussion of a financing
arrangement classified as a variable interest entity that is included in our consolidated financial statements. In the
opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date
and for the interim periods presented have been included; such adjustments consist of normal recurring
adjustments. All significant intercompany balances and transactions have been eliminated in consolidation.
Financial information related to subsidiaries acquired during any year is included only for periods subsequent to
their acquisition.

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.

MOLINA HEALTHCARE, INC.

Use of Estimates

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. As of December 31, 2011, these health plans served

approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health

care programs for low-income families and individuals. The health plans are operated by our respective wholly

owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO.

On February 17, 2012, the Division of Purchasing of the Missouri Office of Administration notified us that

our Missouri health plan was not awarded a contract under the Missouri HealthNet Managed Care Request for

Proposal; therefore, our Missouri health plan’s existing contract with the state will expire without renewal on

June 30, 2012. In connection with this notification, we recorded a non-cash impairment charge of approximately

$64.6 million, or $1.34 per diluted share. Most of the impairment charge is not tax deductible, resulting in a

disproportionate impact to net income. For the year ended December 31, 2011, our Missouri health plan

contributed premium revenue of $229.6 million, or 5% of total premium revenue, and comprised 79,000

members, or 4.7% of total Health Plans segment membership. For further discussion of the impairment charge,

see Note 2, “Significant Accounting Policies.”

Our Molina Medicaid Solutions segment, which we acquired during the second quarter of 2010, 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.